[S]en. Bernie Sanders used the occasion of the TARP anniversary to take on the size of the country’s largest banks with a bill aimed at preventing another expensive bailout.
Sanders, I-Vt., and Democratic Rep. Brad Sherman of California introduced legislation Wednesday that would break up the nation’s six largest banks, saying that no financial institution should be so big that its failure would be catastrophic to the economy.
“We must end, once and for all, the scheme that is nothing more than a free insurance policy for Wall Street: the policy of ‘too big to fail’,” Sanders said in a statement from his office.
Sanders, a ranking member of the Senate Budget Committee, has been talking about the dangers of big banks since at least 2000, when Congress was considering legislation to deregulate Wall Street and large financial institutions.
The Troubled Asset Relief Program, or TARP, used $700 billion of taxpayers’ money to bail out some of the largest Wall Street Banks in 2008. Sanders and Sherman want to make sure another such bailout isn’t needed.
The Sanders-Sherman bill would apply a cap on financial institutions, and calls for the breakup of JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley. The bill would also address large non-bank financial service companies such as Prudential, MetLife and AIG. All of the six banks except Citigroup have at least a small presence in Vermont; Bank of America loaned $2 million to the Vermont Community Loan Fund in May.
The Sanders-Sherman bill says that if a bank controls assets that collectively represent more than 3 percent of the country’s GDP, or about $584 billion, the bank must find a way to reduce its size. These institutions would have two years to restructure.
The measure has strong support from the ICBA, or Independent Community Banking Association, which says on its website that “the greatest ongoing threat to the safety and soundness of the U.S. banking system is the dominance of a small number of too-big-to-fail megabanks.”
Like Sanders, the ICBA said the largest banks have become even larger since the recession, and that their size effectively guarantees they’ll be bailed out if they fail.
“The markets offer them credit at rates that do not reflect their true risk — rates that are subsidized by an implicit taxpayer guarantee,” ICBA said. “In addition, large or interconnected institutions are too big to prosecute and their executives are too big to jail.”
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
requires banks to maintain plans that would resolve the company’s assets and affairs without the help of a bailout. ICBA called for regulators to ensure the largest banks are following this mandate.
“It is essential that the largest financial companies submit credible contingent resolution plans that would facilitate a rapid and orderly resolution of the company and describe how the liquidation process could be accomplished without posing systemic risk,” the group said. “If a company cannot submit a credible plan, the FDIC and the Federal Reserve should exercise their authority under the Dodd-Frank Act to order a divestiture of those assets or operations that might hinder an orderly resolution.”
Financial Services Forum, an economic policy and advocacy organization in Washington, D.C., that has many of the nation’s largest banks as members, said large global banks are essential to the economy, unlikely to fail, and have plans in place to handle failure themselves if it happens.
The Forum’s policy research director, Sean Campbell, argued that banks have addressed the “too big to fail” problem with changes implemented over the last decade, such as reducing their complexity and being more transparent.
“Bank creditors have realized that they bear default risk, and the cost of funding large banks has increased as a result,” he said on the group’s website. “Taken together, these developments point to a world in which large banks and large bank creditors would be required to deal privately with the consequences of failure.”
That’s not enough for Sanders, who said in a release that the nation’s four largest financial institutions — JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup — are on average nearly 80 percent bigger than they were before the bailout, and control nearly 36 percent of all bank deposits.
Sanders’ office said the six largest institutions have over $10 trillion in assets, equivalent to 54 percent of the annual U.S. GDP.
The future of the bill is uncertain. With the House on recess and the midterm elections approaching, no consideration of the measure is expected at least until next year. A banking bill that amends the Truth in Lending Act to allow banks or credit unions to waive some requirements for residential mortgage loans passed earlier this year with bipartisan support.
