- The continued growth and dominance of a small number of too-big-to-fail banks has created an overly concentrated financial system, created unacceptable moral hazard and systemic risk, thwarted the operation of the free market, and harmed consumers and business borrowers.
- ICBA supports legislative and regulatory changes that would curb or end advantages currently enjoyed by too-big-to-fail banks. Such changes should include higher capital and lower leverage requirements, enhanced liquidity standards, activity restrictions, concentration limits, limitations on the federal safety net, and more effective resolution authority. So far, the implementation of the Title I and Title II changes mandated by the Dodd-Frank Act have not ended TBTF.
- ICBA supports the FDIC’s and the Federal Reserve’s rules on contingent resolution plans and encourages the agencies to use the provisions of the Dodd-Frank Act requiring systemically important financial institutions (SIFIs) to divest their assets if they do not file credible plans.
- ICBA supports FDIC Vice Chairman Tom Hoenig’s proposal to restructure banking organizations to prevent extension of the federal safety net and reduce systemic risk. Under the Hoenig proposal, banks would be restricted to core banking activities and would be prohibited from engaging in risky non-banking activities.
- The U.S. Justice Department must end the double standard with regard to prosecutions for bank operations and practices. Despite rampant malfeasance in the years prior to the financial crisis, no senior executives at large banks have been prosecuted.
- The Volcker Rule prohibition on proprietary trading and limitation on investment in and sponsorship of hedge funds and private equity funds by banking companies should completely and effectively exempt community banks.
- While ICBA fully supports higher prudential standards for the largest bank holding companies, as required under Title I of the Dodd-Frank Act, we believe the $50 billion threshold may be too low and that consideration should be given to raising it.
Dominance of the Largest Banks. 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. The megabanks have become even larger since the financial meltdown. In fact, the 12 largest U.S. banks, or 0.2 percent of all U.S. banks, hold nearly 70 percent of industry assets, dwarfing the rest of the banking system and representing massive systemic risk. Because these firms are too big to fail, they act with impunity and court risks that no smaller firm would tolerate. The markets offer them credit at rates that do not reflect their true risk—rates that are subsidized by an implicit taxpayer guarantee. In addition, large or interconnected institutions are too big to prosecute and their executives are too big to jail. No banker should be above the law. The same prosecutorial standards must apply to community banks and megabanks alike.
Estimation of the TBTF Subsidy. The Government Accountability Office released the second part of its report, “Government Assistance for Bank Holding Companies,” in July 2014 which indicated that the TBTF subsidy was significant during the economic crisis but has recently narrowed. According to two economists from the International Monetary Fund and Bloomberg View, the government’s too-big-to-fail subsidy for megabanks is worth an estimated $83 billion per year, offering these firms a clear competitive advantage. Despite the implementation of Dodd-Frank Title I and II reforms, the TBTF banks maintain a funding advantage which will become more significant as industry concentration continues.
Enhanced Prudential Standards for SIFIs. ICBA generally endorses higher capital, leverage, liquidity standards, concentration limits and contingent resolution plans for SIFIs and supported the requirement for a higher supplementary leverage ratio on the largest banks and their holding companies adopted by bank regulators. ICBA supports a significant capital surcharge on SIFIs that would not be less than what was proposed by the Basel Committee for G-SIFIs—a progressive common equity tier 1 capital requirement of between 1% to 4.5%, depending on the bank’s systemic importance. However, ICBA supports raising the $50 billion threshold in Title I of the Dodd-Frank Act above which the Federal Reserve Board is required to establish prudential standards for bank holding companies that are more stringent that other financial institutions. A higher threshold and a more flexible “SIFI” definition under Title I would more accurately identify those institutions that impose systemic risk to our banking system.
FDIC as Receiver; “Funeral” Plans. ICBA supports the orderly liquidation rules of the FDIC and the provisions of the Dodd-Frank Act that provide a process for the appointment of the FDIC as receiver of a failing financial company that poses significant risk to the financial stability of the United States. ICBA also supports the FDIC’s and the Federal Reserve’s rules requiring SIFIs to submit contingent resolution plans that enable the FDIC, as receiver, to resolve the institution under the Federal Deposit Insurance Act. It is essential that the largest financial companies submit credible contingent resolution plans that will facilitate a rapid and orderly resolution of the company and will describe how the liquidation process can be accomplished without posing systemic risk. 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.
ICBA Supports Hoenig Proposal. ICBA supports FDIC Vice Chairman Tom Hoenig’s proposal to restructure banking organizations, restrict banks to core banking activities of making loans and taking deposits, and prohibit them from engaging certain non-banking activities such as dealing and market making, brokerage, and proprietary trading. In addition, banking organizations would be prohibited from holding “complicated” securities such as multilayer structure securities (e.g., CDOs) because of the difficulty determining and monitoring their credit quality. The Hoenig proposal would better align the interests of banks and their customers. Trading activities can set up a conflict of interest between a bank and its customers. The proposal would reduce risk among large financial institutions and shadow banks and improve overall stability in the financial system.
Volcker Rule Should Target Large Banks Exclusively. ICBA is committed to ensuring that the Volcker Rule prohibition on proprietary trading and investment in and sponsorship of hedge funds and private equity funds completely and effectively exempts community banks. ICBA commends the banking agencies for their January 2014 interim final rule regarding the inapplicability of the Volcker Rule to collateralized debt obligations backed primarily by community bank-issued trust preferred securities (TruPS CDOs), but believes the Volcker prohibition should be limited to equity interests in hedge funds and private equity funds and not be extended to other types of non-equity investments in pools and investment vehicles that are not hedge funds or private equity funds.
Staff Contact: Chris Cole