Ending Too-Big-To-Fail

Position

  • 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. Banks that are too- big-to-manage are vulnerable to illegal employee conduct that triggers regulatory overreach.
  • 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 leverage requirements, enhanced liquidity standards, activity restrictions, concentration limits, limitations on the federal safety net, and more effective resolution authority. ICBA also supports proposed new Federal Reserve requirements that would impose total loss absorbing capacity (TLAC) and long-term debt (LTD) requirements for globally significant banks.
  • 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.
  • 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.

Background

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 and enforcement procedures must apply to community banks and megabanks alike. As the recent report of the Minneapolis Federal Reserve Bank indicates, the implementation of the Title I and Title II changes mandated by the Dodd-Frank Act have not ended TBTF. The five largest banks hold nearly half of U.S. industry assets, a higher percentage than they held before the 2008 financial crisis. To address TBTF, we must both reduce the riskiness of megabanks to make it less likely they will fail in the first place, and, when an institution is failing, ensure that tools are available to implement an orderly liquidation of the institution without causing a destabilizing systemic impact.

TBTF Banks Are Too-Big-To-Manage. The Wells Fargo scandal that emerged in the summer of 2016, in which thousands of employees created unauthorized accounts for millions of customers, is a clear consequence of a megabank being too big to manage. Wells Fargo’s sprawling operation and transactions-based business model created an incentive for employee abuse of consumers. Community banks’ relationship model strongly deters such abuse. ICBA is urging Congress and the agencies to ensure that any legislative or regulatory response to Wells Fargo draws a clear line between community banks and the too-big-to-manage behemoths. Costly, unnecessary new requirements would only hamper community banks’ ability to serve their customers and drive further consolidation and concentration of our nation’s financial resources.

Enhanced Prudential Standards for SIFIs. ICBA generally endorses higher capital, leverage, liquidity standards, concentration limits, and contingent resolution plans for SIFIs. ICBA 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 and supports the imposition of TLAC and LTD requirements on globally significant banks. 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 than those that apply to 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 would facilitate a rapid and orderly resolution of the company and describe how the liquidation process could 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.

Volcker Rule Should Target Large Banks Exclusively. ICBA is committed to ensuring that the Volcker Rule prohibition on proprietary trading and investment in or sponsorship of hedge funds and private equity funds completely and effectively exempts non-systemically important financial institutions.

Staff Contact: Chris Cole