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ICBA: Additional Reforms Needed to Address Too-Big-to-Fail Problem

Washington, D.C. (March 30, 2011)-The Independent Community Bankers of America (ICBA) today told Congress that too-big-to-fail financial institutions continue to pose threats to the financial system and Main Street communities. In written testimony for a hearing of the House Oversight Committee's Subcommittee on TARP and Financial Services, the association wrote that while the Dodd-Frank Wall Street Reform and Consumer Protection Act provided regulators with meaningful tools to address the problem of too-big-to-fail, implementing and enforcing these rules in the months and years to come ultimately will determine the law's success.

"ICBA strongly believes community banks will thrive and best serve their communities and customers in a free market," ICBA wrote. "However, a market dominated by too-big-to-fail financial firms-firms whose failure would have such devastating consequences for the economy that the market perceives them as implicitly guaranteed by the government-is not a true free market. It is a market distorted by the government's implicit guarantee of a favored few."

ICBA noted that the recent financial crisis has exacerbated the problem of too-big-to-fail by leaving the financial services industry more concentrated than ever and by confirming that moral hazard existed in the marketplace. The association wrote that these phenomena have a direct impact on Main Street community banks and their customers by providing large institutions with lower funding costs and a dominant market share.

ICBA wrote that it supported provisions in the Dodd-Frank Act to address the too-big-to-fail problem, including establishing the Financial Stability Oversight Council, concentration limits for large institutions and the FDIC resolution authority for systemically dangerous firms. However, the association noted that how regulators implement these policies will determine whether they are successful.

ICBA also recommended that Congress enact additional provisions, including establishing a prefunded resolution fund for too-big-to-fail firms, downsizing systemically dangerous institutions over a five-year period, implementing stronger antitrust provisions that take systemic risk into account in reviewing mergers, closing the industrial loan corporation loophole that allows commercial firms to own banks, and imposing a lower deposit-concentration cap.