Regulation

Lawmakers urge financial regulators to strengthen capital standards

Sherrod Brown

Sherrod Brown

Sens. Sherrod Brown (D-Ohio), David Vitter (R-La.) and Carl Levin (D-Mich.) urged financial regulators in a Friday letter to raise proposed capital standards to eliminate the possibility of a future taxpayer-funded bailout of America’s “too big to fail” institutions.

“We write to your agencies today to urge you to help prevent the next financial crisis, and ensuing bailouts, by strengthening your proposed enhanced supplementary leverage ratio for the largest financial institutions,” the senators said in the letter. “Your proposals make very positive steps in the right direction, but without further strengthening they will not provide adequate protection for taxpayers. We urge you, in the strongest terms possible, to consider a higher final leverage ratio. We feel this proposal along with your proposal on a capital surcharge for the largest banks must move forward thoughtfully and aggressively.”

The senators said measures of assets and equity are the “most effective form of capital regulation.”

“The Bank of England’s Andy Haldane has found the predictive value of simple measures of equity and leverage to be ten times greater than that of complex risk-weighted asset measurements,” the letter said. “As you implement your proposal, we urge you to focus on real, loss-absorbing equity. During the crisis, markets ignored certain instruments that qualified as Tier 1 capital but were not reliable buffers against loss and focused upon whether institutions had sufficient levels of common equity.”

Brown and Vitter are co-sponsors of a plan to implement a 15 percent capital requirement on the nation’s largest banks—those with $500 billion or more in assets—including JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, Bank of America and Wells Fargo, Businessweek reports.

The plan goes beyond Dodd-Frank, which took away the Federal Reserve’s ability to bail out individual firms. The central bank can only use its emergency powers to provide broad support to the overall financial system, under the approval of the U.S. Treasury secretary.

“Capital rules should be designed to take into account the fact that institutions’ crisis planning will never be perfect and that banks are likely to downplay possible problems,” the senators said. “The Board of Governors of Federal Reserve System’s recent report on stress testing found that some of the largest institutions remain focused upon meeting regulatory minimum capital ratios; continue to overlook uncertain sources of financial losses; lack appropriate plans to raise capital when faced with financial distress; and design stress scenarios containing overly optimistic assumptions of their perceived strength during a financial crisis. Given this reality, we agree with the view of experts that regulators should focus on financial institutions’ levels of pure tangible common equity to total, non-risk-weighted assets.”

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