Bipartisan Group Of Senators Urges Financial Regulators To Prioritize Rules And Regulations That Help End “Too Big To Fail”

Tuesday, April 09, 2013

Senators Bob Corker, R-Tn., Sherrod Brown, D-Ohio, Elizabeth Warren, D-Mass., David Vitter, R-La., and Susan Collins, R-Maine, on Tuesday wrote to Federal Reserve Governor Daniel K. Tarullo, Comptroller of the Currency Thomas Curry, and Chairman of the FDIC Martin Gruenberg, urging them to “proceed deliberately and expeditiously” to finalize rules regarding capital requirements for large financial institutions and to ensure that should a large institution fail, the losses associated with the failure can be absorbed by its own shareholders and creditors.

Their letter states, “By acting to substantially strengthen capital requirements and to ensure that future losses of a large bank failure will be absorbed by its shareholders and unsecured creditors, you [financial regulators] will further your statutory mandate to protect the public against financial instability and go a long way toward ending too-big-to-fail.”

A complete copy of the letter follows:

“Dear Governor Tarullo, Comptroller Curry, and Chairman Gruenberg:

“As you know, the debate over ending too-big-to-fail continues to draw public attention and concern.  In this regard, we urge you to proceed deliberately and expeditiously with the following measures:

“Bank Capital: Numerous studies have shown that regulator reliance on the internal models of large banks to determine the riskiness of the banks’ assets has led to wide variations in the amount of capital held by banks with similar portfolios.  Internal models can be inherently unreliable, and, of course, they rest on assumptions that often prove to be false, such as, most recently, the assumption that OECD member country debt is entirely risk free. 

“The Basel Committee agreed to an international leverage ratio in its 2010 Basel III capital accord to address weaknesses in the use of risk-based standards.  But this leverage ratio will only have meaning if it is sufficiently strong.  And just as importantly, while the use of asset risk weights makes some sense, we should not rely on them completely.  An appropriate minimum overall capital ratio in exchange for a reduced reliance on models would make sense.

“There is widespread, bipartisan agreement that excessive leverage played a major role in the 2008 financial crisis and ensuing need for taxpayer bailouts.  Constraining leverage through the use of a simple and effective leverage ratio would go a long way toward correcting deficiencies in the capital regulation of large, complex financial institutions that proved to be seriously over leveraged prior to the crisis. 

“In addition, we believe that we should not move forward with an overly complicated capital regime for smaller institutions.  As you know, community banks, for example, have very different business models than globally active financial institutions, and while there may be merit in improving the capital framework applicable to them, this should be a secondary priority to constraining leverage at the largest firms.  The new Basel III capital standards were designed for large, internationally active banks, as was appropriate. We urge you to complete work on capital standards for the largest banks before turning to the smaller institutions. Then, devise a simpler framework that, unlike the current proposals, will be within the reach and capabilities of community institutions.

“Enhanced Prudential Standards: Even with tougher capital standards, there is no guarantee that a large bank failure can be prevented in the future. As a consequence, it is imperative that you ensure that should a large institution fail, the losses associated with the failure can be absorbed by its own shareholders and creditors. These losses should not be forced on other members of the industry through special assessments, as DFA would require, or worse, despite the prohibition in DFA, on taxpayers.  The FDIC, working in consultation with the Federal Reserve Board and international regulators, is developing a new strategy for the orderly resolution of a large, internationally active bank which involves seizing control of its holding company.  However, to be successful, it is imperative that the holding company issue enough equity and long-term unsecured debt to absorb losses.  For this reason, commentators, including FDIC and Federal Reserve Board officials, have acknowledged the wisdom and need for requiring complex financial institutions to issue an appropriate amount of equity and long-term, unsecured debt at the holding company level, where investors and creditors clearly understand there is a risk of loss in the event of a failure.  We urge you to consider the vital step of having loss absorption capacity at the holding company level, as you draft rules for the regulation of large systemically risky firms.

“We understand that the financial regulators have had a daunting task in promulgating and finalizing the numerous regulatory provisions required by Dodd-Frank.  Given the many demands on your time and resources, some prioritization is obviously necessary.  As such, we ask that you move expeditiously in these two areas, given continued public concern over the dangers that large financial institutions pose to our banking system and to the overall economy.  By acting to substantially strengthen capital requirements and to ensure that future losses of a large bank failure will be absorbed by its shareholders and unsecured creditors, you will further your statutory mandate to protect the public against financial instability and go a long way toward ending too-big-to-fail.”


June County Unemployment Rates

County unemployment rates for June show the rate increased in all 95 counties. Specific county information for June is available on the Internet; enter http://www.tn.gov/labor-wfd/labor_figures/LaborJune2014.pdf . Davidson County had the state’s lowest major metropolitan rate in June at 6.0 percent, up from 5.2 in May. Knox County was 6.3 percent in June, up from 5.3 in May. ... (click for more)

CapitalMark 2nd Quarter Earnings Remain Strong

CapitalMark Bank & Trust on Friday reported earnings for the second quarter ended June 30, 2014. Net income for the six months ended was $3.3 million, an increase of 39% from the same period in 2013. Net income per fully diluted common share increased 41% from the same six month period last year to $0.41. “CapitalMark had another quarter of strong results fueled by exceptional ... (click for more)

EPB Files With FCC To Expand TV, Phone, Internet Offerings Outside Electric Service Area

 EPB announced Thursday that it has filed a petition to the FCC "in an effort to respond to neighboring communities’ requests for access to the company’s gigabit enabled high-speed Internet service." Officials said, "EPB offers high-speed Internet access, video programming and voice services using a fiber optic communications network that allows the company to deliver these ... (click for more)

Black Creek Developers Say They "Followed The Rules" On $9 Million TIF: To Continue Project

The developers of the Black Creek project at Aetna Mountain said Thursday they "complied precisely by the rules when we applied for and received approval of the TIF district." Doug Stein said the group plans to continue on with the project, which he said earlier would include the creation of a small town on a huge undeveloped tract on the mountain above Black Creek (formerly ... (click for more)

Cell Phones And Roundabouts

I read the article written by Chris Morgan about the use of cell phones in vehicles and the Chattanooga Roundabouts. Cell phone use in vehicles especially in crisis intersection situations is extremely dangerous. I also agree with his assessment about the roundabouts. One problem I see with roundabouts is that on the two-lane roundabouts where they are coming in from ... (click for more)

Roy Exum: The NCAA’s “Division IV”

Jonathan Jensen and Brian Turner are two very smart guys. Not long ago the two sports researchers at Ohio State authored a story that appeared in the Journal of Quantitative Analysis in Sports that focused on the most successful college football teams in the country and, earlier this week, a writer named Ben Cohen broke it down in understandable terms for a fascinating Wall Street ... (click for more)