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

Tuesday, April 9, 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.”


Summit Physical Therapy Opens Cambridge Square Practice

Cambridge Square developers have announced the addition of Summit Physical Therapy to the community’s tenant family. Summit Physical Therapy, which was founded and  is co-owned by Chattanooga businessmen Dan Dotson and Kevin Kostka, is an outpatient physical therapy clinic that will occupy 2,700 square feet. Summit is scheduled to open in November. Cambridge Square is ... (click for more)

U.S. Xpress To Hold Career Fair This Thursday

U.S. Xpress, Inc., a  Chattanooga based company with over 1,000 employees located at the corporate headquarters, will be hosting an on-site career fair this week, providing a unique opportunity for candidates to connect with the U.S. Xpress team. The event will focus on a number of open positions including: Fleet Manager Trainees, Driver Recruiters, Capacity Buyers, XRA Triage ... (click for more)

City Council Members Call For Definition Of Gender Expression In Non-Discrimination Ordinance Education Meeting

A potential non-discrimination ordinance for same-sex city employees continued as a point of contention in a city council on Tuesday as some called for further definitions about “gender expression and identity,” and posed questions about how the ordinance may limit the freedom of religious residents or affect individual privacy in public restrooms. The ordinance would ... (click for more)

Prosecutors Take New Charge Against Doggart To Knoxville Grand Jury

Federal prosecutors on Tuesday obtained an indictment from a federal Grand Jury in Knoxville on a new charge against a Signal Mountain man charged with making threats against a Muslim settlement in New York. The case will remain in Chattanooga, however. RoVanita Gupta, the head of the Civil Rights Division, and Bill Killian, the U.S. Attorney for the Eastern District ... (click for more)

Why Chattanooga Should Stop Granting Apartment Complex PILOTs - And Response

A new report indicates why Chattanooga and Hamilton County officials do not need to extend PILOTs to apartment complex developers. Demand is high, therefore developers will continue to build to meet the demand without PILOTs. What is truly needed in the Chattanooga metroplex is low-income affordable housing. “Homeownership Drops to Lowest Level in Decades” ... (click for more)

Roy Exum: Gun Control? Accuracy!

When President Barack Obama responded to the tragic killing of nine people who were worshiping at their beloved Emanuel AME Church in Charleston, S.C., last month, he immediately blamed the gun, saying, “We don't have all the facts, but we do know that once again, innocent people were killed in part because someone who wanted to inflict harm had no trouble getting their hand on ... (click for more)