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.”


Vista Points Inc. Hires Loretta Lynn Leda As Public Relations Marketer For East Tn. And North Ga.

Executive Director Darlene Kemp, MPH, MBA, of Vista Points Inc., announced that Loretta Lynn Leda has been hired as the public relations marketer covering East Tennessee (including the Knoxville and Chattanooga areas) as well as North Georgia.  “Ms. Leda brings with her more than 20 years experience in marketing and public relations not only in the for profit industry ... (click for more)

Chief Justice Lee Says State Judiciary In Great Shape

Tennessee Supreme Court Chief Justice Sharon Lee said Monday she could sum up the state of the judiciary in one word: Great. She then gave details to several hundred Rotary Club members who attended Monday’s weekly meeting at the Wildhorse Saloon in downtown Nashville. She emphasized how the judiciary has made innovation a recent priority, bringing in new technologies ... (click for more)

Cleveland City Schools Announces 5 Finalists For Director Of Schools

The Cleveland City Schools Board of Education announced the five finalists for the director of schools position.   The community is invited to attend the Board of Education interview session each day 6-8 p.m. at Mayfield Elementary School, 501 20 th Street NE, Cleveland. A complete schedule is attached.   Candidates:   Wednesday, ... (click for more)

Expansion By Developers Of McCallie Commons Would Raze 3 Old Houses On Oak Street

Developers of the McCallie Commons student housing at McCallie and Central are wanting to expand the project, but it would involve tearing down three old homes on Oak Street. The proposal from developer David Hudson would be an expansion of the four-story apartment building and separate parking garage with 300 parking spaces proposed that was approved earlier. The original ... (click for more)

Marvelous News From Central High School

To Roy Exum:     With all the recent news of major dysfunctions within our educational system, I thought I might alert you to something better. About a year ago you ventured up Highway 58 to Central High School to represent your late grandfather, Roy McDonald, as he was honored as a Distinguished Alumnus during the annual Senior Day festivities. I sort of expected ... (click for more)

Roy Exum: Yes, A Social Experiment

JoeySalads, his screen name, is widely known for his funny pranks except for the fact he calls them “social experiments.” So while we are still on the transgender-restroom issue, our boy JoeySalads got a transgender friend to approve his attire before he tried his luck at entering women’s restrooms. I don’t think you’ll be real surprised at what really happened in this video. Click ... (click for more)