It’s hard to get politicians from different sides of the aisle to cooperate in Washington these days. Thus our surprise when we read a letter from two members of the Senate banking committee, Sen. David Vitter (R-LA) and Sen. Sherrod Brown (D-OH), asking the Ben Ben Bernanke to do something that will make Wall Street howl (h/t Politico).
From the letter (which you can download here):
Your proposed rule on capital standards misses a huge opportunity to address the too-big-to-fail issue by setting the so-called SIFI surcharge far too low. We urge you to revisit your proposed rule and modify it so that megabanks fund themselves with proportionately more loss-absorbing capital per dollar of assets than smaller regional or community banks. The surcharge on the megabanks should be high enough that it will either incent them to become smaller or will help to ensure they can weather the next crisis without another taxpayer bailout.
You may recall that this is the very thing Wall Street bankers, with JP Morgan CEO Jamie Dimon leading the pack, have been saying is destroying their business. In the last few years, capital requirements both domestic and international, have forced banks to layoff workers and sell-off assets — to downsize.
This letter is proof that someone is Washington likes that.
The letter goes on to say that the Senators agree that capital should be based on a bank’s “systemic footprint.” That means community and regional banks would keep less cash. It also means banks would essentially be rewarded for getting smaller.
Because these banks are massive, internationally exposed, and super complicated, Vitter and Brown conclude that current capital requirements are just a “baby step in the correct direction” (yes, that’s in the letter).
All this said, who knows if the Fed will do much about this letter. In fact, Brown and Vitter might even know that. This is, however, an indication that someone in Washington knows that high capital requirements will compel banks to get smaller on their own without much intervention from Washington, which is something that academics and analysts (like Meredith Whitney) have been saying all summer.