The regulation proposed by Senators David Vitter (R-LA) and Sherrod Brown (D-OH) intended to end ‘Too Big To Fail’ was obviously going to make Wall Street nervous — but we didn’t expect Standard and Poor’s to call it the end of the world.
The “Terminating Bailouts for Taxpayer Fairness Act of 2013,” raises the amount of cash that Wall Street banks need to based on the assets on their balance sheets. Big banks will have to keep cash equal to 15% of assets on their balance sheets, for small banks the number is 8%.
S&P estimates that banks would have to raise cashed between $1.2 trillion and $160 billion depending on their size. Additionally, they say, the Brown Vitter measure would hurt shareholders, make banks less competitive internationally, and possibly send us into another recession. The banks may even have to break up.
From S&P’s report:
We would be most concerned about the impact on the economy because it appears banks would need to build significantly more capital, which would likely impede their ability to extend credit. In addition, the proposal does not appear to be comprehensive–it focuses primarily on capital and does not address liquidity. Under our methodology, we would potentially no longer factor in government support if we believed that once large banks are broken up, we would not classify these banks as having high systemic importance. Clearly, if enacted, a transition period will be required as many moving parts in this legislation are absorbed by management teams and investors alike.