Big banks need to run for cover

BY Darrell Delamaide | FROM USA TODAY | 2014-09-10 15:50

  9:39 p.m. EDT September 9, 2014

  WASHINGTON – Regulators are coming down harder than ever on big banks, and a Senate hearing Tuesday indicated they are all out of friends to defend them on Capitol Hill.

  The Senate Banking Committee once again convened the six main financial regulatory agencies to testify about progress in implementing the Dodd-Frank reforms.

  The regulators — and especially Daniel Tarullo, who heads up the Federal Reserve's regulatory efforts — rattled off a number of new and forthcoming measures to rein in the banks.

  But it was Sen. Elizabeth Warren, D-Mass., who rattled the regulators when she asked how many criminal referrals they had made in the wake of the financial crisis.

  It was a rhetorical question since the six agencies couldn't come up with a single referral between them. Tarullo only lamely managed to say that the Fed had "shared" information with the Justice Department, so they, um, knew what was going on.

  Warren noted that the country's three biggest banks — JPMorgan Chase, Citigroup and Bank of America — between them have paid $35 billion in the past year to settle probes into illegal and fraudulent behavior.

  "The law on this is clear," Warren said, citing federal judge Jed Rakoff, "that no corporation can break the law unless an individual within those corporations has broken the law."

  And yet, Warren continued, "not a single senior executive of these banks has been criminally prosecuted."

  Worse, she said, citing the case of JPMorgan chief executive Jamie Dimon, they are likelier to get a raise for negotiating such a "great settlement" when the bank breaks the law.

  Surprisingly, Warren was backed up immediately, not by another Democrat on the panel, but by Alabama Republican Richard Shelby, a veteran lawmaker who once chaired the Banking Committee.

  "If there is no justice," he said, "then there is something wrong with the Justice Department."

  He agreed with Warren but suggested the onus lay with the department rather than with the regulators, who have no authority to prosecute.

  The DOJ, Shelby said, "seems bent on money more than on justice." He added: "And that's a mistake, and the American people pick up on that."

  For his part, Tarullo detailed a battery of current and forthcoming requirements that will make it more costly for big banks to do business, essentially penalizing them for their size because of the risks that size poses to the financial system as a whole.

  The Fed, which is the lead supervisor for the biggest banks, and other regulators last week finalized new regulations that for the first time require the big banks to keep a certain amount of liquid assets on hand in order to avoid the crunch that occurred when the 2008 crisis broke.

  The Fed is also working on a rule that would require the eight biggest banks to hold extra equity – a capital surcharge well beyond that required by other banks and even beyond the minimum recommended in international guidelines.

  "By further increasing the amount of the most loss-absorbing form of capital that is required to be held by firms that potentially pose the greatest risk to financial stability, we intend to improve the resiliency of these firms," Tarullo said in his written testimony. "This measure might also create incentives for them to reduce their systemic footprint and risk profile."

  In short, it should encourage them to slim down because it is too costly to maintain their current size.

  An added twist of the screw is that the Fed may require banks to include short-term funding in their assets for the purposes of calculating the capital ratio – a step beyond what even other conservative regulators like those in Switzerland have gone.

  "We believe the case for including short-term wholesale funding in the surcharge calculation is compelling," Tarullo said, "given that reliance on this type of funding can leave firms vulnerable to runs that threaten the firm's solvency and impose externalities on the broader financial system."

  In general, the Fed is concerned about banks' reliance on short-term funds to finance their activities after these sources of funding dried up overnight during the financial crisis, requiring the Fed to inject billions into the financial system to keep banks afloat.

  If Tarullo or the other regulators were looking for a pat on the back, however, what they got instead were questions about how quickly the tools provided by Dodd-Frank were going to be used to eliminate "too big to fail."

  Whether Ohio Democrat Sherrod Brown or Tennessee Republican Bob Corker, or Shelby and Warren, or several others from both sides of the aisle, the panel provided ample demonstration that "too big to fail" is the bipartisan issue.

  Banks may whine about the cost of the new regulations, but they will find little political cover in Congress.

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