Too-Big-To-Fail Banks Seek Backroom Deal

Reacting to growing pressure from lawmakers and regulators for more meaningful reforms to put an end to Too-Big-To-Fail, some of the largest banks and their lobbying group recently held a closed-door meeting with federal regulators to present a plan that they hope will stave-off more comprehensive reforms, like increasing common equity capital standards for the largest systemically-important banks.

A report published earlier this week in The Wall Street Journal revealed that representatives of some of the largest Wall Street mega-banks and at least one of their lobbying groups met with officials of the U.S. Federal Reserve (Fed) at a private meeting in Washington, DC on May 22 to present a proposal that outlined a plan for the restructuring of the nation’s largest financial institutions in the event of a future financial crisis or failure.

The banks represented at the meeting reportedly included:  Bank of America Corporation, Citigroup, Wells Fargo and Company and a lobbying group for the mega-banks–The Clearing House.

Putting aside the propriety of a group of banks and their lobby group holding closed-door meetings with Fed officials in an attempt to make regulatory policy without the antiseptic of sunlight that a public forum might provide, the Fed heard little in the way of new or meaningful ideas from the Too-Big-To-Fail banks.

Rather than proposing meaningful reforms that would put an end to Too-Big-To-Fail, the largest banks instead proposed to hold an undeterined amount of debt and equity that could be used to bail out any failed bank subsidiary seized by regulators. Some regulators have favored banks’ issuing more debt on the belief that additional liquidity can provide a some stop-gap funding for a failing bank while government regulators figure out a longer range resolution of the institution’s problems.

The debt placement, euphemistically called a “bail-in”, would theoretically place a greater burden on the bank’s creditors in the case of a bank failure.

What the proposal completely side-steps is the more fundamental question of putting the banks on a more sound financial footing that would reduce the likelihood of a catastrophic failure in the first place.  The Too-Big-To-Fail banks and their lobbysts are fighting, tooth-and-nail, against legislation proposed by Sen. Sherrod Brown (D-OH) and Sen. David Vitter (R-LA) that would require them to hold greater amounts of common equity capital, or reduce their size, thereby making them less likely to need either a taxpayer bail-out or creditor bail-in.

The Too-Big-To-Fail banks and their lobbyists hope that regulators at the Fed and lawmakers on Capitol Hill will accept their empty, backroom proposal instead of enacting more meaningful measures that woud put the nation’s largest financial institutions on sounder financial footing.

If the Too-Big-To-Fail banks decide they want to get serious about reform, they can talk to government officials about:  increased tangible capital requirements; greater reliance on real, rather than risk-weighted asset calculations; reducing their size and complexity; and keeping their creditors and the U.S. taxpayers safe from the folly of their exotic, synthetic, risky, derivative market gambling; then regulators and lawmakers will be ready to listen–in an open, public forum.  Until then, they can keep their backroom deals to themselves.

WSBE Staff Writer

Posted On Date Tuesday, June 25, 2013 At 11:22AM