New Bill Ensures Banks Don’t Become ‘Too Big to Fail;” Have Resources to Cover their Losses

U.S. Sens. Sherrod Brown (D-OH) Ted Kaufman (D-DE), Robert P. Casey (D-PA), Sheldon Whitehouse (D-RI), and Tom Harkin (D-IA) have sponsored a new legislation that would place reasonable caps on the size of financial institutions.

The SAFE Banking Act of 2010, would ensure that banks have the resources to cover their losses. The senators explained why Wall Street reform is needed to hold Wall Street accountable, prevent future bailouts, and protect American homes, jobs, pensions, and businesses.

The Safe Banking Act of 2010 would limit the size of megabanks by:

• Imposing a strict 10 percent cap on any bank-holding-company’s share of the United States’ total insured deposits;

• Reducing the maximum amount of non-deposit liabilities at financial institutions (to two percent of United States GDP for banks, and three percent of GDP for non-bank institutions);

• Setting into law a six-percent leverage limit for bank holding companies and selected nonbank financial institutions.

According to Sen. Brown, the SAFE Banking Act would also help boost lending to small businesses. The dominance of a few megabanks has helped to contribute to a virtual freeze of lending to small businesses, which create approximately 64 percent of new jobs, according to Sen. brown. Over the last year, banks have been decreasing their consumer and small business lending, including Small Business Administration (SBA) loans. The three biggest banks reduced their 7(a)-SBA lending by 86 percent from 2008 to 2009), while increasing their investments in securities by almost 23 percent. Having more banks will create competition and increase small business lending so that the U.S. economy can grow, he added.

After being introduced on the Senate floor on April 21, 2010, the bill was read twice and referred to the Committee on Banking, Housing, and Urban Affairs for study and deliberation.

“If we’re going to prevent big banks from putting our entire economy at risk, we need to place sensible size limits on our nation’s behemoth banks. We need to ensure that if banks gamble, they have the resources to cover their losses,” Brown said. “The SAFE Banking Act prevents megabanks from controlling too much of our nation’s wealth – no one investment bank or financial institution should be able to risk more than three percent of our nation’s gross domestic product and they should have enough money to back up their liabilities. This bill would not only prevent bailouts and protect against economic collapse, it will help boost lending to small businesses. We know that the dominance of a few megabanks has virtually frozen lending to small businesses, which account for 64 percent of new jobs.  Having more banks will create competition and increase small business lending so that our economy can grow and unemployed Americans can find jobs.”

“We can either limit the size and leverage of ‘too big to fail’ financial institutions now, or we will suffer the economic consequences of their potential failure later,” said Kaufman. Breaking apart too-big-to-fail banks is the necessary first step in preventing another cycle of boom-bust-and-bailout.  This debate is a test of whether the power of that idea can spread and gain support,” Kaufman added. “Though it is clearly the safest way to avoid another financial crisis, this idea must overcome tremendous resistance from Wall Street banks and their politically powerful campaigns against structural financial reform.

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