Wednesday, April 24, 2013

Brown-Vitter and the Big Banks

It looks for now like the "break up the big banks" caucus has given up on actually breaking up our biggest banks. Instead, Senators Sherrod Brown (D-Ohio) and David Vitter (R-Louisiana) have introduced legislation that would raise capital requirements for the "too-big-to-fail" banks to make it less likely that they will fail. Matt Yglesias:
Specifically, they want banks with over $400 billion in assets to finance their investments at least 15 percent with equity (i.e., money raised from retained earnings or selling shares) and at most 85 percent with debt. Smaller banks would face a lesser threshold in the 8-9.5 percent range. This addresses the issue of "too big to fail" in what I think is the best possible way, making it much less likely that large banks will fail. . . .

The bank lobby, dutifully quoted in today's Politico Morning Money, is going to tell you that curbing risky investments by large banks will curtail economic growth. I think that's probably true if you ignore the cost of large bank failures and panics. If you pretend that lightly regulated banks will never fail or that failures of large banks have no social or economic cost, then clearly regulations aimed at curbing risk-taking are going to be pointless and harmful. But does anyone really believe that? I sure don't.

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