Senators usually opposed to each other – Sherrod Brown (D-OH) and David Vitter (R-LA) – have introduced high-profile legislation they believe will eliminate too-big-to-fail (TBTF) financial institutions. The measure does so by imposing very high capital requirements on covered firms, overturning U.S. plans to adhere to the Basel III capital requirements, imposing new restrictions on inter-affiliate transactions designed to restrict federal support only to insured depositories engaged in traditional activities, and sharply curtailing access to federal safety nets. New capital charges would apply to many activities now conducted in large banking organizations (including foreign ones in the U.S.), thus dramatically changing the universal-banking model fundamental to many franchises and going well beyond the current FRB proposal (very contentious) for foreign banking organizations. The measure does not expressly include specific size limits on large banks or otherwise constrain their activities, but its capital requirements and prohibitions on inter-affiliate transactions may well create de facto restrictions in both of these areas. The bill covers only very large BHCs and certain SLHCs, perhaps allowing other systemically-important financial institutions (SIFIs) to grow large as big BHCs are forced to shrink, resulting in little net impact on taxpayer risk and, perhaps, still greater systemic risk due to the uncertain regulatory framework governing non-bank SIFIs.

The full report is available to retainer clients. To find out how you can sign up for the service, click here