Yesterday, we sent clients a report on the Senate Banking Committee’s rockem, sock’em hearing on whether bank regulators are doing diddly to prevent banks from facilitating money laundering and terrorist financing. The session came a day after the Attorney General surprisingly told the Senate Judiciary Committee that he would have done far more to penalize banks if he had not forborne due to fears of systemic risk sparked by the huge size of his defendants. Is now the time that fury over money laundering combines with continued assertions about too-big-to-fail to cause a real rewrite in U.S. banking?
Specific statutory changes that cap bank size, reinstate Glass-Steagall or otherwise redesign the industry’s roadmap face an uphill struggle. But, that Congress can’t act doesn’t mean that nothing happens. Quite the contrary.
I expect three major developments: a lot tougher prosecution of any future financial malefactors, loads of new rules demanding far better anti-money laundering (AML) compliance and, in the structural-reform arena, final action by the FRB on a host of new standards that, combined with tough FRB and FDIC review of living wills, puts the screws on the very largest U.S. and foreign banks.
This might seem daunting enough to the biggest banks, but it’s my baseline forecast. In what the Federal Reserve dubs the “seriously-adverse scenario” for purposes of its capital stress tests, there’s lots more for which the biggest BHCs need to plan. Sens. Sherrod Brown (D-OH) and David Vitter (R-LA) will soon introduce revised break-up legislation, with Sen. Brown yesterday telling the American Banker that he thinks he’s got about ten more GOP senators interested in signing on to a bill that now, he thinks, could garner 45 votes in the Senate.
This bipartisan spirit is hard to come by in the Senate, and still scarcer in the House. Still, FinServ Chairman Hensarling this week will launch its own attack on TBTF and, when he does, I think he’ll have a surprising cadre of liberal Democrats watching his back. In the past, Republicans have sought simply to repeal the orderly-liquidation authority (OLA) provisions in Dodd-Frank on grounds – wrong – that OLA equals TBTF. Wising up, the plan now is to come up with replacements for OLA that eliminate the FDIC’s “bridge” powers without, sponsors hope, sparking the meltdowns that resulted when systemic firms failed in 2008. Ideas here include the new “Chapter 14” resolution regime for complex financial contracts and/or elimination of any possible FDIC draw on taxpayers (now scored as a $20 billion hit to taxpayers) in favor of a systemic resolution fund paid for up front by the biggest banks and designated financial-services firms.
All of these ideas are complicated and some cut key GOP leaders the wrong way. For example, creating an ex ante resolution fund for systemic firms requires designation of lots more of them, an idea many in the House and Senate strongly oppose. But, the more OLA rewrites founder, the greater the pressure for alternative TBTF solutions – starting first with the Brown-Vitter debt ceilings, an idea already under active consideration by the Federal Reserve. Simple, high capital requirements for the biggest BHCs are also possible, especially if the forthcoming U.S. Basel III rules still rub community banks the wrong way.
And, for the first time, we’re hearing talk of something like a “user fee” for the very biggest BHCs – i.e., a fee larded atop wholesale-debt issuances to “charge big BHCs for the purported privilege of their TBTF status.” If this scores big from a budget perspective – which it could – it might well cost a lot.
The biggest boon for big banks is Congress’ continued inability to act on anything controversial. But, stick a budget price-tag on it, and the odds change. Have a vigorous debate that puts the industry in the wrong light, and the needle also moves, if not towards Congressional action, then at least to regulatory sanctions. In short, counting on business as usual because Congress is as it is is a thin reed on which to rest an industry strategy.