US Senators Brown and Vitter introduce bill to end US implementation of Basel III

A new bill has been introduced in the US Senate that would raise bank capital requirements to 10% with an additional surcharge of 5%. This would scrap Basel III and is the follow up from an October 2012 letter that two Senators sent to major regulators after draft Basel III rules (Notices of Proposed Rulemakings) were introduced last summer. Some interesting text in this bill, below.

Here’s what Senators Brown and Vitter said last October:

“Wall Street banks have become too large, while their capital requirements are too small. And both these institutions and their rules are so complex that no one—not their executives, nor their shareholders, nor their regulators—truly understand their financial health,” Brown said. “It is essential that banks fund themselves with more pure equity, so that taxpayer dollars are not on the line, and capital rules should be simple enough that banks of all sizes can understand them.”

Here are highlights of Brown and Vitter’s bill:

– Banks should have the same or higher equity capital ratios as banks had before the creation of the Federal Reserve and federal deposit insurance.

– Insured banks including foreign banks’ US subsidiaries must have at least 10% of equity capital to total assets.

– Banks with over $400 billion would have a surcharge of 5%.

– No cheating. Banks wold be prohibited by law to try and avoid the equity levels. This would presumably include hedging activities.

– Equity capital “shall consist of tangible common equity, defined as stockholders’ equity less goodwill and intangible assets plus retained earnings.

– US regulators could still allow supplemental risk-based capital requirements (?? – wouldn’t that defeat the purpose of banning Basel III?)

According to the blog Quartz that obtained a copy of the original bill, “While the appetite for reform may exist in Congress—Brown has suggested this bill may attract 50 or 60 votes—the Obama White House is reluctant to tackle the bill while the new rules created just three years ago by the Dodd-Frank financial overhaul are still being implemented. A former Treasury official warns that opening up financial reform could become a field day for financial sector lobbyists seeking to attack other parts of the bill, including the new consumer protection agency. But reformers tend to say the process is taking too long, and that waiting for safer banks is too risky for the economy.”

The New York Times added “It’s unclear if the Brown-Vitter bill will even get a vote on the Senate floor. Mr. Vitter’s office believes that the banking lobby leaked the draft in an effort to ruin its chances. But even if it will face tough political odds, the bill is important in that it offers an opportunity for Washington to engage in an essential economic debate.”

We don’t think that this bill will go far – there is too much momentum behind Basel III to stop the US process now. But the debate ought to be interesting.

The full text of the bill is here.

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