Ted Kaufman - United States Senator for Delaware

Kaufman: Role of Megabanks in Euro Debt Crisis Shows Congress Must Strengthen Wall Street Reform Bill in Conference

Senator argues “too big to fail” provisions must be included and strengthened in conference committee to prevent next crisis

May 25, 2010

WASHINGTON, DC – As Wall Street reform legislation moves to conference, Senator Ted Kaufman (D-DE) on the Senate floor Tuesday asked Congress to take notice of the role “too big to fail” megabanks are playing in the current European debt crisis. Arguing the crisis has led to a “bailout” on the scale of what the United States faced in 2008, Kaufman stressed the need to include and strengthen current Senate and House bill provisions that address the “too big to fail” problem in the final conference report.
 
“The current crisis in Europe has shown that this problem [too big to fail] has not gone away. It has merely morphed into another form,” said Kaufman. “As the Senate considered Wall Street reform legislation last week, the E.U. and I.M.F. scrambled to assemble an almost $1 trillion emergency package to forestall a full-blown series of sovereign debt crises throughout the continent.”  
 
With an estimated $2.5 trillion in exposure to Europe among the top 5 U.S. banks, and $900 billion among German and French banks, Kaufman argued that the so-called rescue package for sovereign nations like Greece and Spain “is actually a bailout of Europe’s megabanks, not to mention our own.”
 
“The conference report must include and strengthen provisions in the current Senate and House bills that address the ‘too big to fail’ problem,” Kaufman continued. “If we don’t get this right, we could have another full-blown banking crisis in the United States in only a few years time.  Anyone who doesn’t understand that is not paying attention to the current situation in Europe and the current contagion affecting global markets.”


The current Senate and House bill provisions to address “too big to fail” include:

·     Volcker Rule ban on proprietary trading within banks  
 
·     Senator Lincoln’s provision on swaps dealers
 
·     Senator Collins’ capital standards amendment  
 
·     Representative Kanjorski’s systemic risk amendment
 
·     Representative Speier’s leverage amendment

Full remarks, as prepared for delivery:

As financial reform legislation moves to conference, I want to highlight provisions in both the Senate and House bills that address the pressing problem of “too big to fail.” 

The current crisis in Europe has shown that this problem has not gone away.  It has merely morphed into another form. 

As the Senate considered financial reform legislation, the E.U. and the I.M.F. scrambled to put together an almost $1 trillion emergency package to forestall a full-blown series of sovereign debt crises throughout the continent. 

While ostensibly a rescue package for overleveraged and embattled sovereign nations like Greece and Spain, it was actually a bailout of Europe’s megabanks, not to mention our own. 

German and French banks alone have more than $900 billion in exposure to Greece and other vulnerable Euro countries, including Ireland, Portugal and Spain.  Meanwhile, our top 5 banks have an estimated $2.5 trillion in exposures to Europe. 

On the front page of today’s Wall Street Journal, there is an article on how European banks are saddled with higher funding costs because of skepticism of whether the E.U./I.M.F. bailout plan will work. 

The conference report must include and strengthen provisions in the current Senate and House bills that address the “too big to fail” problem. 

If we don’t get this right, we could have another full-blown banking crisis in the United States in only a few years time.  Anyone who doesn’t understand that is not paying attention to the current situation in Europe and the current contagion affecting global markets.

These include: 

Volcker Rule Ban on Proprietary Trading within Banks 

  • The conference report should strengthen the existing language on the Volcker Rule, which would bar banks and their affiliates from engaging in proprietary trading and from owning a hedge fund or private equity fund. 

 

  • In particular, instead of giving undue discretion to regulators to modify the Volcker Rule, the conference report should specifically direct them to develop relevant rules. 

 

  • This was called for by the Merkley-Levin amendment, which, unfortunately, never received a vote on the Senate floor.

 

Senator Lincoln’s Provision on Swaps Dealers 

  • The conference report should include Senator Lincoln’s provision to prohibit banks with swap dealers from receiving emergency federal loans. 
  • By forcing megabanks to spin off their swap dealer into an affiliate or separate company, Section 716 of the Senate bill would help restore the wall between the government-guaranteed part of the financial system and those financial entities that remain free to take on greater risk. 
  • Allowing massive derivatives dealers to be housed within banks creates moral hazard. 
  • Forcing banks to spin off large derivatives dealers would end this moral hazard and force swaps dealers to adequately price and capitalize the risks associated with these activities.   

Senator Collins’ Capital Standards Amendment 

  • The conference report should include some form of Senator Collins’ amendment to ensure that bank holding companies and systemically significant nonbank financial institutions are subject to capital and leverage requirements as stringent as those that insured depository institutions face under existing prompt corrective action regulations. 

 

  • This amendment would raise the capital bar for our largest financial institutions, requiring them to hold more committed and reliable forms of capital, namely common equity and retained earnings. 

 

Representative Kanjorski’s Systemic Risk Amendment

  • The conference report should include Representative Kanjorski’s amendment to require the Council, following consultation with applicable prudential regulators, to take action actions against a financial institution that poses a “grave threat” to U.S. financial stability. 
  • These actions might include the imposition of enhanced capital and other prudential standards, activity restrictions, the sale of assets or business lines, among others. 
  • Hence, this amendment gives regulators added tools and authority to impose strict standards and take preemptive actions against financial institutions that pose outsized risks to the overall system before a full-blown financial crisis occurs. 

      

Representative Speier’s Leverage Amendment

  • The conference report should include Representative Speier’s amendment to require the Federal Reserve to set a minimum leverage ratio of 15 to 1 on all systemically-significant financial institutions. 
  • A statutory leverage limit of this kind will ensure a capital floor for our largest banks and help ensure that regulators don’t miss the forest for the trees as they calibrate risk-based capital standards.    

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