Ted Kaufman - United States Senator for Delaware

Kaufman, in Senate Floor Speech, Says Only Breaking Apart Mega-Banks Will End Problem of “Too Big to Fail”

Says Current Reform Bill Gives Regulators “a Reshuffled Set of Regulatory Powers That Already Exist”

March 25, 2010

WASHINGTON, D.C. – Sen. Ted Kaufman (D-Del.) on Friday took on the critical issue of banks that are “too big to fail” and whether it is adequately addressed in the Senate’s current financial reform legislation. His conclusion: Congress must erect statutory walls between commercial and investment banks or the nation will remain at risk of another taxpayer bail-out.

“Does this bill take the necessary steps to reduce the size, complexity and concentrated power of the behemoths that currently dominate our financial industry and our economy?” asked Kaufman.

“The answer is there is little in the current legislation that would change the behavior or reduce the size of the nation's six mega-banks . . . .  Just this week, a Moody’s report stated: ‘…the proposed regulatory framework doesn't appear to be significantly different from what exists today.’”

Kaufman’s speech was his third major address on the Senate floor since February dealing with banks that are “too big to fail.”  Kaufman’s point is that the nation’s biggest financial institutions are increasingly concentrated and interconnected and becoming more so. “Only 15 years ago, the six largest U.S. banks had assets equal to 17 percent of overall GDP.  The six largest U.S. banks now have total assets estimated to be in excess of 63 percent of our GDP,” said Kaufman.  “Three of these mega-banks have close to two trillion dollars of assets on their balance sheets.”

And, he notes, the current legislation’s mechanisms are insufficient to oversee the mega-banks — which he deems “too big to manage” and “too complicated to regulate” — and to resolve a bank that is failing.

“The reform proposals would put in place a systemic risk council to monitor for such risks and to identify financial institutions that should be subject to enhanced supervision…. The truth is that we have had a de facto systemic risk council for decades.  It’s called the President’s Working Group on Financial Markets,” said Kaufman.

“Under the proposed legislation, the Federal Reserve would have specific powers to impose higher leverage, capital, liquidity and other requirements upon [systemically significant] institutions.” But, Kaufman notes, “the Federal Reserve already has the power to impose such standards on most of these institutions. The proposed regulatory reforms are mainly a redundant statement of the Fed's existing powers.”

Under the bill, notes Kaufman, “regulators could potentially invoke the Volcker Rule, which would prohibit commercial banks from owning or sponsoring ‘hedge funds, private equity funds, and purely proprietary trading in securities, derivatives or commodity markets.’” But, under the bill, he adds, regulators could also in the end “issue a recommendation not to enforce the Volcker Rule at all.”

As for the proposed resolution authority, Kaufman said:  “no matter how well Congress crafts a resolution mechanism, there can never be an orderly wind-down of a $2-trillion financial institution that has hundreds of billions of dollars of off-balance-sheet assets, relies heavily on wholesale funding, and has more than a toehold in over 100 countries….Resolution authority is therefore a slender reed upon which to lean when it comes to institutions as large, complex and interconnected as these.”  

“We must break up these banks and separate again those commercial banking activities that are guaranteed by the government from those investment banking activities that are speculative and reflect greater risk,” Kaufman concluded. “We must limit the size, liabilities and leverage of any systemically significant financial institution. Given the ever-increasing rate of financial innovation, the need for Congress – not the regulators – to impose these time-honored principles has never been greater. The stakes have never been higher.”

Read the full March 25 speech here.

Read “The Rule of Law and Wall Street” given on March 15 here.

Read “Wall Street Reform That Will Prevent The Next Financial Crisis” given on March 11 here.

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