Risk Management

House Bill Would Quantify Taxpayer Support of Banks

HR 888 would force the Federal Reserve to measure the financial benefits that banks receive from being 'too big to fail,' says one of the bill's au...
Katie Kuehner-HebertMarch 11, 2015
House Bill Would Quantify Taxpayer Support of Banks

Financial institutions that are “too big too fail” should be required to detail just how much they financially benefit from taxpayer support, so says one of the authors of federal legislation that is trying to do just that.

Professor Cornelius Hurley, director of the Boston University Center for Finance, Law & Policy, on Tuesday wrote an American Banker column supporting HR 888. The bill, called the Subsidy Reserve Act, would require financial institutions with $500 billion or more in assets to identify the portions of their retained earnings that are attributable to taxpayer subsidies, and place such capital in a “subsidy reserve,” to be included in its financial statements.

The Federal Reserve, after public hearings, would then establish a formula for determining the financial benefits received by each company, based on expectations from shareholders and other stakeholders on how much the federal government should shield them from losses in the event of each company’s potential failure.

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Such transparency could lead to more shareholder calls to “right size” over-capitalized companies — due in part to accumulated subsidies — by selling off assets or divesting units and returning cash to shareholders, Hurley wrote. The banks would never truly get too unwieldy, potentially requiring massive taxpayer bailouts if they teetered on failure.

“As banks become overcapitalized, market discipline in the form of shareholders’ pressure to more efficiently deploy their capital will drive the bus, not the Fed,” he wrote.

However, the country’s largest banks that have been designated by the government as “systemically important” are reportedly balking at the bill, claiming there are no financial benefits, Hurley wrote. But he disputed their claim, contending that big banks don’t want transparency because they value “complexity and opacity over simplicity.”

Hurley wrote that one of the benefits to HR 888, which he helped to write, would be to force the biggest financial services companies to quantify how much they are financially benefiting from one amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act. That amendment enabled them to bring their high-risk derivatives activities back into their banks, instead of having separate units perform such activities.

Since those banks are insured by the Federal Deposit Insurance Corp., that amounts to taxpayer support, he claimed, and HR 888 would force such banks to describe “the financial benefit of conducting their swaps business with the taxpayer backing of the [FDIC].”

Hurley contended that the public has a right to know the details of such benefits:

“Last week, Sen. Elizabeth Warren grilled Federal Reserve Chairman Janet Yellen about her general counsel Scott Alvarez,” he wrote. “Alvarez had popped off about the lucrative repeal of derivative provisions of Dodd-Frank. While Alvarez’s views may be of interest to some, the more compelling questions Warren should have asked are: ‘Has the Fed measured the financial benefits that the TBTF banks receive by shifting the risk of these activities onto the backs of the U.S. taxpayers? And if not, why not?’”

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