Why Congress Won't Act on 'Too Big to Fail'

In a rare moment of bipartisan consensus, the Senate on Friday voted 99-0 in favor of an amendment that would end federal subsidies for the nation?s biggest banks. The amendment, introduced by Democratic Sen. Sherrod Brown of Ohio and Republican Sen. David Vitter of Louisiana, was one of hundreds that formed the vote-a-rama on the Senate Democrats? budget that stretched into the wee hours of Saturday morning. The actual budget, in contrast to the too-big-to-fail amendment, passed with not a vote to spare, 50-49.

The passage of Brown and Vitter's amendment is the latest evidence of growing rhetorical momentum to strip away the advantages big banks have by virtue of their size. The basic idea behind ?too big to fail? is that because the collapse of a large bank would threaten the entire financial system, it is assumed the U.S. government would bail it out rather than let it go under. As a result, such banks can borrow at lower rates because their creditors think they won?t fail ? and hence have a subsidy the smaller banks don?t enjoy.

But even though everyone in the Senate agreed Friday that a too-big-to-fail problem exists, Congress is unlikely to take up legislation to tackle it anytime soon.?Washington is otherwise occupied at the moment.

The Obama administration hasn?t indicated any desire to revisit financial reform after the passage in 2010 of the contentious Dodd-Frank financial reform law. The White House has made clear it has other priorities for the second term, such as immigration reform and gun control. Those will take plenty of time. Fiscal fights dominated the end of 2012 and early 2013 and will certainly color the rest of the year, also dominating lawmakers' time.

Certain steps to address ?too big to fail? are laid out in Dodd-Frank, so taking new steps to tackle the issue risks opening up the entire Dodd-Frank Act to changes. Neither the White House nor Sen. Tim Johnson, D-S.D., who heads the Senate Banking Committee, has shown any desire to do that. Such a move could also be seen as premature, given that fewer than half of the rules required under the law have been finalized. There's also debate over whether the law will fix the problem, once it's fully implemented, or perpetuate it.

And while it?s widely accepted to come out in support of ending too-big-to-fail subsidies, there?s far from a consensus on how best to do it. Do you set a cap on bank size, as Federal Reserve Governor Dan Tarullo has suggested? Do you increase capital requirements even further, as Brown and Vitter have advocated? Do you ring-fence banks' retail divisions from their investment-banking practices, as the United Kingdom has done? That?s where finding bipartisan agreement is going to be tough, not on the basic principle that taxpayers shouldn?t be on the hook for the failures of large banks. ?We all agree there should be world peace, but fundamentally, we radically disagree about how to achieve that,? said Dan Alamariu, director of financial services at the Eurasia Group.

The vote isn?t for naught, though. ?It is signaling,? Alamariu said. ?What it does is it basically makes the regulators more likely to issue stringent rules on issues related to large banks.?

Regulators in the United States are still writing and implementing the Dodd-Frank law and the Basel III agreement, a set of international banking-sector reforms. The financial industry has lobbied for less-stringent requirements under some of the rules; Congress could keep up the pressure on regulators to make the rules strong through demonstrations like Friday's vote. Bank shareholders, too, may read the signs from Congress and regulators and perceive that it's to a bank's competitive advantage to shrink and place pressure from within to slim down.

Finally, and perhaps the most obvious reason Friday's vote won't lead to action, was that it was nonbinding. ?There?s no consequences of the vote whatsoever. There?s nothing that?s going to happen next as a follow-up,? said Brian Gardner, senior vice president for Washington research at Keefe, Bruyette & Woods. ?[It?s] totally symbolic.??

The legislative calculus could shift if there?s another scandal in the financial industry, akin to but perhaps more dramatic than the estimated $6 billion in trading losses at JPMorgan Chase last year, which caught the attention of Capitol Hill but failed to bring about any new movement for reform. Some made the case that the fact the losses were contained at JPMorgan meant the system worked just as it was supposed to. A massive, uncontained screw-up on Wall Street could change that feeling.

For now, though, despite the rhetorical shift to action, the legislative momentum is likely to stay right where it has been: Stuck in neutral.

Source: http://news.yahoo.com/why-congress-wont-act-too-big-fail-075932057--politics.html

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