This legislation would require the Secretary of the Treasury to identify and break up institutions that are deemed too big to fail. This is the third time Congressman Sherman has introduced similar legislation in the House, and the third time Senator Sanders has introduced such legislation in the Senate. The only thing that has changed is the biggest banks have gotten even bigger – 38% bigger than 2008.
“Too big to fail should be too big to exist,” said Congressman Sherman who has advocated this position since 2009. “Never again should a financial institution be able to demand a federal bailout. Today they can claim: ‘if we go down, the economy is going down with us.’ By breaking up these institutions long before they face a crisis, we ensure a healthy financial system where medium-sized institutions can compete in the free market.”
“These medium-sized and smaller banks will be more inclined to make loans to small- and medium-sized businesses – which are the backbone of our economy. The legislation is endorsed by the Independent Community Bankers of America (ICBA), which represents over 6,000 of our nation’s 6,589 banks.”
Sherman continued, “Every financial institution should compete for funds based on the soundness of its balance sheet, and no financial institution should be able to claim that there is a special federal safety net available to its investors because of the institution’s sheer size.”
“In my view, no single financial institution should have holdings so extensive that its failure could send the world economy into crisis,” Senator Sanders said. “At the very least, no institution, no CEO in America should be above the law. If an institution is too big to fail, it is too big to exist.”
Richard Fisher, former President of the Federal Reserve Bank of Dallas, argued that when markets presume a systemically important institution has implicit government backing, access to capital is easier. A study by International Monetary Fund researchers showed a potential advantage of these firms as high as 80 basis points (.8%). Building on that estimation, Bloomberg News calculates taxpayers could be creating a subsidy of $83 billion dollars annually, roughly equal to the bank’s annual profits.
This legislation would require the Secretary of the Treasury to submit to Congress a list of all banks and other financial institutions that the Secretary believes have become too big to fail. Those entities deemed too large would then be broken up in a managed process of reorganization, so a single failure would no longer cause a catastrophic effect on the United States or global economy without a taxpayer bailout.
“Too Big to Fail” refers to any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial government assistance.
News courtesy: Congressman Sherman
Read more » http://sherman.house.gov/media-center/press-releases/congressman-sherman-and-senator-sanders-stand-together-to-reintroduce