Will this plan end the era of "too big to fail"?
Financial regulators say that proposed industry rules will help prevent the kind of banking panic that nearly took down the global economy in 2008. But experts are less sure that the plan will eliminate such risks, or curb the dominance of "too big to fail" banks in the U.S.
The Financial Stability Board (FSB), an international forum that works to create uniform global banking rules, on Monday proposed requiring the world's largest banks to hold a larger amount of their risk-weighted assets -- some 16 percent to 20 percent -- in equity and cancellable debt. The idea is to ensure that major banks have "sufficient capacity" to absorb losses in the event of a financial crisis without exposing taxpayers to a potential loss, the group said.
Experts said the rules, which are now open for public comment until Feb. 2, could have a significant impact on the financial sector and on the broader U.S. economy.
"There is an argument to be made that it's counter-productive for consumers because it probably inhibits bank lending," said Brian Gardner, an analyst with Keefe, Bruyette & Woods. "For taxpayers, it is probably more of a positive since it probably reduced the chances of [another] taxpayer bailout."
Stephen Miller, a senior research fellow at the Mercatus Institute, a market-oriented think tank associated with George Mason University, tells MoneyWatch that the FSB rules would place more pressure on bank stockholders and bondholders to prevent risky lending activities.
"The call for higher capital requirements is an attempt to make bank investors more responsible for the risks banks take," he said. In Miller's view, that's preferable to counting on the federal government to bear the sole responsibility for cleaning up the mess created by banks.
The requirement to raise debt and hold more capital would post a "modest earnings headwind" for U.S. banks that would reduce earnings per share in the low-to-mid single digits range, Goldman Sachs analysts said in a research note.
Notably, the FSB's guidelines aren't binding on U.S. financial regulators such as the Federal Reserve and the Office of the Comptroller of the Currency. The Fed, in particular, has a full plate trying to implement the Dodd-Frank financial reform law enacted in 2010. But the FSB hopes that the U.S. watchdogs will feel compelled to coordinate their capital requirements for banks with other regulatory regimes around the world.
Like the FSB standards, Dodd-Frank also aims to eliminate the implicit federal guarantee for what are considered "systemically important" U.S. banks, such as Bank of America, Citigroup and JPMorgan Chase. A key part of Dodd-Frank is what is known as the Volcker Rule (named after former Fed Chairman Paul Volcker), which is designed to prevent publicly protected banks from making risky, speculative investments out of their own accounts. It also places limits on their ownership of private equity and hedge funds.
But addressing these issues is proving to be easier said than done. According to press reports over the weekend, Fed general counsel Scott Alvarez told an American Bar Association conference that the central bank is considering extending the deadline for implementing the Volcker Rule, as well as changing the metrics for its implementation.
"Too big to fail is a test of political will," Hester Peirce, a former staffer on the Senate Banking Committee who is also a Mercatus senior fellow. "How much pain can lawmakers handle when the financial system is in crisis? There is nothing that the Fed, the European financial ministers or the FSB can do to control their legislators from bailing out their largest banks."