Senators push regulators for bigger bank cushions

By Peter Schroeder - 10/17/12 10:18 AM ET

A bipartisan pair of senators are keeping up their campaign to get regulators to require banks to hold bigger protective cushions of capital.

Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) sent a letter to top banking regulators Wednesday, asking them to simplify and strengthen new capital requirements to ensure that when times get tough, no bank becomes "too big to fail."

While regulators are working to implement an international accord on bank capital standards known as Basel III, the two lawmakers insisted that they not overthink it. Instead, they argue that regulators ought simply to require banks to hold a substantial amount of capital so they are protected if their lending or investments turn south.

"Both these institutions and their rules are so complex that no one — not their executives, nor their shareholders, nor their regulators — truly understand their financial health,” said Brown. “It is essential that banks fund themselves with more pure equity, so that taxpayer dollars are not on the line, and capital rules should be simple enough that banks of all sizes can understand them.”

“This is not complicated finance. If a huge bank wants to provide loans and investments for billions of dollars, then they should be required to keep a certain amount of reserves on hand to absorb any rapid or sudden market turns,” added Vitter.

The letter from the Senate Banking Committee members was sent to head regulators at the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

In it, they critique the Basel III accord, which requires banks to hold at least 7 percent of their assets in what is known as Tier 1 Capital. Larger banks, or ones deemed vital to the financial system, would be required to hold more.

But the senators said this plan might not go far enough, and could still leave banks vulnerable to extreme shocks.

"As you begin implementing these standards, we urge you to focus on simplifying these rules, with a focus on pure, loss-absorbing capital," they wrote. "This will strengthen mega-banks’ balance sheets, protect taxpayers, reassure investors and reduce the regulatory burden on the community banks that are already better capitalized than Wall Street banks. In this case, simpler really is better."