‘Too big to fail’ legislation catches the attention of Wall Street

“Too big to fail” is a hot topic again on Capitol Hill, and Wall Street is taking note.

Sen. Bernie SandersBernard (Bernie) SandersDemocratic Socialists of America endorses Sanders for president Trump on 2020 Dems skipping AIPAC: 'I think they're anti-Jewish' The Hill's Morning Report — Washington readies for Mueller end game MORE (I-Vt.) and Rep. Brad Sherman (D-Calif.) on Tuesday introduced legislation that would require the Treasury Department to dismantle institutions that threaten the stability of the financial system.

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Later in the day, a bipartisan group of senators sent a letter to federal regulators urging them to speed up work on new rules meant to prevent banks from becoming so massive that the government has no choice but to bail them out in times of trouble.

The new rules would beef up capital requirements for banks and ensure that shareholders and creditors — not taxpayers — are on the hook for losses.

The financial industry agrees that “too big to fail” should be stopped, but argues the Dodd-Frank financial overhaul passed in 2010 did just that.

But an increasing number of lawmakers are skeptical of that argument, and are pushing legislation aimed at curbing risky behavior on Wall Street.

For now, financial industry officials believe the “too big to fail” movement is more talk than action. But they are well aware that one headline-grabbing misstep by a major bank — similar to the multibillion-dollar losses on derivatives suffered by JP Morgan — could help legislation catch fire.

“One more London Whale incident and the whole thing blows up,” said one financial industry representative, referring to the JP Morgan losses.

In the push to squelch the “too big to fail” chatter, the banking industry’s biggest ally might be President Obama.

The Obama administration and financial regulators have been adamant that the Dodd-Frank law will put the issue of bailouts to rest once the rules are fully implemented.

While the market might still perceive big banks as enjoying some form of implicit government backing, the administration contends that bank bailouts are a thing of the past, and that watchdogs will soon have the tools they need to take apart ailing financial institutions with minimal collateral damage.

Wall Street couldn’t agree more.

“We believe that Dodd-Frank, once fully implemented, addresses the issue of ‘too big to fail,’ ” said Scott Talbott, senior vice president for public policy at The Financial Services Roundtable.

“No institution should be ‘too big to fail’ and taxpayer money should never be used to rescue financial firms from their mistakes,” added Rob Nichols, president and CEO of the Financial Services Forum.

Regulators are still immersed in implementing the Dodd-Frank law, including several provisions aimed at tackling the “too big to fail” issue. They are also grappling with adhering to a new global accord on capital requirements known as Basel III that is aimed at bolstering bank cushions.

Lawmakers on both sides of the aisle are watching closely while pushing regulators to pick up the pace.

Liberal stalwarts Sens. Elizabeth WarrenElizabeth Ann WarrenTrump on 2020 Dems skipping AIPAC: 'I think they're anti-Jewish' The Hill's Morning Report — Washington readies for Mueller end game 2020 Dems avoid this year's AIPAC conference MORE (D-Mass.) and Sherrod BrownSherrod Campbell BrownWarren, Klobuchar call on FTC to curtail use of non-compete clauses The Hill's Morning Report - Trump, Dems put manufacturing sector in 2020 spotlight Trump faces political risks in fight over GM plant MORE (D-Ohio) signed the letter to regulators on Tuesday, along with Republican Sens. David VitterDavid Bruce VitterBottom Line Bottom Line Top 5 races to watch in 2019 MORE (La.), Bob CorkerRobert (Bob) Phillips CorkerTrump keeps tight grip on GOP Brexit and exit: A transatlantic comparison Sasse’s jabs at Trump spark talk of primary challenger MORE (Tenn.) and Susan CollinsSusan Margaret CollinsSenate GOP poised to go 'nuclear' on Trump picks Overnight Health Care: CDC pushes for expanding HIV testing, treatment | Dem group launches ads attacking Trump on Medicare, Medicaid cuts | Hospitals, insurers spar over surprise bills | O'Rourke under pressure from left on Medicare for all Dem group launches ads attacking Trump's 'hypocrisy on Medicare and Medicaid cuts' MORE (Maine).

Lawmakers like Sanders and Sherman, meanwhile, argue more legislation is the only way to fix what they see as Dodd-Frank’s flaws.

“We have more momentum than we had in the past,” Sanders, a longtime Wall Street critic, said Tuesday. “It’s not going to happen immediately, but I think momentum is with us.”

Brown and Vitter are working on their own legislation to rein in big banks. A draft version of the legislation indicates the two are looking to significantly beef up capital requirements, requiring much bigger cushions against risk.

Despite the activity, most lawmakers appear hesitant to revisit Dodd-Frank, including the Democrats who championed it.

To throw support behind any further restrictions on banks would be a tacit admission that the original law failed to do the job, some argue.

“They would have to admit that Dodd-Frank failed to rein in ‘too big to fail,’ ” said Brian Gardner, senior vice president for Washington research at Keefe, Bruyette and Woods. “I’m not sure there are a lot of Democrats that are ready to make that plunge.”

He added that the odds of a “too big to fail” bill gaining traction are low because it would essentially reopen the Dodd-Frank debate. With backers of the law extremely wary of considering even technical changes, he is skeptical Congress would be able to restrain the debate to any particular issue.

But at the same time, anger over the financial crisis remains strong in some quarters. The “too big to fail” issue is showing no signs of waning, and might not until Dodd-Frank is put to the test and the public finds out if Washington will dismantle a bank instead of bailing it out.

“You probably need a test case,” said Gardner. “You really need to see, does Dodd-Frank work or not?”