U.S. Representative John Campbell said he plans to offer legislation intended to shrink too-big- to-fail banks by requiring them to hold more capital including long-term debt.
Lawmakers and regulators from both parties — including Federal Reserve Governor Tarullo — argue that the 2010 Dodd-Frank Act failed to curb the growth of large banks and express support for renewed efforts to limit the kind of systemic risk that fueled the 2008 financial crisis.
“Being big is not a problem in and of itself, but being big in a sense that it creates a competitive disadvantage and a systemic problem is a bad thing,” Campbell, a California Republican. Three of the four largest U.S. banks — JP Morgan, Bank of America Corp. and Wells Fargo & Co. — are bigger today than they were in 2007, heightening the risk of economic damage if one gets into trouble.
Banks typically fund their longer-term assets with short- term debt, making a profit on the interest-rate difference between the two. In a bank failure, stockholders typically are wiped out, and short-term debt can evaporate quickly as creditors refuse to renew commercial paper and short-term notes.