Ellison introduces bill to break up ‘too big to fail’ banks

Rep. Keith Ellison. Photo: WDCpix

Rep. Keith Ellison is sponsoring a bill that would break up banks deemed too big to fail. The Safe, Accountable, Fair, and Efficient Banking Act of 2010 would set the limits on the size of deposit holdings that a bank can have.

Ellison and several Democratic House colleagues sent a letter to members of Congress on Thursday asking for support and pointing out that 63 percent of the gross domestic product is held by just six large financial institutions.

“The gigantic size of megabanks, and the perception in the marketplace that they are indeed too big for the government ever to permit them to fail, gives them a competitive advantage over smaller financial institutions that distorts the market and discourages competition,” wrote Ellison, along with Reps. Brad Miller of North Carolina, Ben Chandler of Kentucky and Steve Cohen of Tennessee. “The lack of competition in the banking industry, in turn, leads to ever-higher levels of risk in the system.”

The bill would restrict any bank from having more than 10 percent of the nation’s total insured deposits. It would also cap a bank’s liability to 2 percent of the national gross domestic product and establish a 6-percent equity minimum for bank holding companies.

“The six largest U.S. banks today have total assets estimated to be in excess of 63 percent of our national GDP,” wrote the House members. “The gigantic size of megabanks, and the perception in the marketplace that they are indeed too big for the government ever to permit them to fail, gives them a competitive advantage over smaller financial institutions that distorts the market and discourages competition. The lack of competition in the banking industry, in turn, leads to ever-higher levels of risk in the system.”

Here’s the full text of the letter:

Dear Colleague:

We’re writing to invite you to join us as cosponsors of legislation to restrict the leverage and size of the very largest banks and financial institutions in the United States.

The resolution powers in the financial regulatory reform bill that passed the House last year represent critical first-steps in addressing the problem of risk-taking by institutions that are “too big to fail.” But it has become increasingly clear that to make absolutely certain U.S. taxpayers are never again forced to rescue a giant financial institution, we must make sure that no market participant is so large that a failure would result in economic collapse.

The six largest U.S. banks today have total assets estimated to be in excess of 63 percent of our national GDP. The gigantic size of megabanks, and the perception in the marketplace that they are indeed too big for the government ever to permit them to fail, gives them a competitive advantage over smaller financial institutions that distorts the market and discourages competition. The lack of competition in the banking industry, in turn, leads to ever-higher levels of risk in the system.

There is no evidence that giant financial institutions perform any public service or market function that cannot be performed as well or better by smaller, and even substantially smaller, banks and financial institutions. To the contrary, all the evidence suggests that megabanks distort the market and impose substantial risk to the public. Further, the unprecedented size of the largest banks gives them enormous political power, including the ability to thwart appropriate financial regulation. As former Secretary of Labor Robert Reich correctly observed in a recent column, “the only competitive advantage to being a giant bank headquartered on Wall Street is to have the economic and political clout to get bailed out by American taxpayers when the next crisis hits.”

The SAFE Banking Act of 2010 would limit the size of megabanks by prescribing statutory limits on deposits, non-depository liabilities, and leverage. These steps would require several of the largest banks to, in effect, break themselves up to come in under the limits that this law would create. Specifically, the bill would:

• Impose a strict 10 percent cap on any bank-holding-company’s share of the United States’ total insured deposits;

• Reduce the maximum amount of non-deposit liabilities at financial institutions (to two percent of United States GDP for banks, and three percent of GDP for non-bank institutions);

• Set into law a six-percent equity minimum for bank holding companies and selected nonbank financial institutions, ending the extreme leverage that puts at risk the solvency of the entire financial system.

For more information about the SAFE Banking Act, or to become a cosponsor, please contact [removed for privacy] in Rep. Miller’s office.

Sincerely,

Brad Miller

Ben Chandler

Keith Ellison

Steve Cohen