WASHINGTON, D.C. – The U.S. Senate tonight unanimously approved a bipartisan financial reform amendment, authored by Senator Susan Collins, that would help prevent future economic crises by directing regulators to impose tough risk-and sized-based capital standards on financial institutions. The amendment, cosponsored by Senators Jeanne Shaheen (D-NH), Sam Brownback (R-KS) and Lisa Murkowski (R-AK), tackles the “too big to fail” problem by requiring financial firms to have adequate amounts of cash and other liquid assets available under new regulatory capital standards.
Senator Collins’s amendment was endorsed by Sheila Bair, chairman of the nation’s Federal Deposit Insurance Corporation (FDIC), who expressed her "strong support” for the amendment. In a letter to Senator Collins, Chairman Bair called the proposal “a critical element to ensure that U.S. financial institutions hold sufficient capital to absorb losses during future periods of financial stress. With new resolution authority, taxpayers will no longer bail out large financial institutions.”
“It makes no sense that the capital and risk standards for our nation’s largest financial institutions are more lenient than those that apply to smaller depository banks, when the failure of larger institutions is much more likely to have a broad economic impact. Yet, that is currently the case. We must give the regulators the tools – and the direction – to address this problem,” said Senator Collins. “Our amendment strengthens the economic foundation of these firms, increases oversight and accountability, and helps prevent the excesses that contributed to the deep recession that has cost millions of Americans their jobs. Increasing capital requirements as firms grow provides a disincentive to their becoming ‘too big to fail’ and ensures an adequate capital cushion in difficult economic times.”
Senator Collins’ amendment directs federal regulators to impose minimum leverage and risk-based capital requirements on banks, bank holding companies, and non-bank financial firms identified by the new Financial Stability Oversight Council for supervision by the Federal Reserve. Neither current law nor the Senate Banking Committee bill requires regulators to adjust capital standards for risk factors as financial institutions grow in size or engage in risky practices. The amendment directs the regulators to use a ratio of “Tier 1 capital” to risk-adjusted assets. Tier 1 capital, which is comprised of cash, the value of common stock, and some types of preferred stock, reduced by unrealized losses, is closely correlated with bank liquidity and stability and thus is a measure of an institution’s economic health.