Too big to fail. More federal control on just about everything.

Bank bill tackles ‘too big to fail’ issue
BY LESLIE WIMMER Fort Worth Business Press
September 07, 2009

A bill currently sitting in a U.S. Senate committee would give the Federal Deposit Insurance Corp. the power to break apart bank holding companies a panel of banking and finance officials believe are too big to fail.

The bill, nicknamed “The Resolution Reform Act of 2009,” would authorize the creation of a panel made up of regulators from the Federal Reserve, FDIC, Office of Thrift Supervision, Office of the Comptroller of the Currency, and other organizations, which would determine if a bank holding company is too big to fail and how to break the company apart to sell its assets, or “unwind” a holding company, said Greg Hernandez, a FDIC spokesman.

The bill does not address how officials would determine what defines a “too big to fail” company, Hernandez said.

But, local banking and finance professionals have mixed opinions about the bill, with some officials saying the government already is too involved in the banking and

finance industries, and others saying legislation to address “too big to fail” companies may level business playing fields.

Sen. Bob Corker, R-Tenn., sponsored the bill, which is co-sponsored by Sen. Marr Warner, D-Va., and Sen. Kit Bond, R-Mo., and introduced the bill on July 30, 2009. It currently sits in the U.S. Senate Committee on Banking, Housing and Urban Affairs.

“The FDIC has the authority to wind down a failing bank, but not a failing bank holding company, which has exacerbated the moral hazard problem we’ve seen over the past 18 months,” Corker said in a statement. “It’s important that we take our time with regulatory reform, but in the interim we need the ability to resolve bank holding companies in an orderly way.”

In his statement, Corker added that FDIC Chairman Sheila Bair told him having a resolution mechanism in place to deal with “too big to fail” financial institutions would have reduced the risk to the economy in the current recession, and would have created better market discipline across the system.

A resolution mechanism would have “reduced market uncertainty about who would be next, who would in, and who would lose,” Corker said in a statement.

Brian Happel, Fort Worth market president with BBVA Compass Bank, said he doesn’t think the bill – or bills similar to the Resolution Reform Act – are a good idea.

“I think the focus should be more on governance,” Happel said. “The focus should be more on making sure banks have good management, an experienced management team in place that’s accountable. Also, making sure that business models banks have in place are sound business models that make sense, and making sure that the values of that company are very clearly identified and that principles are being practiced.

“As you look under a lot of the underlying problems that have taken place out there, greed has played in part,” Happel said. “Had those other [principles] been in place, you would have eliminated or at least lessened the impact of what greed could have on those banks.”

Stanley Block, a Texas Christian University finance professor, said he is against the legislation, adding that he believes the government should get out of the banking business as much as possible after the United States comes out of the current financial crisis.

“I’d hate to think in this country that the government could break up a bank holding company at its will,” Block said. “I think there should be adequate regulation to make sure banks don’t get in too risky a situation, but I don’t think the government should be making a decision that a bank holding company is too large and needs to be broken up.”

OmniAmerican Bank’s President and Chief Executive Officer Tim Carter said government intervention since late 2008 has made competition difficult between large conglomerate banks and smaller community banks.

“There’s been a lot of debate about the large banks and what happened to all of the TARP dollars,” Carter said. “I do believe it’s created an unlevel playing field for big banks versus community banks. All that money that went in [to larger banks] was done almost essentially overnight, very quickly, with no due diligence, [the government] picked winners and picked losers.”

Banks the government chose to invest in with TARP funds have been given a competitive edge over other banks in that larger corporations can raise more funds in the current credit markets by paying more than the market rate because they have federal dollars on their balance sheets, Carter said.

“I see this as one step in trying to address ‘too big to fail,’ but it’s not going to be the only step, there needs to be other things,” Carter said.

The definition of “too big to fail” has yet to be clearly defined, Block said, but he believes bank holding companies on par with the United States’ largest banking companies, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo & Co. would fall in the category.

“I would say the definition would be that a bank is so large that its failure would cause the financial markets to tremble, that it would cause international fear about the banking system in the U.S. and the rest of the world,” Block said.