WASHINGTON -- A rift has emerged over “too-big-to-fail” between the Treasury Department and the regulators who oversee financial groups, a top Democratic lawmaker has alleged, potentially creating an uncomfortable situation for an administration keen to show it has cracked down on the nation’s biggest banks.
The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. said in a joint statement this week that financial markets continue to perceive some leading financial institutions as too big to fail, perverting the financial system and giving large banks unfair advantages over smaller peers in the form of lower funding costs.
Sen. Sherrod Brown (D-Ohio), a senior lawmaker on the Senate Banking Committee, on Thursday seized on an April speech delivered by Mary Miller, Treasury undersecretary for domestic finance, in which Miller disputed the notion that big banks enjoy a funding advantage due to perceptions they are too big to fail. At the time, lobbies representing big banks cheered her remarks.
Quoting the bank regulators, Brown asked her simply: “Why are they wrong and you’re right?”
Miller stuck to her previous remarks -- the evidence that big banks unfairly benefit from a funding advantage remains mixed -- but the potentially divisive question showed what some Democrats privately acknowledged as a source of frustration with the Obama administration over financial regulation.
While many lawmakers have praised the administration for its efforts to reform Wall Street, some have said they’ve been disappointed the Treasury Department has not been more aggressive in fixing the industry blamed for triggering the 2007-09 financial crisis and the most punishing economic downturn since the Great Depression.
In the fall of 2008, virtually every large financial group was rescued by the federal government, committing taxpayer dollars to propping up teetering banks whose failure risked sending the economy into a worse tailspin.
With some Republican support, a group of Democrats have proposed forcible restructurings of big banks, breaking them up along lines of business, capping their size, forcing them to significantly reduce their borrowing, and tougher prohibitions on certain trading activities.
For example, this week, a bipartisan group of four lawmakers led by Sens. Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.) proposed a law that would force large banks to cleave off their securities units in a revival of the Depression-era law known as Glass-Steagall.
Though the Treasury Department has largely opposed these moves, Treasury Secretary Jack Lew appeared to endorse additional efforts that regulators deemed necessary to forever end the perception that some banks remain too big to fail.
“It is certainly the objective to be able to say at the end that we have ended ‘too-big-to-fail’ and that we have eliminated any subsidy that might exist,” Lew told Brown during a May hearing before the Senate Banking Committee. “The fact that the market implies a subsidy when we've said as a matter of policy that ‘too-big-to-fail’ is not our policy is a bit of a challenge.
“And we are saying it as often as we can, but we're going to have to demonstrate it with the rules that we've put in place that make it quite costly to be a large bank in terms of the requirements that are put in place,” Lew added.
To Lew’s point, some regulators at the banking agencies have supported tougher measures.
On Tuesday, the desire among some regulators to do more led the Fed, FDIC and OCC to propose a measure that would force the eight biggest banks, including JPMorgan Chase and Citigroup, to significantly reduce their reliance on borrowed funds in favor of building up their capital.
As part of the rule, the regulators said they remained concerned over too-big-to-fail. The acknowledgement marked one of the few times the banking agencies had teamed up to express alarm about the continued existence of too-big-to-fail in the wake of Dodd-Frank, the post-crisis 2010 overhaul of U.S. financial regulation designed specifically to forever end the perception that some banks are considered so big or important that policymakers would never allow them to fail. The law explicitly bans taxpayer-funded bailouts.
“A perception continues to persist in the markets that some companies remain ‘too big to
fail,’ posing an ongoing threat to the financial system,” the regulators said. “First, the existence of the ‘too-big-to fail’ problem reduces the incentives of shareholders, creditors and counterparties of these companies to discipline excessive risk-taking by the companies.
“Second, it produces competitive distortions because companies perceived as 'too big to fail' can often fund themselves at a lower cost than other companies. This distortion is unfair to smaller companies, damaging to fair competition, and tends to artificially encourage further consolidation and concentration in the financial system.”
The statement signified a rare agreement among regulators that big banks continue to benefit from a cost advantage due to the perception that they are too big to fail. The argument over whether this subsidy exists gripped Washington earlier this year as banking groups rushed to dispute the charge after lawmakers used the subsidy claim to justify moves to break up America’s biggest banks.
The regulators added that the enhanced capital measure they proposed this week addresses “the concern that some institutions benefit from a real or perceived implicit federal safety net subsidy or may be viewed as ‘too big to fail.’”
By contrast, Miller said in April that the evidence regarding a cost advantage for big banks was “mixed and complicated, making it hard to attribute the existence or absence of a funding cost advantage to any single factor, including a market perception of a too-big-to-fail subsidy.”
Rather, Miller said, the funding advantage may be due to a variety of factors. For example, larger companies in all sectors tend to enjoy lower borrowing costs because the market for their debt is bigger, allowing it to trade more often and with more buyers. Big banks also may enjoy advantages because they are involved in more businesses, she said, providing a buffer if one line of business suffers.
Miller also argued that perhaps big banks are paying more to borrow than their smaller peers, citing recent research.
She urged caution to those seeking to draw conclusions, though she expressed hope that regulators’ efforts “should help wring it the rest of the way out of the market.”
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The UK bank has been at the centre of a very public storm since U.S. and British authorities fined it more than $450 million last month for its part in manipulating Libor. The ensuing backlash cost chief executive Bob Diamond and chairman Marcus Agius their jobs. The pair have appeared before a parliamentary committee to testify about what went on at the bank, in a scandal which has drawn in British central bankers and government ministers.
BANK OF AMERICA
Bank of America is among the banks being investigated, a person familiar with the matter told Reuters last year. The bank did not comment in its 2011 annual report. It is one of 11 banks accused of conspiring to manipulate Libor in two lawsuits filed by discount brokerage and money manager Charles Schwab.
The Swiss Competition Commission said in February that Bank of Tokyo-Mitsubishi UFJ was among those it was investigating on suspicion of conspiring to manipulate rates. The Japanese bank did not comment on any probes in its 2011 annual report. This month, the group suspended two London-based traders as a result of a probe into manipulating interbank lending rates, but the bank said that was not to do with their conduct at BTMU. They had previously worked at Dutch lender Rabobank.
Citigroup said its subsidiaries had received requests for information and documents as part of investigations in various jurisdictions. The U.S. bank said it was cooperating. The bank is also subject to a number of private lawsuits filed in the U.S. against banks that served on the Libor panel. In December, Japan's financial regulator said it would penalise the Japan securities units of Citigroup and UBS after finding that an individual who worked at UBS and then moved to Citi had, along with his boss at Citi, attempted to influence the Tokyo interbank offered rate (Tibor).
Credit Suisse is one of 12 banks being investigated by the Swiss Competition Commission about alleged collusive behaviour among traders to influence the bid ask spread for derivatives tied to Libor and Tibor as well as the rates themselves. Credit Suisse said it was cooperating fully.
The German bank said it was cooperating with investigations in the United States and Europe in connection with setting rates between 2005 and 2011. It has had civil actions filed against it in the United States related to the setting of Libor. Germany's market regulator has launched a probe into the bank over suspected manipulation of interbank lending rates, sources have said. Results are expected in mid-July. German magazine Der Spiegel reported, citing no sources, that two Deutsche Bank employees have been suspended after external auditors examined whether staff were involved in manipulating rates.
Lloyds said it was cooperating with investigations. It has also been named in private lawsuits in the U.S. related to the setting of Libor. It said it 2011 annual report that it could not predict the ultimate outcome of investigations or lawsuits. In May, the bank said two derivatives traders had been suspended following an investigation into possible interest rate manipulation.
HSBC has said it received demands from regulators for information in connection with Libor investigations and it was cooperating. It has also been named in lawsuits related to Libor in the United States. HSBC said in its 2011 annual report that it could not predict the outcome of the investigations and lawsuits.
The bank, now a subsidiary of Lloyds, said it was cooperating with investigations. It has also been named in private U.S. lawsuits related to the setting of Libor. HBOS said it in its 2011 annual report it was not possible to predict the scope, outcome or impact of the investigations and lawsuits.
JPMorgan said it was cooperating with regulators and government bodies investigating the setting of Libor, Euribor and Tibor rates, mainly in 2007 and 2008. It has also been named as a defendant in private U.S. lawsuits over Libor.
Rabobank said it was cooperating with investigations into possible manipulation of Libor rates. It has also been named as a defendant in a number of civil lawsuits in the United States. Rabobank said it was confident the claims would be held unfounded and was conducting its defence as such.
Canada's largest bank did not make any comment in its 2011 annual report on its involvement in regulatory probes into possible manipulation of interbank lending rates.
Royal Bank of Scotland said it was cooperating with investigators, who had requested information. RBS said members of its group had been named as defendants in a number of lawsuits in the United States. The bank said it had substantial defences to these claims. Following a newspaper report last month that it faced a 150 million pound fine, RBS said there could not be any certainty as to the timing or amount of any fine or settlement.
The Swiss bank said it had been granted leniency or immunity from potential violations by some authorities, including the U.S. Justice Department and Swiss Competition Commission, in return for its cooperation in the Libor manipulation probe. It did not specify what information it was providing. In December, Japan's financial regulator said it would penalise the Japan securities units of Citigroup and UBS after finding that an individual who worked at UBS and then moved to Citi had attempted to influence Tibor. It has also been the subject of U.S. lawsuits.
The German bank was among those being investigated, a person familiar with the matter told Reuters in March last year. The bank made no mention of the probes in its 2011 annual report. In July last year it was dropped, at its request, from the panel of banks contributing to daily fixings of Libor for U.S. dollars.
The Japanese bank did not mention the investigations into possible Libor manipulation in its 2011 annual report. In April last year it was one of 12 banks sued by Vienna-based asset manager FTC Capital, accused of conspiring to manipulate Libor.