SB 21-23: Too Big to Fail, Too Big to Exist Act (Final Vote)

[Pericles]

A BILL

To break up big banks.

Section 1: Short title

This Act may be cited as the “Too Big to Fail, Too Big to Exist Act”.

Section 2: Content

(a) Definitions.—In this section—

(1) the term “covered entity”—

(A) means a financial institution, as defined in section 803 of the Payment, Clearing, and Settlement Supervision Act of 2010 (12 U.S.C. 5462); and

(B) does not include—

(i) a Farm Credit System institution chartered under and subject to the provisions of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.);

(ii) a governmental entity; or

(iii) a regulated entity, as defined in section 1303 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4502); and

(2) the term “gross domestic product” means gross domestic product as calculated by the Bureau of Economic Analysis of the Department of Commerce.

(b) Total exposure.—

(1) TOTAL EXPOSURE.—

(A) IN GENERAL.—On February 1, May 1, August 1, and November 1 of each year, no covered entity may have a total exposure, as reported by the covered entity on the Federal Reserve form required to monitor the systemic risk profile of financial institutions for the previous reporting period, equal to or greater than 3 percent of the most recent estimate for annual gross domestic product of the United States (in current dollars) for the previous calendar year.

(B) OTHER REPORTING.—If a covered entity is not required to complete a Federal Reserve form required to monitor the systemic risk profile of financial institutions, the Financial Stability Oversight Council shall design and assign a quarterly reporting form as appropriate for each covered entity with total assets greater than $50,000,000,000 that reflects the total risk exposures of the financial institution, including off-balance sheet exposures and derivatives exposure within 18 months of the date of enactment of this Act. Once designated a reporting form, on February 1, May 1, August 1, and November 1 no covered entity may have a total exposure, as reported by the covered entity for the previous reporting period, equal to or greater than 3 percent of the most recent estimate for annual gross domestic product of the United States (in current dollars) for the previous calendar year.

(2) RESTRUCTURING.—

(A) IN GENERAL.—

(i) DESIGNATION.—Any covered entity that violates paragraph (1) shall immediately be designated as a “Too Big to Exist Institution” by the Financial Stability Oversight Council.

(ii) SUPERVISION.—The Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, or during any period in which that position is vacant, the Chair of the Board of Governors of the Federal Reserve System, shall require and supervise a “Too Big to Exist Institution” to restructure to comply with paragraph (1) not later than 2 years after the date on which the first violation arises.

(B) SUBSEQUENT REQUIREMENTS.—After the date on which a covered entity is required to restructure under subparagraph (A), the Vice Chair for Supervision of the Board of Governors of the Federal Reserve System or, during any period in which that position is vacant, the Chair of the Board of Governors of the Federal Reserve System, shall require and supervise any “Too Big to Exist Institution” to restructure to comply with paragraph (1) not later than 1 year after the institution is again found to be in excess of the threshold specified in paragraph (1).

(c) Prohibition against use of federal reserve financing.—Notwithstanding any other provision of law (including regulations), any “Too Big to Exist Institution” may not use or otherwise have access to advances from any Federal Reserve credit facility, the Federal Reserve discount window, or any other program or facility made available under the Federal Reserve Act (12 U.S.C. 221 et seq.), including any asset purchases, temporary or bridge loans, government investments in debt or equity, or capital injections from any Federal institution.

(d) Prohibition on use of insured deposits.—

(1) IN GENERAL.—Any “Too Big to Exist Institution” that is an insured depository institution, or owns such an institution, may not use any insured deposit amounts to fund—

(A) any activity relating to hedging that is not directly related to commercial banking activity at the insured bank;

(B) any creation or use of derivatives for speculative purposes;

(C) any activity related to the dealing of derivatives;

(D) any creation of, or lending against, new or existing forms of structured or structured derivatives products, including col­lat­er­al­ized debt obligations, col­lat­er­al­ized loan obligations, and synthetic derivatives of col­lat­er­al­ized debt obligations and col­lat­er­al­ized loan obligations; or

(E) any other form of speculative activity that regulators specify.

(2) RISK OF LOSS.—A “Too Big to Exist Institution” may not conduct any activity listed in paragraph (1) in such a manner that—

(A) puts insured deposits at risk; or

(B) creates a risk of loss to the Deposit Insurance Fund.

(e) Report; testimony.—The Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, or during any period in which that position is vacant, the Chair of the Board of Governors of the Federal Reserve System, and the Chair of the Financial Stability Oversight Council shall annually testify before the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives and submit to those committees an annual report the restructuring and designation under subsection (b)(2).

(f) Effective date.—Subsections (c) and (d) shall apply to a covered entity 90 days after the date on which a covered entity is designated as a “Too Big to Exist Institution”.

House of Representatives
Passed the House of Representatives 4-3-1-1
X YE
People's Regional Senate
[/quote]

Sponsor:
Senate Designation: SB 21-23

[Pericles]

This needs a sponsor.

[ON Progressive]

I will sponsor.

[Pericles]

24 hours to object to Senator ON Progressive sponsoring this.

[Pericles]

ON Progressive is recognized as the sponsor and is invited to speak on this bill.

[ON Progressive]

This bill is a bill that directs the Federal Reserve board to break up any financial institutions (mainly banks) that are considered "too big to fail", and limits the activities that they can conduct while this is being done.

[Dr. MB]

Looks like a great bill! Voted for it in the House and excited to vote Aye in the senate.

[Southern Senator North Carolina Yankee]

How does that $50,000,000,000 number relate to the size of current firms? Is it indexed to inflation?

[Southern Senator North Carolina Yankee]

For a little background ending too big to fail has been an objective of mine since I spearheaded Glass Steagal in 2017, but RL, other policy initiatives, etc kept causing it to be pushed to the back burner.


It is a delicate balance because you need to account for:
1. Systemic Risk
2. Moral Hazard
3. Too Big to Fail


Its easy to address one at the expense of the others.

Moral Hazard
For instance you can quite easily deal with moral hazard by letting people fail, to some extent that is healthy but if it gets out of control you can reach a 2008 situation or even a 1930-1932 situation where the banking sector implodes and it takes decades to recovery. The domino effect then pulls down firms that were not exceptionally risky, doubly so when it reaches main street.

While being a of a pro-market mind, I have never thought a dynamic to be fair or acceptable when one firm's irresponsibility can take out several other businesses right down to a mom and pop coffee shop on the corner, who may have done everything right themselves. I also don't see this dynamic as pro-market as the market is being destroyed in this scenario, ironically laissez fair can become anti-market in this case.

Systemic Risk:

Likewise the easiest way to deal with systemic risk is to bail everyone one. This means you end up with even bigger firms, controlling even large shares of wealth and power and they can quickly consume both the market into a monopoly and the gov't into a corporatist oligarchy. This also rewards bad behavior and encourages it to continue at the expense of main street, leading to moral hazard.

Too Big to Fail:

Depending on how aggressive you are, this could lead to both moral hazard and systemic collapse. Breaking up the big banks too quickly can trigger a financial system collapse if credit locks up and firms can no longer make ends meet. It also triggers a different kind of moral hazard on its own or perhaps that is not the best term for it, but the knowledge that the government will break you up at a certain size will alter behavior for the good in some cases but this could also in turn lock up access to credit in certain economic situations.


As for this bill here, it actually does the most controversial part of the strategy that I was considering merely setting a market cap and breaking up firms that reach it. This was probably the biggest thing that kept me from moving ahead was how to structure it primarily since last time the ham-fisted approach used almost ten years ago (January 2010) was so extreme even some resident socialists labeled it "excessive". The other concern was how to avoid opposition from my own side since on the surface it is a regulatory action manipulating the market, but it saves billions of dollars in bailouts, saves the market itself and preserves economic stability, which 1) helps the budget deficit and 2) helps ameliorate the economic despair from which all forms of extremism feast. Of course this Burkean mindset of fiscal conservatism and societal stability trumping the anti-regulation mindset is not in vogue among today's right obviously.

If this passes, I can then come back and deal with Systemic Risk and Moral Hazard similarly to pre-reset but that is a story for another time.

[Dr. MB]

Good points Yankee. I wonder if a more comprehensive bill could be created later on.

Any other thoughts?

[Southern Senator North Carolina Yankee]

I have said most of what I wanted to. If no one else has anything else, I motion for a final vote.

[Pericles]

24 hours to object to the final vote motion.

[Pericles]

With no objection, a final vote has begun on this bill. Senators have 72 hours to vote Aye, Nay or Abstain.

[Peanut]

Aye.

[ON Progressive]

Aye

[Dr. MB]

Aye

[Pericles]

This bill passes 3-0-0-3.
Aye; 3  (Peanut, ON Progressive, MB)
Nay; 0
Abstaining; 0
Not voting; 3 (North Carolina Yankee, Devout Centrist, PyroTheFox)

[Pericles]

A BILL

To break up big banks.

Section 1: Short title

This Act may be cited as the “Too Big to Fail, Too Big to Exist Act”.

Section 2: Content

(a) Definitions.—In this section—

(1) the term “covered entity”—

(A) means a financial institution, as defined in section 803 of the Payment, Clearing, and Settlement Supervision Act of 2010 (12 U.S.C. 5462); and

(B) does not include—

(i) a Farm Credit System institution chartered under and subject to the provisions of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.);

(ii) a governmental entity; or

(iii) a regulated entity, as defined in section 1303 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4502); and

(2) the term “gross domestic product” means gross domestic product as calculated by the Bureau of Economic Analysis of the Department of Commerce.

(b) Total exposure.—

(1) TOTAL EXPOSURE.—

(A) IN GENERAL.—On February 1, May 1, August 1, and November 1 of each year, no covered entity may have a total exposure, as reported by the covered entity on the Federal Reserve form required to monitor the systemic risk profile of financial institutions for the previous reporting period, equal to or greater than 3 percent of the most recent estimate for annual gross domestic product of the United States (in current dollars) for the previous calendar year.

(B) OTHER REPORTING.—If a covered entity is not required to complete a Federal Reserve form required to monitor the systemic risk profile of financial institutions, the Financial Stability Oversight Council shall design and assign a quarterly reporting form as appropriate for each covered entity with total assets greater than $50,000,000,000 that reflects the total risk exposures of the financial institution, including off-balance sheet exposures and derivatives exposure within 18 months of the date of enactment of this Act. Once designated a reporting form, on February 1, May 1, August 1, and November 1 no covered entity may have a total exposure, as reported by the covered entity for the previous reporting period, equal to or greater than 3 percent of the most recent estimate for annual gross domestic product of the United States (in current dollars) for the previous calendar year.

(2) RESTRUCTURING.—

(A) IN GENERAL.—

(i) DESIGNATION.—Any covered entity that violates paragraph (1) shall immediately be designated as a “Too Big to Exist Institution” by the Financial Stability Oversight Council.

(ii) SUPERVISION.—The Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, or during any period in which that position is vacant, the Chair of the Board of Governors of the Federal Reserve System, shall require and supervise a “Too Big to Exist Institution” to restructure to comply with paragraph (1) not later than 2 years after the date on which the first violation arises.

(B) SUBSEQUENT REQUIREMENTS.—After the date on which a covered entity is required to restructure under subparagraph (A), the Vice Chair for Supervision of the Board of Governors of the Federal Reserve System or, during any period in which that position is vacant, the Chair of the Board of Governors of the Federal Reserve System, shall require and supervise any “Too Big to Exist Institution” to restructure to comply with paragraph (1) not later than 1 year after the institution is again found to be in excess of the threshold specified in paragraph (1).

(c) Prohibition against use of federal reserve financing.—Notwithstanding any other provision of law (including regulations), any “Too Big to Exist Institution” may not use or otherwise have access to advances from any Federal Reserve credit facility, the Federal Reserve discount window, or any other program or facility made available under the Federal Reserve Act (12 U.S.C. 221 et seq.), including any asset purchases, temporary or bridge loans, government investments in debt or equity, or capital injections from any Federal institution.

(d) Prohibition on use of insured deposits.—

(1) IN GENERAL.—Any “Too Big to Exist Institution” that is an insured depository institution, or owns such an institution, may not use any insured deposit amounts to fund—

(A) any activity relating to hedging that is not directly related to commercial banking activity at the insured bank;

(B) any creation or use of derivatives for speculative purposes;

(C) any activity related to the dealing of derivatives;

(D) any creation of, or lending against, new or existing forms of structured or structured derivatives products, including col­lat­er­al­ized debt obligations, col­lat­er­al­ized loan obligations, and synthetic derivatives of col­lat­er­al­ized debt obligations and col­lat­er­al­ized loan obligations; or

(E) any other form of speculative activity that regulators specify.

(2) RISK OF LOSS.—A “Too Big to Exist Institution” may not conduct any activity listed in paragraph (1) in such a manner that—

(A) puts insured deposits at risk; or

(B) creates a risk of loss to the Deposit Insurance Fund.

(e) Report; testimony.—The Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, or during any period in which that position is vacant, the Chair of the Board of Governors of the Federal Reserve System, and the Chair of the Financial Stability Oversight Council shall annually testify before the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives and submit to those committees an annual report the restructuring and designation under subsection (b)(2).

(f) Effective date.—Subsections (c) and (d) shall apply to a covered entity 90 days after the date on which a covered entity is designated as a “Too Big to Exist Institution”.

House of Representatives
Passed the House of Representatives 4-3-1-1
X YE
People's Regional Senate
Passed 3-0-0-3 in the Atlasia Senate Assembled

[Southern Senator North Carolina Yankee]

AYE ftr

[Pyro]

AYE ftr