Rogue banks remain too big to fail: Our view

The Editorial Board | USATODAY

Perhaps the best way to view the world's largest banks is not as companies, but as nations unto themselves.

Like rogue states, they profit from their ability to wreak havoc on the world, borrowing for less because lenders know that governments wouldn't dare let them collapse.

And like opportunistic governments, they are brilliant at playing nation against nation. They fend off proposed regulations that pop up in one country by arguing that such rules need to be coordinated globally so as not to cause money to be pulled out of some nations and rushed into others.

All this helps to explain where major banks are now, which is pretty much where they were five years ago when the financial crisis hit. While these banks have shored up their balance sheets with more capital held in reserve to protect against losses, they still operate in a world where they can take risks knowing that they will get bailed out if they get into trouble.

Yes, the 2010 Wall Street reform law has a provision for government to quickly deal with failed major banks, much as the Federal Deposit Insurance Corp. takes over smaller ones. But few people have much confidence that it would work in the real-world setting of an economic meltdown.

At least six financial institutions — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — remain too big to fail. Collectively, they hold $9.4 trillion in assets. That's more than twice the annual spending of the U.S. government.

These banks, and their lobbyists, have worked to weaken the 2010 law, fighting agency by agency to water down the regulations. Just last week, they won a major victory in a regulation that allows the market for credit derivatives — the financial instruments that helped inflate the housing bubble and bring down insurance giant AIG — to remain concentrated in a handful of institutions.

But now comes a bipartisan plan that would end too-big-to fail once and for all. Proposed by Sens. David Vitter, a Louisiana Republican, and Sherrod Brown, an Ohio Democrat, it is the kind of aggressive and simple approach that should have been adopted long ago.

Their plan would require that institutions with more than $500 billion in assets — namely, the six mentioned above — meet a capital reserve requirement of 15%. Simply put, that means these banks would have to set aside 15 cents in liquid assets for every dollar of liabilities. (Smaller banks would still have to meet a complex, but less stringent, set of rules contained in the Basel III treaty signed by the United States.)

The proposal would force major banks to either maintain very conservative balance sheets or break themselves into smaller banks that could fail without bringing down the economy. It would eliminate the need for more complex regulations. And it would end the subsidization of big banks, which can borrow at rock bottom rates with taxpayers serving as their uncompensated backstops.

If Congress is serious about wanting to end too-big-to-fail, the 15% solution is the kind of bold move that would do the trick.

USA TODAY's editorial opinions are decided by its Editorial Board, separate from the news staff. Most editorials are coupled with an opposing view -- a unique USA TODAY feature.