Jon Huntsman President 2012

FINANCIAL
REGULATORY REFORM

Capitalism without failure isn't capitalism. We need banks that are small and simple enough to fail, not financial public utilities.

ENDING TOO BIG TO FAIL

To protect taxpayers from future bailouts and stabilize America's economic foundation, Jon Huntsman will end too-big-to-fail. Today we can already begin to see the outlines of the next financial crisis and bailouts. More than three years after the crisis and the accompanying bailouts, the six largest U.S. financial institutions are significantly bigger than they were before the crisis, having been encouraged by regulators to snap up Bear Stearns and other competitors at bargain prices. These banks now have assets worth over 66 percent of gross domestic product – at least $9.4 trillion – up from 20 percent of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risks they pose. In fact, the megamergers that prompted the repeal of Glass-Steagall have failed to provide the benefits that were promised to America's consumers; the average checking-account holder pays nearly triple what banks charged two decades ago.

The major banks’ too-big-to-fail status gives them a comparative advantage in bor­rowing over their competitors, thanks to the implicit federal bailout backstop. This funding subsidy amounts to at least 25 basis points and perhaps as much as 50 basis points, or between one-quarter and one-half of a percentage point. In today’s markets, this is a huge advantage.

Governor Huntsman believes we must build resilience into the financial system by getting ahead of the next financial shock. Anything that is too big to fail is simply too big – with the real danger that large banks have the incentive and ability to become even bigger. Next time, the largest banks may be so big that their failure will swamp the fiscal balance sheet of the government. If we let today's financial behemoths grow unchecked, this will lead to fiscal ruin.

There are a number of tools we can use to break the "doom loop," in which banks and their creditors are bailed out, and therefore feel empowered to again take excessive risk. As president, Governor Huntsman will work with Congress to implement one or more of the following:

  • Set a hard cap on bank size based on assets as a percentage of GDP. (This cap would be on total bank size, not using any of the illusory “risk-weights” currently central to thinking about bank accounting. The lowest risk assets for banks in Europe, supposedly, are sovereign debt - yet this very same debt is now at the heart of the current crisis.)
  • We should have a similar cap on leverage - total borrowing - by any individual bank, relative to GDP. In some European countries, one bank can bring down the nation. Why would we want such unfair and inefficient arrangements in America?
  • Explore reforms now being considered by the U.K. to make the unwinding of its biggest banks less risky for the broader economy.
  • Impose a fee on banks whose size exceeds a certain percentage of GDP to cover the cost they would impose on taxpayers in a bailout, thus eliminating the implicit subsidy of their too-big-to-fail status.  The fee would incentivize the major banks to slim themselves down; failure to do so would result in increasing the fee until the banks are systemically safe.  Any fees collected would be used to reduce taxes for the broader non-financial corporate sector.
  • In addition, focus on establishing an FDIC insurance premium that better reflects the riskiness of banks’ portfolios. This would provide an incentive for banks to scale down, allowing the financial system to absorb them organically in the event of a collapse.
  • Strengthen capital requirements, moving far beyond what is envisioned in the current Basel Accord. The Accord is a mixture of regulatory oversight and political compromise. As a result, the U.S. has allowed its banking policy to be determined by the “least common denominator” among European and Asian countries, many with a long history of not being prudent. We want a financial system that has more equity financing and relatively little debt financing.

Eliminating subsidies would encourage the affected institutions to downsize by selling off certain operations or face having to pay the real costs of bailouts. Removing the taxpayer subsidies that create too-big-to-fail will also strengthen local and community banks which are unable to compete with the subsidized megabanks.

We need banks that are small and simple enough to fail, not financial public utilities. Hedge funds and private equity funds go out of business all the time when they make big mistakes, to the notice of few, because they are not too big to fail. There is no reason why banks cannot live with the same reality.

This country was not built on the basis of big banks. The dynamism of our core non-financial sector does not depend on having financial institutions that can take - and consistently get wrong - economy-sized risks.

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