By Ryan Tracy
WASHINGTON--Lawmakers from both parties pressed U.S. regulators
to continue efforts to shrink or lessen the risk big banks pose to
the financial system, signaling support for recent moves to impose
new constraints on Wall Street.
The support for a big-bank regulatory crackdown was underscored
at a Senate Banking Committee hearing Tuesday as lawmakers drew a
distinction between large banks and other financial firms. Several
senators pushed regulators to ease burdens on insurance companies
and small and midsize banks while backing additional regulatory
action to ensure the biggest banks aren't "too big to fail."
Unless regulators "are willing to take the steps necessary to
make sure that these organizations are not too complex to be
resolved through bankruptcy, than all is for naught," said Sen. Bob
Corker (R., Tenn.).
Mr. Corker was referring to the Federal Reserve and the Federal
Deposit Insurance Corp.'s recent rejection of big banks' plans to
avoid a taxpayer bailout if they run into financial trouble.
Regulators' strong words on that issue last month surprised Wall
Street. Under questioning from Mr. Corker and others, regulatory
officials reiterated they are prepared to use the 2010 Dodd-Frank
law to force firms to simplify their structures if they are unable
to fix flaws in their plans.
Sen. Sherrod Brown (D., Ohio) praised Fed Gov. Daniel Tarullo
Tuesday for promising to raise capital requirements above
international levels for the very largest U.S. banks.
"There's a great deal of support in this committee and I think
throughout the House and Senate on stronger capital standards like
that, " Mr. Brown said.
The standards could force big U.S. banks to retain additional
earnings in order to build the capital they use to fund lending,
rather than distributing those earnings to shareholders.
Alternatively, banks could pull back from certain short-term
funding markets, including repurchase agreements, that will be
discouraged under the new rules. Analysts said Tuesday some banks'
stock prices could face downward pressure as a result of the Fed
move.
"No matter when we think Basel's done there's another round to
it," said Bank of New York Mellon Corp. Chief Executive Gerald
Hassell at a conference in New York Tuesday, referring to the
agreements on bank capital levels negotiated in Basel, Switzerland.
The Fed is changing those rules to include the higher U.S.
requirement.
However, Mr. Hassell said he didn't see a major effect on his
bank: "Our capital ratios are extremely strong. I think we're in
good shape."
While Washington continues to impose additional requirements for
the biggest firms, Mr. Tarullo said "it may be time" for Congress
to exempt small and medium-size banks from certain aspects of the
2010 Dodd-Frank financial law. He said some banks with more than
$50 billion in assets probably shouldn't be subject to the Fed's
annual "stress tests" of their ability to weather a recession.
Mr. Tarullo also reiterated the Fed's desire to have Congress
change the Dodd-Frank law to give it more flexibility in writing
rules for some of the biggest U.S. insurance companies. A bill to
that effect has passed the Senate but stalled in the House. Mr.
Tarullo said Fed staff are working simultaneously on two versions
of the rule: One if Congress acts, and one if it doesn't.
"In the absence of the legislation, we would still be able to do
some things" to tailor rules to insurance companies, he told the
lawmakers. He said some insurance products don't resemble banking
products and therefore wouldn't have to be subject to banklike
capital standards.
The Senators' frustrations with Wall Street banks were laid bare
near the end of the hearing, when Sen. Elizabeth Warren (D., Mass.)
asked regulators why they hadn't held individual bankers
accountable for actions that led to the financial crisis despite
the multibillion-dollar settlements announced in recent months
related to those misdeeds.
"Without criminal prosecutions, the message for every Wall
Street banker is loud and clear. If you break the law, you are not
going to jail, but you might end up with a much bigger paycheck,"
Ms. Warren said.
Sen. Richard Shelby (R., Ala.), who could take the gavel of the
committee should Republicans retake the Senate in the November
elections, said he agreed with Ms. Warren's outrage over the lack
of jail time for bankers--a noteworthy statement since the two
don't often agree on policy.
No one in the financial sector or elsewhere should be "able to
buy their way out from culpability when it's so strong it defies
rationality--I agree with her on that," Mr. Shelby said.
Mr. Tarullo said regulators have asked firms to fire employees
who did wrong and have "shared all the information that the
Department of Justice needed" if it were going to pursue
prosecutions.
A Justice Department representative didn't respond to a request
for comment.
Victoria McGrane and Saabira Chaudhuri contribute to this
article
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