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Warren and Vitter Call for End of ‘Too Big to Fail’

Sen. Elizabeth Warren (D-Mass.) called for the end of “too big to fail,” arguing that it encourages “riskier behavior” from financial institutions.

“If you advertise to the market that the Fed is here — and no need for any large financial institution ever to have to go to the bankruptcy courthouse or to declare itself insolvent — but instead there will be trillions of dollars available to back up these giant institutions, I think that changes fundamentally the behavior of the big banks themselves, the behavior of those who lend them money, the behavior of those who invest in them. And I’ve got to say in all three cases, not for the better because it encourages riskier behavior knowing there is an option available,” Warren said at the CATO Institute in Washington.

Sen. David Vitter (R-La.) agreed with Warren’s assessment.

“The legitimate question is, OK, does having this facility available all over again encourage or discourage bad stuff to happen? I think it clearly encourages it and those are the dynamics we’re trying to change,” he said at CATO. “There’s been study after study after study that says number one, too big to fail is alive and well,” he said. “Number two, it gives megabanks a market advantage, a lower cost of capital, other market advantages that are simply unfair in the market.”

Warren lamented the Fed’s current insolvency standard for financial institutions.

“The way I read that, they said, ‘What we’re going to do is set up a little cart, right in front of the bankruptcy courthouse, and when institutions come to file their papers we’ll just intercept and say, ‘Would you like a trillion dollars from us instead?’” she said.

Vitter and Warren have introduced the Bailout Prevention Act of 2015, which would declare a borrower “ineligible to borrow from any emergency lending program or facility” unless the Fed and all federal banking regulators with jurisdiction over the borrower certify that the borrower is “not insolvent” when they initially borrow under the program or facility.

Vitter said smaller institutions such as community banks and credit unions are now at a disadvantage.

“We’ve tilted the playing field even further in favor of megabanks against smaller community banks and credit unions,” he said.

Warren shared a similar view.

“The question is, will the insiders control the game — those who have the lobbyists, those who’ve got a lot of money on the table but a very small, insular group that frankly wants to enhance its profits at the expense of the public,” she said. “You’re driving one set of competitors out of business, and advantaging another set of competitors.”

Vitter announced that he is currently working on a bill with Sen. Sherrod Brown (D-R.I.) that would enact higher capital requirements for megabanks to avoid another financial crisis.

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