Republican presidential candidate Jon Huntsman has unveiled a financial reform proposal that would,not only repeal the Dodd-Frank financial reform bill, but cap bank sizes relative to the United States gross domestic product (GDP) and impose a fee on large banks to discourage institutions from being “too big to fail” and to cover the cost of bailouts that might be made necessary by such large banks.
“[E]liminating “too big to fail” is really the core of what he’s trying to do,” explains James Pethokoukis, who has the proposal. “As Team Huntsman correctly notes, the six largest U.S. financial institutions are significantly bigger than they were before the financial crisis. 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. And the major banks’ too-big-to-fail status gives them a huge advantage in borrowing over their competitors.”
Here’s Hunstman’s financial reform plan:
2. We should have a similar cap on leverage—total borrowing—by any individual bank, relative to GDP.
3. Explore reforms now being considered by the U.K. to make the unwinding of its biggest banks less risky for the broader economy.
4. 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.
5. 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.
6. Strengthen capital requirements, moving far beyond what is envisaged 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.
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