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Print Version-Rep. Capuano Introduces Subsidy Reserve Act

PRESS RELEASE

Rep. Capuano Introduces Subsidy Reserve Act

February 13, 2015

Rep. Mike Capuano has introduced H.R. 888, The Subsidy Reserve Act of 2015, legislation he first filed in 2013. It requires financial entities with assets over $500 billion, those perceived as “too big to fail”, to maintain capital equal to the amount of the subsidy they receive from taxpayers, to weather a future crisis. The largest and most interconnected financial institutions in America still benefit from an effective government subsidy, shielding them from the worst effects of their risky behavior. Just last year, the Federal Reserve found that the 11 largest banks in the country have failed to show, six years after the financial crisis, that they could collapse without taking the whole economy with them. H.R. 888 provides the shareholders of these institutions with two options: if you choose to remain large enough to threaten the whole economy then you must hold enough capital to cover your own losses. If you prefer not to hold the capital, then reduce the size of your company.

The idea behind the legislation is simple. If banks get a subsidy, it should be quantified and banks should hold capital sufficient to cover it. If they don’t get a subsidy, the legislation won’t have any impact on them. The process of determining the scope of the subsidy would be transparent and the Federal Reserve would write the formula. If a bank’s shareholders decide that it’s not worth holding capital in reserve to pay for the subsidy, they would be free to downsize their institution.

“The choice would be up to each institution and their shareholders – stay big while protecting taxpayers or shrink your institution and access those funds, you cannot do both”, stated Rep. Mike Capuano.

The Dodd- Frank financial regulatory reform law addresses “too big to fail” financial institutions by requiring living wills and establishing an orderly process to unwind failing banks without devastating the financial system. The impression still lingers, however, that the government would bail out “too big to fail” firms and the largest actors are benefitting from this perception at the expense of smaller financial institutions and taxpayers. H.R. 888 would end this unfairness. Structural reform of “too big to fail” entities would be achieved without overt government intervention. Banks competing for financing would do so on the merits. Ultimately, the risk to taxpayers would be reduced, either because these firms have voluntarily downsized, or because they are better capitalized and less risky.

The Subsidy Reserve Act has been referred to the Financial Services Committee.

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Contact: Alison Mills (Rep. Capuano) 617-621-6208



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