By Emily Stephenson
WASHINGTON (Reuters) - The largest U.S. banks would have to hold far more capital under a proposal from two senators that would toss out international bank capital rules, according to draft legislation.
The draft bill, which was obtained by Reuters, calls for regulators to throw out the Basel III capital accord and instead require U.S. banks to hold an equity capital ratio of no less than 10 percent of total assets.
The biggest banks, those with more than $400 billion in total assets, would face an additional capital surcharge under the proposal from senators David Vitter, a Louisiana Republican, and Sherrod Brown, an Ohio Democrat.
The debate about too-big-to-fail banks has heated up in recent weeks in Washington, with politicians and even some regulators calling to do more to protect taxpayers from footing the bill the next time a bank goes belly-up.
"If you thought that the biggest megabanks were too big to fail before the crisis, then I have bad news for you, they have only gotten bigger," Brown said in February.
The 2010 Dodd-Frank overhaul of Wall Street has not done enough to address the risk in big banks, these groups say.
But there is little chance of political consensus over the plans to carve up banks such as JP Morgan Chase & Co, Citigroup Inc, Bank of America Corp or Morgan Stanley.
"There's very little political will today ... There's a significant minority who would like to go forward, but nothing approaching a majority," said Douglas Elliott, a fellow at the Brookings Institution.
"That said, we're one or two banking scandals away from there being a real probability from this happening."
The bill would also prevent banks' riskier affiliates from accessing government support such as deposit insurance.
Brown's office declined to comment on the draft. Luke Bolar, a spokesman for Vitter, said the bill is still being refined and that the draft was removed from a meeting.
"A Wall Street lobbyist stole and distributed a copy of our draft bill to try and drum up support for protecting the big banks' taxpayer funded handouts - and ultimately remain too-big-to-fail," Bolar said on Friday.
The Basel capital agreement also calls for banks to hold higher capital ratios, but these levels are determined based on the riskiness of their assets, making them less demanding than the Brown/Vitter proposal.
Many lawmakers, banks and even some regulators, have also criticized the Basel approach as too complicated.
Officials at the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp have yet to finalize rules that would implement the capital accord in the United States.
In addition to the Basel rules, regulators are still working through dozens of new requirements called for by the Dodd-Frank law, including controversial actions such as the Volcker rule.
The Senate did show support for cracking down on the biggest banks last month, approving a non-binding measure introduced by Brown and Vitter.
That measure called for eliminating the so-called subsidy big banks receive in the form of cheaper borrowing because financial markets believe regulators would bail them out if they got into trouble.
Brown and Vitter are expected to introduce the final version of their bill in the coming weeks. The Senate returns next week from a two-week recess.
(Reporting by Emily Stephenson.; Additional reporting by Douwe Miedema. Editing by Andre Grenon)