Kevin Glass
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Congressman John Campbell (R-Calif.) has introduced a bill that would enforce simple and easy regulations that Campbell says will end the problem of too-big-to-fail banks in the United States - a problem that has been exacerbated by the Dodd-Frank financial regulation passed in the wake of the financial crisis. The biggest banks are bigger than ever and potentially pose more risk than they did before the 2008 financial crisis.

Congressman Campbell's bill would raise capital requirements and require banks with more than $50 billion in assets to hold more "safe" assets like long-term bonds while repealing the "Volcker Rule" that prohibited certain kinds of speculative investments. Additionally, there would be rules in place that would give federal regulators an additional early warning system to indicate when a bank became hazardous.

The Reason Foundation writes in mild favor of Rep. Campbell's bill while identifying that it's imperfect:

Enter Congressman John Campbell, Chairman of the Financial Services Subcommittee on Monetary Policy and Trade, who just last week introduced the Systemic Risk Mitigation Act, a bill aimed at eliminating the TBTF problem. While the California Republican's bill doesn't go as far as saying big banks need to be torn apart, it does intend to shrink TBTF banks by requiring them to hold more capital. The idea is to get big banks to shrink their balance sheets, putting taxpayers at less of a risk in event of a failure.

Perhaps the better line of delineation between big and small is $250 billion. This is more along the lines of the 12 U.S. Banks that Richard Fisher identified back in January as candidates for TBTF status. Together, these 12 banks hold 69 percent of total industry assets, but only account for .2 percent of all U.S. Banks.

Ordinarily, such heavy-handed government intervention is anathema to free-market reformers. But as Reason writes, banks that are too big to fail is get a "hidden subsidy" that amounts to between $30 and $60 billion every year. Jim Pethokoukis at the American Enterprise Institute wrote about how the subsidy received by too big to fail banks poses more danger than most Americans believe:

The higher that capital ratios are, the less likely banks are to face liquidity and solvency problems... Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., would prefer using stricter accounting standards. “Derivatives, like loans, carry risk,” Hoenig said in an interview with Bloomberg. “To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.”

The big banks point out that US rules allow them and their trading partners “to add up the positions they have with each other and show what would be owed if all contracts had to be settled suddenly.” Thanks to this “netting” practice, US bank asset size is, in reality, a lot less.

What's more, the Dodd-Frank financial regulation passed specifically to address some of the contributing problems of the financial crisis has made the problem worse, not better. Richard Fisher, President of the Dallas Federal Reserve and a Democrat, said that "Dodd-Frank has not done enough to corral 'too big to fail' banks and, on balance, the act has made things worse, not better."

Democrat Sen. Tim Johnson, the chairman of the Senate Banking Committee, has been urging regulators to ignore the too big to fail problem while instead focusing on the implementation of Dodd-Frank rules that enshrine too-big-to-fail as government policy.

Congressman Campbell believes that's the wrong approach, and that the too-big-to-fail problem poses the greatest federal banking policy problem at this point. It remains to be seen if his legislation gets much traction on the Hill.

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Kevin Glass

Kevin Glass is the Managing Editor of Townhall.com. Follow him on Twitter at @kevinwglass.