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05.01.13

Breaking up the Banks

The Financial Times (paywalled, but if you register, you can read 8 stories a month for free) reports on efforts by a pair of United States Senators - Democrat Sherrod Brown of Ohio and Republican David Vitter of Louisiana - to force stricter capital requirements on our biggest banks.

Last week Mr Brown and Mr Vitter unveiled their latest draft legislation on the topic, which would sharply increase the capital requirements on the largest banks with assets of more than $500bn, forcing them to hold 15 per cent equity against their assets.

Analysts at Goldman Sachs calculate the increased capital is worth about $1.2tn, which would equate to the largest banks forgoing dividends and share buybacks for up to 15 years. If shareholders accepted that, they would also have to accept a permanently lower return on equity. Many in the industry believe the economics would not work: the biggest banks might have to break up to escape the tougher regime. Mr Vitter and Mr Brown could live with that – and believe others can, too.

They acknowledge they're at least 20 votes shy (remember, it effectively takes 60 in today's Senate because of the filibuster) of being able to pass such legislation, so don't get too excited/worried just yet.