Senator Sherrod Brown, Democrat of Ohio, and Senator David Vitter, Republican of Louisiana, wrote a letter to Federal Reserve chairman Ben S. Bernanke asking him to implement rules that would require banks take on a level of equity funding that allows banks to better absorb downturns in the future while mitigating the need for any future bailouts from the U.S. government.
Put the words “bailouts” and “banks” together and you may as well start a fire; it’s that combustible to most Americans, but as a matter of commerce, we shouldn’t rule out bailouts completely.
If banks are part of the credit infrastructure, and the exchange of loanable funds is necessary to finance commercial activity, Congress as regulator of commerce should step in to ensure the infrastructure that provides access to credit is maintained.
Congressional action should be of last resort, however. For this reason, Mr. Brown and Mr. Vitter’s argument that banks first increase the level of equity funding versus the amount of leverage they have is a good idea. It puts the onus first on the banks to maintain their own viability.
Should Americans expect to see the concept of banks being too big to fail completely evaporate? I don’t think so.