Bank of America Corp (BAC), JPMorgan Chase & Co. (JPM): Will Big Banks Get Ambushed by Congress?

After treading water yesterday, U.S. stocks have resumed the week’s rally this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average up .5% and .3%, respectively, at 10:15 a.m. EDT.

Targeting “too big to fail”
As the details of a new bill that has megabanks in its crosshairs emerges, lawmakers have already exceeded my expectations regarding how far they are willing to go to tackle the problem of too-big-to-fail banks. Unfortunately, that’s largely a reflection of how low my expectations were, as the banking lobby wields excessive influence on Capital Hill. Still, the new bill is cause for hope.

Last month, I highlighted the fact that the U.S. Attorney General’s admission that financial stability concerns acted as a deterrent to prosecuting megabanks had provided a fresh impetus on the Hill to tackle “too big to fail.” Now, Sherrod Brown (D-OH) and David Vitter (R-LA) are sponsoring a bill that would require institutions with over $500 billion in total assets to hold capital equal to at least 15% of their assets. Dow components Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM), as well as Citigroup Inc. (NYSE:C), fall in the category.

That ratio is much higher than the 9.5% that the international Basel III framework calls for, for the largest, most interconnected global institutions. This is particularly so, as the bill’s minimum ratio is based on the total assets figure at the bottom of the bank’s balance sheet, rather than risk-weighted assets, which rely on a bewildering set of risk assumptions that give banks considerable leeway in coming up with a figure.

Bank of America Corp (NYSE:BAC)Credit: Bank of America Corp (NYSE:BAC)

While JPMorgan Chase & Co. (NYSE:JPM)’s CEO once complained that the Basel capital requirements were “anti-American,” here we have a home-grown alternative that is much stricter! In fact, a 15% minimum ratio would be quite sensible, as I’ve argued in the past. If it were enacted, megabanks’ returns on equity would drop, yes, but they would be much safer, and it would discourage smaller banks from pursuing size solely to achieve TBTF status and the implicit funding subsidy that goes along with it.

Does the new bill have a realistic chance of passing? I don’t think so. If it were to pass, bankers will have seriously underestimated lawmakers’ resolve on this issue. Certainly, investors don’t appear to give it much chance — shares of Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM) were both up roughly 1% at 9:52 a.m. EDT.

The article Will Big Banks Get Ambushed by Congress? originally appeared on Fool.com and is written by Alex Dumortier, CFA.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool owns shares of Bank of America Corp (NYSE:BAC), Citigroup Inc. (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM).

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Bloodiest UFC Fights Ever Fought

Most Expensive Rum Brands in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!