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Thoughts On Simplicity: Bank of America Corp (BAC), JPMorgan Chase & Co. (JPM), Citigroup Inc (C)

Bank of America CorporationThe StressTest column appears every Thursday on Check back weekly, and follow @TMFStressTest on Twitter.

The new banking bill from Senators Sherrod Brown and David Vitter has had some glowing reviews. And that doesn’t surprise me at all, because the headline of the bill has in spades what Dodd-Frank notably lacked. In a word: simplicity.

In fact, the Senators highlight just that fact right at the beginning of the bill’s one-pager (opens a PDF), noting that the bill would “institute new capital rules that don’t rely on risk weights and are simple, easy to understand, and easy to comply with.”

There’s a lot to applaud in that, especially in concept. And I imagine that the fan club for the bill will continue to grow, because there has been a growing drumbeat for simplicity ever since the financial crisis helped bring the U.S. economy to its knees. There’s no doubt that we should push for more clarity and simplicity in some areas — consumers should truly comprehend their credit card statements, and borrowers should mean it when they say they understand their mortgages.

But should the average Joe on the street really be able to digest the intricacies of what’s on a bank’s balance sheet? Can we really expect that a major global bank’s annual report should read like that of a small community bank?

Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C), Wells Fargo & Co (NYSE:WFC), Morgan Stanley (NYSE:MS), and Goldman Sachs Group, Inc. (NYSE:GS) are the primary targets of the bill, as it would require a draconian capital buffer on any bank with assets above $500 billion. It would also do away with the use of risk-weighted assets, which allows banks to carry less capital for assets deemed less risky. It’s essentially a big, blunt club that batters the biggest banks with a 15% capital requirement.

Some will undoubtedly pump their fists, look back at what was, and point out that a 15% capital buffer might have headed off the need to bail out Citigroup Inc (NYSE:C) — and perhaps that’s true. Maybe it would’ve helped with Bank of America Corp (NYSE:BAC), too. Though if Bank of America Corp (NYSE:BAC) had been working under those capital constraints, would it have acquired Countrywide? If not, we wouldn’t have had that gigantic mortgage implosion on our hands.

You might be tempted to think that the Lehman story would have ended differently, but it never converted to bank holding status, and so these rules wouldn’t have applied. Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS) weren’t banks until well into the middle innings of the crisis; while it would apply to them now, it wouldn’t have then.

And what of JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC)? There’s a very valid argument that Warren Buffett’s favorite bank — Wells, that is — didn’t need a bailout at all. It’s not entirely crazy to say the same of JPMorgan Chase & Co. (NYSE:JPM). Slap huge capital requirements on these banks, and you may inhibit their ability to step in and save other huge, flailing institutions. Washington Mutual would have been too small to qualify for the largest capital buffer, and Bear Stearns would have ducked the requirements, because it wasn’t a bank holding company. JPMorgan Chase & Co. (NYSE:JPM) probably headed off significant (further) market dislocations by acquiring both.

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