While the implementing rules and regulations of the Frank Dodd Act are still being drafted, another 'too big too fail' legislation is in the works. There are reports saying that Senators Brown and Vitter would be filing a bill that would require American banks to retain 10% equity capital and the imposition of a 5% surcharge for banks having more than US$400 billion in retained assets in its portfolio.
Both lawmakers admit that the intent was not to create smaller banks by forcing large ones to break up but it is to enforce market discipline. They see that the biggest banks in operation, such as Wells Fargo, Bank of America and JP Morgan Chase would have to create structural changes.
According to a Goldman Sachs report, should the legislation pass and require to be enforced, banks would require nearly US$1.1 trillion in fresh equity to comply. This means important financial institutions would be required to double their equity while others would need to increase by 33%.
The option to separate operational segments for banks in order to reduce the equity requirements may be the short term solution for banks. This though is very difficult to achieve since the previously mentioned banks would have to break up into several segments just to comply with the capital equity ceiling of US$400 billion.
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