The debate over Wall Street regulation has tended to divide politicians along party lines. But on one issue at least, two senators, a Democrat and a Republican, see eye to eye.
In a new letter to be sent to regulators on Wednesday, Senator Sherrod Brown, Democrat of Ohio, and Senator David Vitter, Republican of Louisiana, argue for tougher rules on bank capital reserves, the cushion that financial institutions must keep against losses. The current proposal does not go far enough, they say.
“With financial regulators considering a host of new domestic and international capital requirements, we write today to urge your agencies to simplify and enhance the capital rules that will apply to U.S. banks,†reads the letter from the two lawmakers.
Stricter requirements would “properly align incentives for megabanks by lessening government support for the financial sector, and reassure financial markets that the U.S. financial system is healthy,†the lawmak ers write.
The two men, who sit on the Senate Banking Committee, addressed the letter to three prominent regulators: Ben S. Bernanke, the Federal Reserve chairman; Martin J. Gruenberg, acting chairman of the Federal Deposit Insurance Corporation; and Thomas J. Curry, head of the Office of the Comptroller of the Currency.
Regulators have been grappling with the issue of bank capital since the financial crisis led the government to rescue the largest banks in a taxpayer bailout. The financial industry has pushed back against calls to increase capital buffers, arguing that more equity financing would be burdensome for their business.
Mr. Brown and Mr. Vitter took up the issue in August in a letter to Mr. Bernanke, responding to the Fed's decision to support capital rules drafted by an international group of officials known as the Basel Committee on Banking Supervision.
Those rules, called Basel III, would require banks to hold the equivalent of at least 7 percent of their assets in so-called Tier 1 common capital. Banks considered “systemically important†- those whose failure could threaten the financial system â€" would be required to hold capital above that amount.
Mr. Brown and Mr. Vitter write in their letter on Wednesday that these standards may not be tough enough.
They also take issue with the so-called risk weights in the Basel rules, which allow banks to hold less capital against assets deemed less risky, calling that system flawed.
“Accounting gimmicks may help institutions appear to have higher regulatory capital levels and avoid raising more equity, but when risk weights are gamed, the markets lose faith in banks' balance sheets,†they write.
“In this case,†they say, “simpler really is better.â€
The complexity of the current proposal also puts an unnecessary burden on community banks, the lawmakers say.
Mr. Brown and Mr. Vitter often find themselves on opposit e sides. But Mr. Brown said in an interview that the idea of an alliance occurred to him during a hearing in July, when he admired the questions Mr. Vitter was putting to Mr. Bernanke.
The pair began discussions that led to the letter in August.
“I'm sure we were both shocked at some point to notice common threads in our thinking,†Mr. Vitter said, with a laugh. “We explored those over time.â€
He said he and Mr. Brown were like an “odd couple†in the Senate on this issue.
Mr. Brown added, “I think both conservatives and progressives believe the government shouldn't be subsidizing Wall Street banks.â€
A draft of the full letter is below.
Letter from Senators Brown and Vitter
