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By Ronald Fink
The legislation proposed by the House Financial Services Committee aimed at preventing further taxpayer bail-outs of financial institutions doesn't go far enough to deal with the problem, a critic scheduled to testify before the committee on Thursday told CFOZone.
The bill would require banks of a certain size to pay for the cost of winding down large, complex institutions. Those with more than $10 billion in assets would pay fees into a fund that would backstop such companies until their assets could be sold off, avoiding the need for taxpayer funds.
But Jane D'Arista, a researcher at the Economic Policy Institute, said in an interview with NPR broadcast on Wednesday morning that the proposal fell short of what was necessary to prevent such institutions from posing systemic risk.
While the interview didn't reveal why she held that view, D'Arista said in an email to CFOZone that the bill should impose limits on the size of such institutions and restrict their ability to engage in securities underwriting and proprietary trading.
Federal law separated commercial and investment banking in this fashion for decades. While exemptions began to be granted in the 1980s and 1990s, the limits were formally repealed by the Gramm-Leach-Bliley Act in 1999.
D'Arista is expected to say that such limits should be re-imposed in testimony she's scheduled to deliver before the committee on Thursday. In her email, she noted that there is a "need to go back" to the federal limit on activities that are not "closely related" to banking, which was imposed in 1969 but removed by the Gramm-Leach-Bliley Act.
D'Arista also said there was a need to limit banks' size. In a paper published by the EPI last May, she countered the argument that it was not the size of banks but their "interconnectedness" that led to the bailouts of institutions such as Citigroup, Bank of America and AIG.
"It is hard to dismiss the idea that the size of institutions does not increase interrelatedness or that interrelatedness itself is a product of concentrations in the assets and liabilities on and off the balance sheets of these important firms and in the size of their transactions with key counterparties," D'Arista wrote. "All these elements-institutional size plus asset and counterparty concentrations-contributed to forcing the bailout of AIG and, given AIG's size, increasing its cost."
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