Add to capital reserves or slim your operation down. And this time, we mean it, courtesy of your own shareholders.
That’s the message of a bill introduced on Feb. 11 by U.S. Rep. Michael Capuano (D-Mass.). HR 888, the Subsidy Reserve Act of 2015, would apply to nonbank financial companies supervised by the board of governors of the Federal Reserve, and bank holding companies with total consolidated assets of $500 billion or more to establish and maintain a subsidy reserve.
That would be a separate and distinct addition to existing capital requirements, based on a formula established by the Fed board of governors that requires capital accumulation in direct relation to an implicit government guarantee for larger organizations. That implicit guarantee differentiates large banks from smaller organizations which are deemed to be essentially on their own in the free market.
Financial institutions would have to apply the subsidy formula in their annual financial statements and maintain the resulting amount in their subsidy reserve. The reserve would grow over time, but FIs could not make withdrawals to pay dividends or buy back stock, for example, unless they sold assets, spun off subsidiaries or made a similar divestiture and withdrawals from the reserve would be limited to an amount relating directly to those activities, either pro-rata or risk-weighted. On the plus side, the amounts in the subsidy reserve would be taken into account in determining regulatory capital requirements.
Boston University Professor Cornelius Hurley, director of the Boston University Center for Finance, Law and Policy and author of numerous articles on bank legislation,

U.S. Rep. Michael Capuano

notes a critical component of the bill – the pressure to downsize a big organization would come from shareholders, not the government, because shareholders could take the stand that the FI should sell or divest assets if the reserve became regarded as too big.
“Over a short period that amount of retained earnings becomes larger, to the point where shareholders demand that the company right-size itself,” Hurley said. “Only then can that reserve be monetized for shareholders.”
At press time, HR 888 had one co-sponsor, U.S. Rep. Ruben Hinojosa (D-Texas). Capuano, who filed a predecessor bill to HR 888 in 2013 in the 113th Congress, is seeking allies in the business community. At press time, a plethora of bills – 10,636, to be exact – had been filed to address the topic of risk control, but none as directly as HR 888.
Julieann M. Thurlow, president and CEO of Reading Cooperative Bank, hailed the bill, saying Capuano “is acknowledging what every bank knows: Dodd-Frank did not address too big to fail.” The rules of the Dodd-Frank Act, she said, harm community banks in material ways; money center banks that caused the financial crisis “continue to present an inordinate risk to the U.S. banking system. There is an inherent unfairness that due to sheer critical mass, these banks will never be allowed to fail, nor will the government ever have the courage and conviction to control their activities.”
She commended HR 888, which clocks in at 341 words, for its brevity. “It achieves the objective that Dodd-Frank in its volumes could not,” she said, adding that she gives it an even chance of eventual passage. Hurley gives it an even chance of coming up in the 2016 presidential debates.

Let the Market Decide
Who decides the formula that the Fed board of governors would implement? “Several formulas have already been done,” Capuano said – it’s now a matter of making assumptions and applying them. He cautioned that Congress is not the best suited place to write this into law. “Market advantage is easy to figure,” he said.
The underlying idea is not dissimilar to the concept of net neutrality, Capuano indicated – the largest institutions down to the smallest should have the same access to funds to keep their organizations going. “Everybody should pay the same amount for the same thing,” he said.
Some advocates try to get government out of banking, Capuano said; others try to get government deeper into banking. “Let the market take care of it,” he said. “You can be a liberal and a capitalist.”
So far, Capuano said, there’s been no pushback from the banking industry on HR 888, which is still in its early stages. However, “I ask those, especially my Republican colleagues who say they love the free market, why are they not signing on. If they love community banks so much, why don’t they trust their judgment?”