Five years ago, the collapse of Lehman Brothers put our economy on the brink of collapse and jeopardized the savings and pensions of millions of Americans.
The Lehman Brothers collapse was significant for another reason as well. Because the federal government bailed out other financial institutions before and after Lehman's failure, it set a threshold for banks that are so large and interconnected that they would receive extraordinary help from the government to enable them to survive. Meanwhile, Ohio taxpayers are left paying for Wall Street's failures.
This "too big to fail" designation still wreaks havoc on the safety and soundness of our financial system. Five years after the Lehman Brothers collapse, the biggest megabanks which were "too big to fail" before the crisis have only gotten bigger.
The four largest behemoths, now ranging from $1.4 trillion to $2.4 trillion in assets, are the result of 37 banks merging 33 times. In 1995, the six biggest U.S. banks had assets equal to 18 percent of GDP. Today, they are about 63 percent of GDP. They now have twice the combined assets of the rest of the top 50 U.S. banks.
This enormous growth is aided in large part by an implicit government guarantee awarded by virtue of these megabanks "too big to fail" status. In other words, these same Wall Street megabanks which received bailouts from taxpayers in 2009 also receive taxpayer-funded advantages today simply because of they are deemed "too big to fail."
This taxpayer-supplied subsidy is wrong, and it puts community banks in Ohio at a competitive disadvantage. These megabanks have access to cheaper funding and more favorable borrowing terms than dependable Main Street institutions - such as Huntington Bank or The Peoples Bank in Coldwater - simply because the market knows the government would choose to bail out the Wall Street megabanks if they again reach the point of collapse.
As I visit community banks throughout Ohio, I meet community bank executives who tell me about how they are unfairly disadvantaged when competing against Wall Street megabanks. Millions of families and small businesses depend on their community banks for their savings accounts, home mortgages and business loans.
Community banks help create countless jobs and provide safe and reliable financing options to Ohio's families. We should be supporting our community bankers, not creating an unlevel playing field that favors Wall Street.
That's why my Republican colleague, Sen. David Vitter from Louisiana, and I introduced bipartisan legislation to address this "too big to fail" problem. The Terminating Bailouts for Taxpayer Fairness Act would ensure that financial institutions have adequate capital to protect against losses.
Simply put, the bill would ensure that if Wall Street banks are going to make risky gambles, they do it with their own money. By requiring the biggest banks to have more of their own capital on hand to cover their losses, taxpayers won't be asked to bail them out again. The legislation would also limit the government safety net to traditional banking operations, protecting commercial banks rather than risky, investment banking activities.
Finally, the Terminating Bailouts for Taxpayer Fairness Act also would provide regulatory relief for community banks, allowing them to compete with the mega institutions.
Taking the appropriate steps would lead to more competition, increase lending and provide incentives for banks to do business the right way. Just about the only people who would not benefit from my plan are a few Wall Street executives.
On the five year anniversary of Lehman Brothers' collapse, we must ensure Ohio taxpayers are not the safety net for risky bets made on Wall Street. Americans do not want us to wait for another crisis to take action.