Are U.S. big banks over- or under-regulated?

Debates over "too-big-to-fail" U.S. megabanks have shown no sign of a solution. A new bill proposed by two U.S. senators on whether the megabanks are over- or under-regulated bring the matter back to the focus.

Many specific regulations for implementing the Dodd-Frank Act, aimed at regulating "too-big-to-fail" banks in the wake of the financial crisis, have not yet emerged in a final form amid huge controversies, which raised concerns about the fate of the U.S. financial regulations and whether the country can avoid another crisis.

"Too-big-to-fail" still alive

The new bill, announced by Democratic Senator Sherrod Brown from Ohio and Republican Senator David Vitter from Louisiana on Wednesday, requires that megabanks with more than 500 billion U.S. dollars in assets should meet a new 15 percent capital adequacy ratio requirement.

The measure also proposes that mid-sized and regional banks hold 8 percent of capital to cover their assets, while community banks would remain unchanged by the legislation, as the market already requires them to maintain capital ratios about 10 percent of their assets.

"Our bill will ensure a level playing field for all financial institutions by ending the subsidy for Wall Street megabanks and requiring banks to have adequate capital to back up their liabilities," Brown said, noting that "if big banks want to continue risky practices, they should do so with their own assets."

"Our number one goal is to protect the taxpayers from financial risks and the best way to do this is by implementing a systemic solution, increasing the minimum amount of capital the megabanks are required to have," Vitter said.

Risky practices at Wall Street banks in 2008 put the U.S. economy on the verge of collapse and jeopardized the savings and pensions of millions of Americans. Despite receiving assistance from taxpayers in 2008, the four biggest U.S. banks, namely J.P. Morgan Chase, Bank of America, Citigroup, and Wells Fargo, are nearly 2 trillion dollars larger than they were before the crisis, according to the bill.

Megabanks regulations going too far?

However, huge controversies over financial regulations since the financial crisis made it difficult to tackle the "too-big-too-fail".

Some people, who propose to improve capital adequacy ratios of financial institutions and restrict their trading in high-risk financial products such as derivatives, believe the current supervisions are not bold enough, while others argue that the current regulations unduly restrict financial institutions and some provisions in the Dodd-Frank Act should be removed.

Neil Barofsky, former special inspector general in charge of overseeing Troubled Asset Relief Program (TARP), said in a recent discussion in New York that "we have done some good things in Dodd-Frank, but we are still in an extraordinarily dangerous position."

He noted that reforms put in place under the Dodd-Frank Act have not gone far enough to repair a broken financial system and there are still too many "too-big-to-fail" institutions that need to be smashed into pieces.

However, the opponents believed that the Dodd-Frank Act is enough to prevent another crisis and some provisions under the Act even go too far to limit an institution's ability to lend to businesses, hampering economic growth and jobs creation.

"I think that the worthwhile provisions of the Dodd-Frank Act are sufficient to prevent another financial crisis. But there are other provisions of the Act that do go too far and unduly restrict financial institutions in the United States," said Lawrence White, professor of Leonard N. Stern School of Business in New York University.

White told Xinhua that although the Dodd-Frank Act was far from perfect, it improved the situation.

The two senators' new plan was attacked immediately by the Securities Industry and Financial Markets Association (SIFMA) which represents hundreds of securities firms, banks and asset managers.

"Dodd-Frank set forth a framework that would effectively address too-big-to-fail through new, heightened prudential and capital standards, something that this legislation ignores. We should focus on completing the remaining rulemakings mandated by Dodd-Frank instead of enacting new legislation that would undermine the U.S.'s standing in the global financial system," SIFMA said in a statement.

Wether U.S. can avoid another crisis?

Disputes over the Obama administration's financial regulations are expected to continue as neither side will throw in the towel.

Thus, there are also uncertainties about the fate of Obama's aggressive financial regulations aimed at avoiding another crisis since many specific regulations for implementing the Dodd-Frank Act have not yet emerged in a final form. The specific regulations could be suspended or repealed due to the lobbying of interest groups.

Furthermore, if the Dodd-Frank Act fails to be effectively enforced, White believes a new financial crisis is likely to occur.

"Many of the elements that led to the financial crisis have been addressed. The real question is whether memories will fade in 10 to 15 years," he said.