Column: The Winds Have Shifted Against Mega-Banks

A year ago, the big U.S. banks were focused on repealing, or at least eliminating large parts of, the Dodd-Frank financial-reform law.

They poured money into the campaign of the Republican presidential nominee, Mitt Romney, and gave generously to opponents of the pro-reform Senate candidates Sherrod Brown and Elizabeth Warren. At the same time, lobbyists devised creative tactics to delay implementation of Dodd-Frank — filing lawsuits, mobilizing international pressure, hiring former regulators, writing opinion articles and comment letters, and commissioning faux research pieces. It was a tour de force by one of the great lobbies at the top of its game.

And it failed.

On April 23, I attended a forum organized by American Banker, a trade publication, to discuss the legislative proposal crafted by Brown, an Ohio Democrat, and Sen. David Vitter, a Louisiana Republican. In attendance was a Who’s Who of the industry lobby, with all the major groups represented at a senior level, including the Financial Services Forum, the Clearing House and the American Bankers Association.

They let it be known that the line from big banks and their allies had shifted and that their new refrain is “let’s implement Dodd-Frank.”

This sounds like a significant change in rhetoric, but don’t fall for it. The reality remains the same — a very powerful lobby is working flat out to ensure that the industry keeps its dangerous, nontransparent and unfair subsidies. Yet the winds are shifting against the megabanks for three main reasons.

First, the Brown-Vitter legislation, which was introduced April 24, changes everything. The news isn’t that Brown wants to make the financial system safer. That has been a top priority of his since the spring of 2010, when he co-wrote the Brown-Kaufman amendment, which would have imposed a binding size cap on the largest banks. (It failed on the Senate floor.)

Now, however, he has a Republican co-sponsor, and they have converged on a strong message. Vitter, who is on the right of the political spectrum, articulates well the case for ending the implicit subsidies that exist because creditors understand that the government and the Federal Reserve won’t allow a megabank to fail. This broad and sensible message resonates across the political spectrum.

Second, small banks are increasingly focused on the ways megabanks have achieved an unfair competitive advantage — primarily through implicit government subsidies.

The most compelling voice at the forum last week was Terry Jorde, a senior executive vice president of the Independent Community Bankers of America. She made clear that small banks are being undermined by the reckless behavior of megabanks that are seen as “too big to fail.” There is no market at work here, just a hugely unfair and inefficient government-subsidy scheme. The U.S. economy wasn’t built on megabanks, and there is no good reason to continue to accept the risks they pose.

The megabanks have more money to spend on politics than the community banks. And as the biggest banks become even larger, they acquire more clout, spreading branches and other largesse across congressional districts. But for the moment, in all 50 states, community bankers are strong enough — both directly and as leaders in their communities — to effectively stand up to the six largest banks that are at the heart of the problem.

Camden Fine, the chief executive officer of the Independent Community Bankers of America, has made clear that he strongly endorses Brown-Vitter. Expect to see a lot more community bankers in senators’ offices.

Third, what Brown, Vitter and Fine express isn’t populist anger, but rather a thought-out plan for making the financial system safer. Read the bill and the section-by-section guidance. Brown-Vitter blends some powerful thinking. For example, it reflects the ideas of Richard Fisher and Harvey Rosenblum of the Dallas Federal Reserve on how to remove government guarantees; the critique of the Basel III global guidelines for bank risk from Tom Hoenig of the Federal Deposit Insurance Corp.; and the lessons of Sheila Bair, a former chairman of the FDIC, on the failures of supposedly smart regulation (her book Bull by the Horns, is a must-read; see, for example, the material in Chapter 3 on who pushed for the Basel II capital standards and why this almost proved disastrous).

Bair, Fisher, Hoenig, Rosenblum and the people who work with them aren’t populists. They are thoughtful and experienced technocrats who have worked long and hard in the sphere of practical policy.

Intellectually, the tide has turned. The dangers of reckless behavior by global megabanks are now understood much more broadly. And Brown-Vitter provides an appropriate road map for addressing some of the core problems and making the financial system significantly safer.

Simon Johnson, a professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics, is co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.