A proposed bill written by Senators David Vitter, R-La., and Sherrod Brown, D-Ohio, outlines stricter standards for banks to abide by as the lawmakers try to shield the financial system from excessive risk posed by banks' non-depository affiliates.
The draft bill tightens bank capital adequacy while eliminating certain transactions between depository institutions and their non-depository affiliates.
Currently, the bill states it would require banks to hold a minimum of 10% equity capital to total consolidated assets, which compares to the proposed 7% minimum common equity mandate under Basel III.
Furthermore, if a bank contains assets greater than $400 billion, it would have to meet the minimum 10% of equity total assets along with an additional 5%, the bill states. This measure would include banks such as JPMorgan (JPM), Bank of America (BAC) and Wells Fargo (WFC).
The bill explains equity capital consists of tangible common equity, defined as common stockholders’ equity less goodwill and intangible assets plus retained earnings.
The bill heavily regulates banks' transactions with affiliates, stating "a member bank and its affiliates and subsidiaries may not engage in a covered transaction with another affiliate or subsidiary." Covered transactions would entail areas like loans, securities investments and purchase of assets.
Additionally, the bill prohibits federal assistance from flowing through a depository institution to an affiliate and freezes the enactment of Basel III.