Two members of the U.S. Senate Banking Committee, Elizabeth Warren (D-Massachusetts) and David Vitter (R-Louisiana), have introduced legislation attempting to put a stop to the government from bailing out large financial institutions, according to an announcementon Warren’s website on Wednesday.
The Bailout Prevention Act is aimed at ending “too big to fail” by limiting the lending authority of the Federal Reserve.
“If big financial institutions know they can get cheap cash from the Fed in a crisis, they have less incentive to manage their risks carefully – which further increases the chance of another financial crisis,” Warren said. “This bill would make our financial system safer and help level the playing field between the megabanks and their smaller competitors.”
Following the multitude of multi-billion dollar bailouts of several of the nation’s largest financial institutions during the financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 directed the Fed to limit its spending authority. The Fed’s proposed rule, however, has done little to this effect, according to Warren’s announcement. Warren, Vitter, and 13 other Senators sent a letter to the Fed last August asking the central bank strengthen its lending restrictions, but the Fed has not acted on the issue.
“It’s no secret that too big to fail is still around. If another financial crisis happened tomorrow – and that’s still a real risk – nobody doubts that megabanks would be calling on the federal government to bail them out again,” Vitter said. “Our legislation makes common sense reforms to the Fed’s emergency lending powers to protect taxpayers the next time the megabanks lead us into another crisis.”
Other changes the new bill would bring about are: Requiring lending programs to be truly broad-based, restricting lending to only those institutions that are not insolvent, and requiring lending to be provided at a penalty rate.
Click here to read the full text of the Bailout Prevention Act introduced Wednesday by Warren and Vitter.
It is the second bill in a week introduced by Warren attempting some sort of Federal Reserve reform. Warren has been a major figure in Wall Street reform since the crisis and was the chief architect of the controversial Consumer Financial Protection Bureau. Last week, Vitter and Warren introduced the Fed Accountability Act, which is aimed at increasing the independence of the individual Fed governors to improve the central bank’s decision-making process, and at providing more transparency to votes on enforcement actions taken that total more than $1 million.