Two Senators Try to Slam the Door on Bank Bailouts

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The bill would create an entirely new, transparent and ungameable set of capital rules for the nation's banks -- in other words, a meaningful rainy-day fund. Enormous institutions, like JPMorgan Chase and Citibank, would have to hold common stockholder equity of at least 15 percent of their consolidated assets to protect against large losses. That's almost double the 8 percent of risk-weighted assets required under the capital rules established by Basel III, the latest version of the byzantine international system created by regulators and central bankers.

This change, by itself, would eliminate a raft of problems posed by the risk-weighted Basel approach. Under those rules, banks must hold lesser or greater amounts of capital against assets, depending on the supposed risks they pose. For example, holdings of United States government securities are considered low-risk and require no capital to be held against them. Securities or loans that are riskier require more of a buffer against loss.

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The bill prevents another type of fudging by requiring off-balance-sheet assets and liabilities and derivatives positions to be included in a bank's consolidated assets. In addition, the capital cushion that a bank would hold under the bill is liquid and can absorb losses easily. This capital measure would be more transparent than the current system and could not be manipulated.