'Too-big-to-fail' could jack up loan costs for brokerages, banks

Provisions in legislation aimed at “too-big-to-fail” financial firms will increase borrowing costs for large institutions — and will make it harder to get secured lending, according to financial industry officials. The Financial Stability Improvement Act (HR 3996), approved Wednesday on a 31-27 vote by the House Financial Services Committee, include provisions that could force secured creditors in large failing financial companies to take a 20% reduction, or “haircut,” in the value of their loans. Thus a secured creditor of a failed bank that’s bailed out by the U.S. government will get only 80% of its capital back. Past that, the lender is treated as an unsecured creditor. For brokerage firms and other large financial firms looking for capital, this could lead to problems. “If you’re trying to borrow, it will increase the cost of borrowing or eliminate secured lending,” said Scott Talbott, senior vice president for government affairs at The Financial Services Roundtable, which represents banks, insurance companies, brokerage firms and other companies involved in finance. “It will increase the riskiness of the companies, which is the exact opposite direction we’re trying to move,” Mr. Talbott said. Bond underwriting done by investment banks could be affected. “They would have less money to lend or it would be lent at less favorable rates,” he said. “That risk has to be accounted for.” The resolution process under the bill is “very ambiguous,” said Andrew DeSouza, spokesman for the Securities Industry and Financial Markets Association. “It gives little certainty to secured creditors,” which provide funding for broker-dealers in both debt and equity. “That uncertainty could raise the cost of financing a whole host of things, [including] raising money for their own firms,” Mr. DeSouza said. Under the bill, financial companies with assets of at least $50 billion and hedge funds with assets of more than $10 billion would have to pay into a $150 billion dissolution fund. Members of the Financial Services Committee, however, praised the bill. In a statement, the committee said the legislation “will put an end to `too-big-to-fail’ financial firms, help prevent the failure of large institutions from becoming a systemwide crisis and ensure that taxpayers are never again left on the hook for Wall Street’s reckless actions.” The Financial Stability Improvement Act is the ninth financial-reform proposal approved by the committee. The bills are expected to be considered together on the House floor next week.