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Senate duo dials back anti-big bank proposal

By Douwe Miedema

WASHINGTON (Reuters) - Legislation to force U.S. banks to drastically raise their capital buffers - a proposal that has been criticized as a veiled attempt to break up the biggest banks - was presented in a slightly weakened form by two senators on Wednesday.

The two, Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, want to ditch a global accord on capital standards known as Basel III and put more straightforward caps on how much banks can borrow.

The bill, which adds to a rising chorus of big-bank critics in Washington even if it stands little chance of getting adopted, requires banks with more than $500 billion in assets to have at least 15 percent of shareholder equity.

In a draft proposal, Brown and Vitter had set a minimum capital ratio of 10 percent for all banks, but the final text of the bill lowered that to 8 percent for those banks with more than $50 billion in assets.

Bank regulators could set the capital ratio for banks that were even smaller, the bill said.

"This is a bank break-up proposal," said Tony Fratto, who works at consulting firm Hamilton Place Strategies. "Mandating new and punitive capital charges, and walking away from international agreements ... is misguided."

The debate about whether Washington has done enough to stave off the risk of a taxpayer bailout of Wall Street has heated up in recent weeks, with politicians and even some regulators calling to do more to prevent the next crisis.

Basel III calls on banks to hold up to 13 percent of capital, but that level is determined based on the riskiness of assets, making it far less demanding than the Brown-Vitter proposal.

Many lawmakers, banks and regulators have also criticized the Basel approach as too complicated.

There is little chance of political consensus on any plan to carve up banks such as JPMorgan Chase, Citigroup or Bank of America, though another major mishap at one of these banks might change that.

The Senate last month approved a largely symbolic measure to eliminate a "subsidy" banks receive in the form of cheaper borrowing, because markets assume that governments will always bail them out if they land in trouble.

Small banks grouped together in the Independent Community Bankers of America (ICBA) welcomed the law, which also provides relief for small banks from a range of other rules that have been written after the financial crisis.

Representative Jeb Hensarling - a Texas Republican who chairs the influential House Financial Services Committee - equally promised small banks relief from the increasing regulatory burden at an ICBA conference on Wednesday.

Democrats and Republicans in the committee were negotiating about a "bipartisan regulatory relief bill", Hensarling said. He declined to say what would be in the bill.

(Reporting by Douwe Miedema; Editing by Steve Ortlofsky)

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