Buzzed about in banking circles for weeks, senators Sherrod Brown (D-OH) and David Vitter (R-LA) and Brown have finally unveiled legislation they claim would end “too big to fail” policies. It subjects some of the largest banks to a 15 percent capital reserve and pushes the U.S. to move beyond the international banking accord known as Basel III.

Citing a need for reform, the two, during a press conference on Wednesday, pointed out that despite receiving assistance from taxpayers in 2008, the nation's four largest banks—JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo—are nearly $2 trillion larger today than they were before the financial crisis. The promise of federal bailouts allows “the nation's largest megabanks to borrow at a lower rate than regional banks, community banks, and credit unions,” a “funding advantage” estimated to be as high as $83 billion per year, they claimed in a statement.

The Terminating Bailouts for Taxpayer Fairness Act (sharp eyes will take note of its intentionally ironic acronym, TBTF) includes the following measures:

Mid-sized and regional banks would be required to hold 8 percent in capital to cover their assets

Institutions with more than $500 billion in assets would be required to meet a new 15 percent capital requirement. The bill's authors claim this echoes traditional capital levels that banks maintained before the advent of a government safety net.  They cite estimates that large New York banks in the 1920s funded themselves with Tier 1 capital ranging from 15 to 20 percent of their assets.

Nonbank financial companies will be prohibited from transferring assets or liabilities into federally supported banks.

Community banks would remain unchanged by the legislation, as the market already requires them to maintain capital ratios approaching 10 percent of their assets. Other benefits for smaller banks include expanding the definition of “rural” lenders that can offer balloon mortgages and creating an independent bank examiner ombudsman.

The legislation focuses on core shareholder equity, without intangible instruments or goodwill. Brown and Vitter point out that Lehman Brothers ostensibly had a capital ratio of 11 percent, yet its assets were sold in bankruptcy for nine cents on the dollar. “During the crisis, markets ignored certain instruments that qualified as Tier 1 capital but were not reliable buffers against loss and focused on whether institutions had sufficient levels of common equity,” they wrote.

In what will certainly be a controversial aspect, the legislation would bypass Basel III requirements, replacing them with new capital rules that require “more and purer forms” of capital, don't rely on risk weights, and are “simple and easy to understand and comply with.”

Capital ratios will be based on total assets “to prevent megabanks from gaming the system,” the two senators wrote in a narrative breakdown of the bill, claiming that “risk-weighting can obscure banks' true capital situations”

They added that “the existing international capital rules are insufficient to prevent another crisis” and that “the rules are still too complex.”

They cited an estimate by Andy Haldane, director of financial stability at the Bank of England that an average large bank would have to conduct more than 200 million calculations in order to determine their regulatory capital under the Basel II framework, which Basel III builds upon. The ratios are also too low, the senators claim. Based upon average bank risk weights of 40 percent, the 10 percent risk-weighted Basel III ratio would allow institutions to leverage 25 times their equity, meaning that a bank would become insolvent if its assets declined by as little as 4 percent.