On financial regulatory issues, Republicans have recently retreated back to the idea that all we need to do is to ensure adequate capital requirements at the largest banks. If they can handle anything that comes across with their own reserves, then taxpayer money is secure and the free market can sort out everything else.

There’s a place for capital requirements, though I disagree with conservatives that it’s the only regulation we need. But it’s important to point out that, despite more stringent capital rules from the international Basel III regulatory reforms (which get phased in between now and 2019), the capital standards that the Federal Reserve recently proposed are in many ways inadequate to this ideal of having the banks relying on their own reserves when they run into problems. In fact, in a rare display of election-year bipartisanship, two Banking Committee Senators – David Vitter (R-LA) and Sherrod Brown (D-OH), a top target of Republicans – wrote the Fed yesterday asking them to revisit the capital requirements and forcing larger capital reserves on the biggest banks.

Basically, the Fed’s capital reserves plan envisions higher standards on Systemically Important Financial Institutions, though the amount of those higher standards is not yet clear. But this places all banks that reach the SIFI threshold, whether regional banks or large Wall Street mega-banks, under the same standard. And the risks aren’t weighted the same way among those institutions. In their letter, Vitter and Brown write that “Systemic risk capital buffers should be imposed based upon the actual risks posed to the system, not merely in response to designation as a SIFI.”

Basically, Vitter and Brown want higher capital requirements on “mega-banks,” and it’s really not hard to make the distinction: we have four banks – Citi, Bank of America, Wells Fargo and JPMorgan Chase – that control assets totaling more than half of GDP. Add in Morgan Stanley and Goldman Sachs and you capture almost all of the derivatives contracts and 93% of all trading revenues. Those six banks are twice as large as the next top 50 US banks, COMBINED. You don’t need to go too much further than this. The Basel Committee themselves agreed that the largest banks in the world, including 8 in the US (State Street Bank and Bank of New York Mellon are the others), should be held to a higher capital standard.

“Placing higher capital requirements on megabanks is a common sense way to fix the dangers of too-big-to-fail. The megabanks should bear their own risks and have their financial incentives properly aligned in a way that protects U.S. taxpayers,” Vitter and Brown wrote, in a letter than includes copious footnotes. “However, in order to do so properly, you must have the board revisit the proposed rule to implement Basel III and modify the rule to include a SIFI surcharge significant enough to change the incentives for the largest banks.”

I think there are plenty of things you can do to wring the risk out of the financial system and promote saner, more responsible banking that focuses on consumer lending and allocation of capital. But as long as Republicans want to lean on the crutch of capital requirements, it’s worth teaming with them (even the likes of Vitter) to actually get a workable and consistent standard that will help prevent too big to fail and continual bailouts.

It’s a long letter, so check it out here. Politico has more. The Fed only proposed their rule, so there is still time for a modification.