At a Senate Banking Committee hearing this week called, “The Role of Financial Institutions in Local Communities: Midsized, Regional and Large Institution Perspective,” the American Bankers Association (ABA) and other banking officials commented on the need for tailored regulatory reform.
“Since the enactment of the Dodd-Frank Act and its statutory size thresholds, banking regulators have relied heavily on the single criterion of asset size of financial institutions as a proxy for systemic risk, creating regulatory ‘cliffs’ whereby all institutions over a certain size are regulated and supervised the same,” ABA said in a statement. “Although size-only regulation may be a simpler method for supervising financial institutions, it is inappropriate and needlessly burdensome for many financial institutions with noncomplex operations and business models, thereby increasing costs and reducing products and services available to bank customers. In short, economic growth in our communities suffers.”
Instead, ABA said the best solution is to tailor regulations according to the risks and business model of the bank.
“This is the most effective model for bank regulation because it encourages diversity of business models while providing a regulatory program best adapted to the risks of each bank,” ABA said. “Pending legislative action, the regulators should use their discretion under current law to tailor regulations appropriately.”
U.S. Sen. Mike Crapo (R-ID), chairman of the committee, agreed, saying midsized and regional banks are often subject to the same rules as most systemically important banks.
“Many of these rules are applied based on asset thresholds that do not reflect the underlying systemic risk of financial institutions,” Crapo said. “While the size of a bank is one factor in measuring systemic importance, there are many other aspects of an institution that are relevant to how difficult the company would be to resolve, and how consequential its distress or failure would be to financial markets. The result is a regulatory regime that is insufficiently tailored for many of the firms subject to it.”
He cited stress testing, Comprehensive Capital Analysis and Review (CCAR), and the Volcker Rule as some examples of regulations designed for large institutions that shouldn’t be applied to smaller ones.
“One of my key priorities this Congress is passing bipartisan legislation to improve the bank regulatory framework and stimulate economic growth,” Crapo said.
Crapo said he is encouraged by the Treasury Department report issued last week examining how best to improve our regulatory framework.
“I am particularly encouraged by a number of specific recommendations for midsized and regional banks, including: changing the $50 billion SIFI threshold; exempting midsize banks from company run stress tests; exempting banks without significant trading activity from the proprietary trading prohibition of the Volcker Rule; and improving the transparency and process of CCAR and living wills,” he said.