As the 115th Congress gets underway, the Regional Bank Coalition is calling for comprehensive regulatory reform with a focus on retooling the Dodd-Frank Act’s definition of systemically risky banks beyond asset size.
A bill that would accomplish that, the Systemic Risk Designation Improvement Act, was introduced in the U.S. House of Representatives twice in past years. Sponsored by Rep. Blaine Luetkemeyer (R-MO), the most recent bill passed the House in December 2016 as H.R. 6392.
The legislation seeks to roll back the stipulation in Dodd-Frank that authorizes the Financial Stability Oversight Council (FSOC) to subject banks with $50 billion or more in assets to more stringent regulatory requirements and significant compliance costs.
A Federal Financial Analytics study said that provision has reduced the amount of capital regional banks can lend by as much as $20 billion over a five year period.
The Luetkemeyer bills, which RBC supports, say FSOC should look not just at size, but at a variety of risk factors. Luetkemeyer said the current systemically important financial institution (SIFI) designation process is arbitrary and subjects regional banks to the same standards as trillion-dollar global banks. The SIFI designation refers to financial institutions that could pose a threat to the financial stability of the United States if they failed.
Regional banks are mainly funded by deposits, conduct limited trading, and have little exposure to derivatives. As a result, those institutions argue they lack the systemic risk that fueled the 2008 financial crisis.
On the asset spectrum, regional banks fall between the small community banks and the large mega banks. Many regional banks are over that $50 billion threshold, falling somewhere between the $50 billion and $250 billion asset range. However, they are just the fraction of the size of the large banks like J.P. Morgan, which has some $2.5 trillion in assets.
“Regional banks are caught up in this one-size-fits-all regulatory regime that has had real detrimental effects to them and their downstream customers,” Matt Well, spokesperson for the Regional Bank Coalition, told Financial Regulation News.
Instead of looking purely at asset size, RBC supports legislation that looks at various risk factors, including size (total asset number), interconnectedness (ties to other banks/financial institutions), complexity (where the assets lie), global activity (domestic vs. international assets), and substitutability (dominance in certain customer services).
Some have suggested simply raising the threshold from $50 billion to $250 billion, for example, but RBC said that still would not sufficiently address the issue.
“Our view is that you need to take all of those factors into account,” Well said, noting the concept was not created by Luetkemeyer or RBC, but rather was developed by the Financial Stability Board and the Basel Committee on Banking Supervision.
The challenge is getting the bill reintroduced into a busy and crowded 115th Congress. The Financial Choice Act is expected to be reintroduced this year and will likely be a legislative priority. The Financial Choice Act was introduced in the previous Congress to lift some of the excessive regulatory burdens of Dodd-Frank on banks and credit unions.
While RBC supports much of the Financial Choice Act, it does not directly address the risk-based, multi-factored approach to enhanced supervision that the coalition champions, Well said.
But RBC is hopeful that a reintroduced Systemic Risk Designation Improvement Act would gain traction. H.R. 6392 passed the House with bipartisan support, one of only a few pieces of Dodd-Frank reforms to gain Democratic backing.
In a Feb. 13 letter addressed to House and Senate leaders, RBC’s member companies noted comments from Treasury Secretary Steven Mnuchin on that issue.
The letter quotes Mnuchin as saying, “I believe in a regulatory framework that is determined by complexity and activity, not simply size. I endorse rethinking regulatory requirements facing large regional banks in order to regulate the banking sector in a more effective manner.”
The letter also urges political leaders to address comprehensive reform of the regulatory landscape and corporate taxes, and eliminate government-mandated price controls from the marketplace that dictate the cost of debit card transactions.