By Jeff Bater
Nov. 4 — The House Financial Services Committee approved legislation that would change the way a bank is designated for its risk to the financial system by replacing the $50 billion asset threshold with a new method that weighs not only a company's size but also complexity and other factors.
During a two-day markup of several bills pertaining to banking and the Financial Stability Oversight Council (FSOC), the House committee voted 39-16 for H.R. 1309, the Systemic Risk Designation Improvement Act of 2015. In explaining the bill, its sponsor, Rep. Blaine Luetkemeyer (R-Mo.), criticized the process of designating as systemically risky any bank with assets above $50 billion, saying such an approach “fails to take into account differences in business models or risk posed to the financial system.”
Adjusting the systemic risk process is a key part of a bill in the Senate. S. 1484, approved in May by the Senate Banking Committee, would raise to $500 billion the threshold for automatic designation of systemically important financial institutions (SIFIs). The Senate bill, introduced by Banking Committee Chairman Richard Shelby (R-Ala.), sets up a framework in which the Federal Reserve and the FSOC would evaluate the size, interconnectedness, substitutability, cross-border activity and complexity of banks with assets between $50 billion and $500 billion to determine whether they should be designated as SIFIs.
Jaret Seiberg, an analyst at Guggenheim Securities, questioned whether Luetkemeyer's bill could win support among Senate Democrats. “It is similar to the language that Senate Banking Chairman Richard Shelby included in his regulatory relief bill, which passed the committee without Democratic support,” he wrote in a market commentary.
Fed Chair Janet Yellen expressed concern about the bill during a Financial Services Committee hearing that came on the heels of the markup. “As I understand, 1309 would require the board to use a statutorily defined set of factors or make findings based on factors to decide whether or not to subject firms to higher prudential standards,” she told the panel. “I would see such a process as inhibiting our ability to take timely and necessary supervisory actions to address a firm's risk.”
Later in the hearing, Yellen said she would be amenable to raising the dollar threshold for SIFI designations. “To the extent that I've discussed the possibility of raising the threshold, I would really only support a very modest increase in the threshold,” she said.
Yellen said large regional banks are important suppliers of credit and that while the failure of one of those companies would not bring about the downfall of the financial system, it could affect a significant portion of the U.S. and the borrowers who depend on those institutions for access to credit.
“So I think a threshold is appropriate, especially in which banks over that threshold are designated for more intense supervision, especially if we have the ability to tailor our supervision,” she said. “And the only reason that I have said I'd be supportive of some modest increase in the threshold is because Dodd-Frank does impose some requirements on the smaller institutions in the area of stress testing and resolution plans where we have limited insufficient flexibility to remove those requirements, and we really think the costs exceed the benefits.”
Luetkemeyer told members of the House committee during the markup that the process of designating SIFIs for enhanced supervision shouldn't be allowed to lead to marketplace disruption or to penalize companies for their size alone.
“The risk of a traditional commercial bank is not the same as an internationally active complex firm that engages in significant trading activity,” he said. “My legislation would require federal banking regulators to examine not just size but also interconnectedness, the extent of readily available substitutes, global cross-jurisdictional activity and complexity.”
Luetkemeyer has picked up some Democratic support since introducing the legislation in March. One co-sponsor, Rep. Brad Sherman (D-Calif.), said during the markup that medium-size banks are not too big to exist.
“I don't think the regional banks and the medium-size banks are too big to exist, and I don't think the failure of any one of them would bring down the economy,” Sherman said.
However, Rep. Keith Ellison (D-Minn.) urged his colleagues to oppose the bill, saying there has to be a way to protect the overall financial system.
“When one of these banks that is systemically important gets into trouble, it can cause a contagion throughout the entire system. Let me just remind everybody that large regional banks were involved in the 2008 financial crisis,” he said. “It's not as if these large, regional banks are like community banks. They're different, and they do pose systemic risk.”
As a substitute to the bill, Rep. Carolyn Maloney (D-N.Y.) offered an amendment that she characterized as a “good compromise” in that it would keep the $50 billion threshold but force the Federal Reserve to do more at better tailoring Dodd-Frank's enhanced regulations. While the amendment was ultimately rejected, analysts saw it as a sign of compromise.
FBR analyst Edward Mills said Maloney's bill was the first legislation introduced by congressional Democrats overhauling the regulatory treatment of banks with more than $50 billion in assets since Senate Democrats didn't modify the threshold in the alternative they presented to Shelby's bill.
“In our view, the bill from Maloney will give both sides of the aisle an opportunity to find compromise and shows that increasing the SIFI threshold is an issue with bipartisan support,” Mills said.
In a statement made before the committee's vote on H.R. 1309, the coalition Americans for Financial Reform said H.R. 1309 is designed to roll back the improved Fed oversight of large regional banks and suggested the bill would “severely weaken the Federal Reserve's ability to properly regulate this class of banks, leaving the Federal Reserve with less authority than it had before Dodd-Frank.”
Sixteen regional banks and financial institutions, including PNC Bank in Pittsburgh and M&T Bank in Buffalo, sent a letter dated Nov. 2 to the committee leadership in support of H.R. 130, which they said “would free up capital for regional banks to lend to consumers, businesses and municipalities in local markets across the country.”
In addition to H.R. 1309, the committee approved H.R. 2209, which would allow banks to count certain municipal securities as high-quality liquid assets.
The bill, which was approved 56-1, is a response to regulations that require large financial institutions to maintain enough assets that can be easily converted into cash during a financial crisis. The liquidity coverage ratio (LCR) rule issued in September 2014 by the Fed, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation does not allow most municipal securities to be counted as high-quality liquid assets — although the Fed has since said it will consider changes for investment-grade municipal bonds.
H.R. 2209 is sponsored by Reps. Luke Messer (R-Ind.) and Maloney, with at least nine other co-sponsors from both parties. During a committee hearing in April, Maloney criticized the LCR rule for giving different treatment to corporate bonds and municipal bonds that have the same size, maturity and liquidity. The regulators “established liquidity metrics for corporate bonds, so that if a corporate bond meets all of the metrics, then it can be included in the liquidity buffer, but for some reason, the same deal was not extended to municipal bonds,” Maloney said at the time.
Additionally, the committee approved by voice vote on the first day of the markup Nov. 3 the Federal Savings Association Charter Flexibility Act (H.R. 1660). Rep. Keith Rothfus (R-Pa.) said his measure is meant to reduce regulatory burdens on community lenders. The bill amends the Home Owners’ Loan Act (HOLA) to provide flexibility to federal thrifts and allow them to operate with the same rights and duties as a national bank without the costs and burdens associated with going through the expense of restructuring and applying for a national bank charter, Rothfus said.
H.R. 1660 is a collaborative effort with the OCC, the principal regulator for federal savings associations. Comptroller of the Currency Thomas Curry has addressed the issue of restrictions on those institutions (143 BBD, 7/25/14).
The bill would give thrifts, which specialize in accepting savings deposits and making mortgages loans, the flexibility to exercise national bank powers without changing their charters. In a letter in April, the Independent Community Bankers of America said H.R. 1660 would provide flexibility for institutions to choose the business model that best suits their needs and the communities they serve, without having to go through the process or incurring the legal expense of converting to a national bank charter.
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