Sept. 4 — The magic number could be $250 billion for lawmakers negotiating this fall about whether to provide an escape from the systemic risk label that regional banks say is meant for their bigger brethren.
In policy circles at least, there is consensus on raising the asset threshold for banks considered systemically important financial institutions (SIFIs) from the current $50 billion level to $250 billion. Such a move would exempt about two dozen banks from their current SIFI status, while leaving roughly 10 banks still subject to the additional regulations the designation triggers.
The $250 billion level is lower than the $500 billion proposed by Sen. Richard Shelby (R-Ala.), whose bill would exclude all but the nation's four largest banks from automatically qualifying but also give regulators discretion to designate smaller banks. Senate Democrats have rejected Shelby's threshold as too high, but those who have endorsed the idea of raising the threshold from $50 billion include Sen. Mark Warner (D-Va.), who serves on the Senate Banking Committee, and Federal Reserve Chair Janet Yellen.
“Certainly from the Dems side, $500 billion for a SIFI threshold is too high,” Mark Calabria, a former Shelby aide who is now director of financial regulation studies at the Cato Institute, told Bloomberg BNA. “You’re going to see this get dialed back to something closer to, say, $250 [billion]. But I think that there is consensus there for that.”
Negotiations over the financial regulatory overhaul offered by Shelby will resume after lawmakers return from the August recess. The Senate Banking Committee approved an amended version of his bill (S. 1484) in May along party lines and it was subsequently added to a Senate appropriations bill.
Senate Democrats, who attacked Shelby's bill as a rollback of important Dodd-Frank protections, offered an alternative measure that, like Shelby's, included breaks for smaller banks, but did not provide for changes to the systemic risk designation process. At a July Senate Banking Committee hearing, Sen. Elizabeth Warren (D-Mass.) said raising the $50 billion threshold and “cutting a whole bunch of big banks loose is a dangerous overreaction.”
But Warner has said he is open to raising the threshold, without indicating what he thought the right level would be.
“We all agree that $50 billion is probably the wrong number,” Warner said July 16 at a Bloomberg breakfast in Washington. “I think it's less about asset size and more about business product size.”
Yellen told the Senate Banking Committee during questioning at a July 16 hearing: “I would be open to a modest increase in the threshold.”
The Bipartisan Policy Center has suggested a threshold of $250 billion, with regulatory flexibility. “Few Democrats or Republicans argue that individual $50 billion banks are systemically important by themselves,” Justin Schardin, BPC's associate director of financial regulatory reform, said in an e-mail to Bloomberg BNA. “The current threshold is arbitrary and set too low.”
Schardin said regulators should consider “a range of factors” beyond the size of a bank’s balance sheet in determining whether it is systemically important “including interconnectedness, leverage, liquidity risk, maturity mismatch, and substitutability.”
“Banks below the threshold would be presumed to not be subject to the more stringent requirements, but regulators could ‘capture’ banks under the threshold if they find them to be especially risky,” Schardin said.
Schardin cited the experience of Long Term Capital Management, a hedge fund that nearly collapsed in 1998 and was bailed out by a consortium of banks under the oversight of the New York Fed. “In today’s numbers, it would have had assets under $100 billion, but it was obviously systemically important,” Schardin said. “On the other hand, banks above the threshold would be presumed to be subject to the more stringent requirements, but regulators could allow them out if they are not engaged in particularly risky activities.”
Michael Krimminger, who served as Federal Deposit Insurance Corp. general counsel and policy adviser when the SIFI limits were enacted, also said a $250 billion threshold makes sense.
“If we are talking truly about potentially systemically important firms, then the threshold should be in excess of $250 billion or even higher,” Krimminger, who is now a partner at Cleary Gottlieb, said in an e-mail. “There probably should be some discretion permitted based on complexity or interconnectedness because in a crisis size is not the only criteria.”
Although it establishes a $500 billion threshold for automatic SIFI designation, Shelby's bill also sets up a framework in which the Fed and Financial Stability Oversight Council 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.
Legislation in the House, introduced in March by Rep. Blaine Luetkemeyer (R-Mo.), ties bank regulation more closely to risk than asset size and does not establish any specific dollar thresholds.
At a July hearing, Sen. Warren expressed concerns about whether federal regulators would exercise any new discretion granted them in an exchange with Michael Barr, a University of Michigan law school professor who was testifying before the Banking Committee.
“Let's say Congress raises the threshold to $250 billion or $500 billion, as has been suggested,” Warren said. “You move the threshold and then say you can impose tougher standards. Professor Barr, do you think it's likely that the Fed would actually use that discretion to apply tougher standards to banks below the threshold?”
Barr replied, “I worry about whether they would, in fact, do that. I mean, I think Congress decided in the Dodd-Frank Act, in a number of instances, that the Federal Reserve had too much discretion in the past. And in this instance, and in a number of other instances, reined in Fed discretion. And I think that was a wise choice.”
In his testimony, Barr said the rules were not meant to apply to only the very few largest banks in the United States. Risks aggregate across the financial system, including from institutions of a variety of sizes and types, he said.
A coalition of regional banks—including Huntington Bancshares, which says it has $69 billion in assets—has led the push to raise the SIFI limit.
In a statement made when Shelby unveiled his draft bill, William Moore, the executive director of the Regional Bank Coalition, said that if the legislation were to pass, regional banks currently spending “hundreds of millions of dollars every year to comply with rules that do nothing to preserve safety and soundness would be able to devote that money to improving the economy through loans to families and small businesses in communities across the country.”
A study by Federal Financial Analytics Inc., released on Aug. 6, concluded the direct costs of systemic standards for a sample of U.S. bank holding companies (BHCs) may be at least $2 billion, resulting in a possible reduction of credit in the markets served by the largest of the BHCs of 5.7 percent to 8 percent. Over a five-year period, this reduction in lending by regional banks could total around $14 billion to $20 billion.
Guggenheim Securities analyst Jaret Seiberg said he thinks Shelby will find a way to get the votes needed to advance a bill through the Senate that raises the SIFI level for banks to between $150 billion and $250 billion of assets. “Negotiations are likely to heat up in late September and we would look for Shelby and Sen. Sherrod Brown (D-Ohio) to cut a deal,” he wrote in market commentary Aug. 3.
Another contentious provision in Shelby's bill would provide a safe harbor for banks from litigation brought on by the Consumer Financial Protection Bureau's Qualified Mortgage rule. In their alternative to the Shelby bill, Senate Democrats set a bar on asset size of banks that qualify for the protection at $10 billion.
Calabria said he thinks there will be compromise on some sort of size constraint. “It may well look very close to whatever the ultimate consensus on the SIFI threshold is,” said Calabria, a former Senate Banking Committee staff member who worked for Shelby. “I can see a 250 number for both of those things. The other stuff in the bill is pretty modest.”
To attract Democratic support, a SIFI compromise could be packaged with other financial regulation overhaul measures that have attracted bipartisan support in both chambers.
Shelby's proposal gives highly-rated community banks the opportunity to submit a short-form call report in the first and third quarters of each year. In addition, the bill calls for adjusting the Federal Deposit Insurance Act to increase the number of banks that qualify for an 18-month on-site examination cycle—as opposed to a 12-month cycle—by raising the current asset threshold to $1 billion from $500 million.
The exam cycle proposal was approved 58-0 as part of a package of measures marked up July 29 by the House Financial Services Committee.
In July, Shelby's bill was incorporated into the Senate spending legislation for financial services, a move analysts characterized as an attempt by Shelby to catalyze negotiations—and prevent a repeat of the fate in 2014 of a bipartisan proposal to overhaul the housing finance system.
Attaching the measure to a spending bill maneuver gives Shelby options. If he cuts a deal with Sen. Brown, who is the Banking Committee's ranking member, and then amendments surface that Republicans dislike, Shelby can turn to the appropriations process.
“In short, Shelby has bought himself flexibility by ensuring his regulatory relief bill is part of the appropriation bill,” Seiberg wrote. “And options are important when trying to advance a bill.”
After a Senate policy lunch Aug. 4, Shelby characterized his approach as “a dual track.”
“We're talking some in the back channels, so when we get back, I think things will pick up and we'll see where we are,” he told Bloomberg BNA. “We think we've got a good bill. You know we're subject to negotiations, but we'll see where we go. We're doing OK right now.”
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