Trump, Congress Push Relief for Small Banks on Debt Policy

By Jeff Bater

More community banks would be allowed to raise capital, take on debt, and increase lending under proposals being pushed by the Trump administration and some members of Congress.

Momentum is building in Washington for the second increase within three years of the asset threshold in the Federal Reserve’s Small Bank Holding Company Policy Statement.

The administration has proposed a $2 billion threshold, while a Senate bill recommends $5 billion and lawmakers in the House are calling for $10 billion.

Edward Mills, an analyst at FBR & Co., said the prospects for some sort of threshold increase are good. If there is one group of banks that have almost universal support on Capitol Hill, it is community lenders, he said.

“The smaller you are, the more support you have,” Mills told Bloomberg BNA. “It’s usually because those are the banks where members of Congress know of their existence, know the CEO, they go to Rotary Club with them. They look at them as the lenders who are more likely to lend to small businesses.”

1980 Policy Statement

The Fed policy statement was issued in 1980 to facilitate the transfer of ownership of small community banks by allowing small, non-complex bank holding companies to operate with higher levels of debt than would normally be permitted. While the statement was released by the Fed, the Collins amendment to the 2010 Dodd-Frank Act meant Congress had to approve an increase to the threshold.

The Fed finalized a rule in April 2015 that raised the threshold to $1 billion from $500 million, implementing legislation approved by Congress four months earlier.

Mills said that another increase “is probably top of the list” among the types of regulatory relief that can pass the current Congress. Senate Banking Chairman Mike Crapo (R-Idaho) and ranking member Sherrod Brown (D-Ohio) have discussed the need for targeted community bank legislation and “if any bill does pass through the committee, this is in it,” he said.

A Variety of Plans?

A bill (S. 1284) introduced in May by Sens. Orrin Hatch (R-Utah), Angus King (I-Maine), and Bill Nelson (D-Fla.) proposes an increase to $5 billion. A House bill (H.R. 2133) proposes increasing the threshold to $10 billion. A provision for increasing the asset ceiling to $10 billion was also inserted into the House-passed Choice Act (H.R. 10), a Republican bill that repeals much of Dodd-Frank and overhauls financial regulation.

The Independent Community Bankers of America is pushing for an increase to $10 billion. “The truth of the matter is, we’d be happy to get any of those,” Chris Cole, ICBA’s executive vice president and senior regulatory counsel, told Bloomberg BNA. “Even at $2 billion, that actually covers quite a few bank holding companies.”

At the current threshold of $1 billion, the policy statement covers more than 80 percent of the bank holding companies and savings and loan holding companies, according to the Trump administration. Treasury Secretary Steven Mnuchin said in a June report on a regulatory review ordered by President Donald Trump that raising the threshold to $2 billion “would provide substantial additional and appropriate relief.”

By asset size, there are 249 bank holding companies between $1 billion and $2 billion, while there are 462 firms between $1 billion and $10 billion, the ICBA said, citing figures from S&P Global Market Intelligence.

More Harm Than Good?

Supporters of raising the threshold argue a higher asset level will allow bank holding companies to issue debt and further capitalize their subsidiary banks. Hatch said in a news release his bill helps small financial institutions “provide households and small businesses more quality-based loans that will invigorate our local communities.”

However, allowing a small bank to operate with more debt is also a way to finance acquisitions. The Obama administration and some congressional Democrats opposed legislative efforts in 2015 to raise the asset threshold to $5 billion on grounds that it would cause more harm than good to the community-banking sector.

“Setting the threshold at $1 billion makes it more likely that if a bank is acquired, it will be by an institution that has similar roots in the community,” Rep. Maxine Waters (D-Calif.), ranking member on the Financial Services Committee, said at the time. “I’m very concerned that a bank with a $5 billion footprint would not provide the same kind of personal service a smaller institution might, and I’m further concerned that raising the threshold could encourage aggressive growth at a firm that is more concerned with its bottom line.”

Regulators Crucial

Congressional approval of raising the asset ceiling to $1 billion came a month after then Fed Governor Daniel Tarullo called on lawmakers for an increase. While many Republicans would support a new hike, another endorsement from banking regulators could help win over other lawmakers, such as middle-of-the-road Democrats, Cole said.

“The thing that will be a challenge is whether you can get the regulators to support this or not,” Cole told Bloomberg BNA. “They supported it going from $500 million to $1 billion, and that helped it a lot. Whether regulators will support it this time, the current regulators, I’m not sure they would be willing to do that.

“But if Trump gets his nominees in place at the agencies, we might get a different viewpoint and we might get end up getting some of these agencies supporting it,” he added.

Mills said that it might be best if banking regulators, rather than Congress, had the final say on appropriate asset thresholds in the Fed policy statement.

“The fact that three years later we’re back talking about increasing it again shows how much legislation is a blunt instrument and that these thresholds probably don’t make the most sense being put into law,” he said. “The maximum amount of flexibility for regulators to adjust those thresholds, long term, probably makes the most sense.”

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