The Senate Banking Committee held a hearing on March 19, 2015, to examine the impact of the existing regulatory framework on regional banks. Under the Dodd-Frank Act, all banks with assets of $50 billion or more are subject to “enhanced prudential standards,” which can include heightened capital requirements, leverage, liquidity, concentration limits, short-term debt limits, enhanced disclosures, risk management, and resolution planning.
Opening statements. Chairman Richard Shelby (R-Ala) said that regional banks “have been placed in a regulatory framework designed for large institutions because of an arbitrary asset threshold established by the Dodd-Frank Wall Street Reform and Consumer Protection Act.” Shelby expressed concern about the “arbitrary” $50 billion threshold. “I would like to hear from the witnesses today whether the $50 billion threshold is the appropriate and most accurate way to determine systemic risk in our banking sector.”
Ranking Member Sherrod Brown (D-Ohio) also spoke to open the hearing and stressed the importance of ensuring that prudential regulations for regional banks are crafted appropriately. He said that enhanced prudential standards are important not just to respond to the last crisis, but also to prevent the next crisis. “I agree we should not over-regulate, and so did the authors of Dodd-Frank.” Brown stated that the rules were not meant to cover just the “Too Big to Fail” banks, or the “systemically important” ones. He highlighted that the failure of a single large institution can create systemic risk, but so can multiple failures of similar small or mid-sized institutions.
Asset size a “starting point”. Thomas J. Curry, the Comptroller of the Currency, testified at the hearing regarding his agency’s experience with section 165 of the Dodd-Frank Act, and the OCC’s approach to tailoring its regulatory and supervisory expectations. Curry noted that the OCC’s role in section 165 is limited and said its only direct rulemaking authority is with respect to the company-run stress test requirements. But Curry also stated that the provisions of section 165 have a significant effect on national banks and the OCC’s supervisory oversight of those institutions.
Curry said that while “a bank’s asset size is often a starting point in our assessment of appropriate standards, it is rarely, if ever, the sole determinant.” He said the OCC’s supervisory programs are structured to allow adjustments to the supervisory oversight as a bank’s risk profile changes.
Criteria beyond asset size. Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation, testified that the companies that meet the $50 billion threshold for enhanced prudential standards represent a significant portion of the U.S. banking industry. According to Gruenberg, as of Dec. 31, 2014, 37 companies with combined assets of $15.7 trillion reported total assets greater than $50 billion. They owned a total of 72 FDIC-insured subsidiary banks and savings institutions, with combined assets of $11.3 trillion, which is 73 percent of total FDIC-insured institution assets.
The FDIC has developed criteria to identify community banks that included more than a strict asset size threshold according to Gruenberg. These criteria include the following:
- a ratio of loans-to-assets of at least 33 percent;
- a ratio of core deposits-to-assets of at least 50 percent; and
- a maximum of 75 offices operating in no more than two large metropolitan statistical areas and in no more than three states.
Compliance burden remains. Federal Reserve Board Governor Daniel K. Tarullo testified that the Fed was pursuing a tiered approach to prudential oversight in its supervisory and regulatory practices. Tarullo said the Fed has tailored its supervision of banking organizations by reference to size, business model, and systemic importance. He asked whether there is a threshold that is appropriate for mandatory application of a particular regulatory requirement, taking into account whatever discretion is given to the implementing regulatory agencies.
Tarullo did say that there are some statutory thresholds that might bear reexamination, and specified that:
- The Dodd-Frank Act provisions related to community banks—even with tailored applications by the regulatory agencies, there still remains a level of compliance necessary at community banks.
- The 50 billion threshold under section 165—Tarullo cited difficulty in customizing stress testing, which he said can be a challenge for banks that just hit the threshold. Additionally, Tarullo said the supervisory benefits are “relatively modest” for these financial institutions.
