HFSC on SIFI Designations
House Financial Services Subcommittee on Financial Institutions and Consumer Credit
“Examining the Designation and Regulation of Bank Holding Company SIFIs”
Wednesday, July 8, 2015
Key Topics & Takeaways
- Calculating Threshold: Panelists agreed that the threshold should not be calculated solely by assets, but instead incorporate different factors into the calculation.
- SIFI Designation: Rep. Luetkemeyer re-stated former Congressman Barney Frank’s concern that the SIFI designation went “way beyond what they intended,” as the designation was supposed to apply to the largest banks, not regular banks.
- Capital Surcharge: Rep. Maloney proposed requiring regulators to calculate each bank’s systemic risk based on an indicator test that goes beyond asset size and require a higher capital surcharge by banks that pose a higher systemic risk, and lower capital surcharge for those that pose a lower systemic risk.
- Asset Size: Rep. Sherman stated that the focus on asset size in Dodd-Frank “is wrong,” and that regulators should focus on the size of the liabilities of institutions.
- FDIC Proposal: Dr. Johnson from the Massachusetts Institute of Technology stated that Vice Chairman Thomas Hoenig of the FDIC’s proposal that would focus the regulatory relief “on activity and complexity, not strictly size” is “absolutely sound and should be taken very seriously.”
Panelists
- Harris Simmons, Chairman and Chief Executive Officer, Zions Bancorporation
- Dr. James Barth, Professor of Finance, Auburn University
- Dr. Paul Kupiec, Resident Fellow, American Enterprise Institute
- Satish Kini, Partner, Debevoise & Plimpton LLP
- Dr. Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, Massachusetts Institute of Technology
Due to House floor votes, the hearing was shortened and started with the Question and Answer portion.
Question and Answer
Determining Systemic Risk
Chairman Randy Neugebauer (R-Texas) asked about the calculation for determining systemic risk. Dr. James Barth from Auburn University stated that under Section 165 of Dodd-Frank, the size of the bank is 100 percent of the calculation, but that size is an “inappropriate” way to designate systemically important financial institutions (SIFIs). He continued that for designating a global systemically important banking (GSIB) organization, there are five factors, where size only accounts for 20 percent of the calculation.
Rep. Ruben Hinojosa (D-Texas) stated his opposition of a bright line test due to the uncertainty and inconsistency that is exposed. He asked if the $50 billion threshold is a good measurement for designation. Dr. Simon Johnson from the Massachusetts Institute of Technology stated that calculations must go beyond consolidated assets and incorporate derivatives, credit lines, and others. He continued that any financial institution close to one percent of gross domestic product (GDP) should be paid attention to.
Hinojosa asked if the concentration of large amounts of banking assets is a systematic concern. Barth confirmed that the concentration of assets is a concern, as six of the largest bank holding companies (BHCs) control 68 percent of all BHC assets in the U.S., with the top 11 BHCs controlling approximately 80 percent. He continued that regular banks should not be designated as a SIFI because they do not pose a systemic threat.
Rep. Mick Mulvaney (R-S.C.) asked if there is any evidence that the $50 billion threshold is the “right number.” Johnson explained that each bank above the $50 billion threshold has a total risk exposure over $100 billion except for two firms. Barth stated that there is “no basis” for using size as an indicator or the $50 billion number, and cited multiple studies that prove regional banks do not pose systemic risk.
Rep. Denny Heck (D-Wash.) asked what the appropriate size is for measuring systemic risk. Johnson stressed that when a company’s systemic footprint risk exposure reaches one percent of gross domestic product (GDP), “you should open your eyes” and think about the effect it could have on the financial system.
SIFI Designation
Rep. Keith Rothfus (R-Pa.) stated that if a company is going to be a SIFI, they should “go big” since the company would have more money to cover the costs associated with the designation. Barth agreed but stated that there are no offsetting benefits unless the assets are “much bigger” in order to spread the costs evenly throughout the company.
Rep. Blaine Luetkemeyer (R-Ga.) re-stated former Congressman Barney Frank’s concern that the SIFI designation went “way beyond what they intended,” as the designation was supposed to apply to the largest banks, not regular banks. Harris Simmons from Zions Bancorporation said there is very little inter-connectedness with regular banks, and thus it is difficult for one to impact the other. However, he continued, a community bank in a small community will have a systemic impact on that community, but that the language of Dodd-Frank is for the national economy, not one particular region.
Regulatory Approaches
Ranking Member William Lacy Clay (D-Mo.) asked for examples of how regulators have differentiated regulatory approaches for financial institutions above the $50 billion threshold. Johnson stated that Dodd-Frank set a threshold above which there has to be prudential supervision, at the discretion of the regulators. He gave examples of differentiation including tailoring the content of stress tests, adjusting living wills among large and regional banks, and setting different capital standards. Johnson continued that there should be a category of banks that are not the largest, too-big-to-fail institutions, but are on the way to that territory, such as regional banks due to their “robust and resilient” growth rate.
Rep. Carolyn Maloney (D-N.Y.) asked the panel if it would be helpful for the Federal Reserve indicator based test to be extended to all banks over the $50 billion threshold. Satish Kini from Debevoise & Plimpton LLP stated that a more nuanced alternative than flat asset size is “worth considering.” Johnson noted that he was not in favor of modifying the bright line approach of Dodd-Frank, but agreed that the Federal Reserve should use a multiple indicator approach. Barth stated his support for a multi-factor approach by the Federal Reserve and stressed his opposition to solely using size as an indicator. He continued that if the Federal Reserve can make a tailored approach to banks over the $50 billion threshold and apply it to all banks, there would be “no need for the designation of SIFIs.”
Rep. Brad Sherman (D-Calif.) stated that the focus on asset size in Dodd-Frank “is wrong,” and that regulators should focus on the size of the liabilities of institutions. He asked if the current law requires that the Financial Stability Oversight Council (FSOC) impose “significant” additional standards on “regular” institutions that fall over the $50 billion threshold. Johnson stated that “regular” banks do not have the SIFI designation; they are just subject to additional scrutiny like stress tests.
Rep. Stephen Lynch (D-Mass.) asked Johnson about the proposal Vice Chairman Thomas Hoenig of the Federal Deposit Insurance Corporation (FDIC) put forth that would focus the regulatory relief “on activity and complexity, not strictly size.” Johnson stated that “Hoenig has many good ideas and that is one of them.” He explained that once a financial institution has over $100-150 billion in total assets there should be a level of scrutiny and concern, but it should not prevent them from growing or running their business. Johnson continued that Hoenig’s proposal is “absolutely sound and should be taken very seriously.”
Heck stated that there is merit in Hoenig’s approach in making determinations in the level of risk activity, which Johnson agreed and stated it creates a “safe haven” for community banks.
Rep. Mia Love (R-Utah) asked the panelists whether regulators would still have the supervisory tools necessary to make sure banks are operated in a safe and sound manner, if the SIFI thresholds are raised or eliminated. All panelists agreed that regulators have always had the tools, but Johnson stated that the unwillingness of regulators to use the tools was the motivation for the threshold.
Rep. Ed Royce (R-Calif.) asked Kini where the $50 billion threshold has been applied other than SIFI designation. Kini explained that regulators have dictated that certain exchange compliance rules apply under the Volcker Rule without the statutory directive to do so, as well as applying it to certain risk management standards.
Royce then asked if the Federal Reserve could raise the Comprehensive Capital Analysis and Review (CCAR) level to $100 billion or more, as a higher number would make more sense for stress testing. Kini replied that while the Federal Reserve could vary different types of stress testing, it has to apply enhanced capital requirements to firms above $50 billion in assets.
Royce asked if the Federal Reserve advocated for a bright line $50 billion asset based threshold when the Basel Committee was designing methodology for determining risk regulation. Kini stated that he was unaware if the Federal Reserve advocated for the $50 billion and explained that the Basel Committee used a more nuanced indicator approach.
Tailored Approach
Vice Chairman Stevan Pearce (R-N.M.) challenged the idea of a tailored process, stating it would not work from a regulatory perspective. He asked if banks would purposely stay under the threshold in order to avoid enhanced capital standards and regulations. Simmons stated that it may have that effect.
Maloney stressed that the prudential standards intended to mitigate risk should be tailored to a bank’s systemic risk, and that while the Federal Reserve has the discretion to tailor enhanced prudential standards, they have not done so. She proposed requiring regulators to calculate each bank’s systemic risk based on an indicator test that goes beyond asset size and require a higher capital surcharge by banks that pose a higher systemic risk, and lower capital surcharge for those that pose a lower systemic risk.
Restrictions on Risk
Sherman asked what limits there are on bank holding companies (BHCs) issuing credit default swaps (CDS). Johnson explained that there are a “variety” of restrictions on the amount of risk BHCs can take and that there are additional concerns and scrutiny by regulators the kind of open positions and exposure taken through derivatives such as CDS.
Transparency
Rep. Robert Pittenger (R-N.C.) asked the panel if the SIFI designation has been helpful or a hindrance. Simmons stated that the SIFI designation has been a hindrance to his company and said he is in favor of any legislation that will move beyond the asset size threshold. He added that stress testing is a useful tool in risk management but that the lack of transparency in the Federal Reserve modeling process is a “great frustration,” which leads his business to curtail some lending. Barth stressed that the SIFI designation “has not been worthwhile or beneficial” as it misleads the actual systemic risk of institutions. Dr. Paul Kupiec from American Enterprise Institute stated the need to identify operations that must continue if a SIFI fails, and said that rather than focusing on a SIFI threshold level, the focus should be on operations that make financial market work.
Impact on Business
Rep. Roger Williams (R-Texas) asked Simmons how the SIFI designation has impacted his business model and if it has impacted the services provided to customers. Simmons responded that their seven subsidiary banks are consolidating into a single charter in order to reduce the cost of regulation and have consistency in data generation for regulators.
Love asked Simmons who bears the cost of compliance in firms. Simmons replied that the cost is divided between customers and shareholders, and added his concern that the additional costs are making the “entire regulated industry less competitive.”
Rep. Andy Barr (R-Ky.) asked what impact Dodd-Frank law has on community banks. Kupiec stated that “it is not a good environment to be a banker,” and added that when a bank, of any size, fails it likely has negative impacts on businesses that were being served by the bank.
For more information on this event, please click here.
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House Financial Services Subcommittee on Financial Institutions and Consumer Credit
“Examining the Designation and Regulation of Bank Holding Company SIFIs”
Wednesday, July 8, 2015
Key Topics & Takeaways
- Calculating Threshold: Panelists agreed that the threshold should not be calculated solely by assets, but instead incorporate different factors into the calculation.
- SIFI Designation: Rep. Luetkemeyer re-stated former Congressman Barney Frank’s concern that the SIFI designation went “way beyond what they intended,” as the designation was supposed to apply to the largest banks, not regular banks.
- Capital Surcharge: Rep. Maloney proposed requiring regulators to calculate each bank’s systemic risk based on an indicator test that goes beyond asset size and require a higher capital surcharge by banks that pose a higher systemic risk, and lower capital surcharge for those that pose a lower systemic risk.
- Asset Size: Rep. Sherman stated that the focus on asset size in Dodd-Frank “is wrong,” and that regulators should focus on the size of the liabilities of institutions.
- FDIC Proposal: Dr. Johnson from the Massachusetts Institute of Technology stated that Vice Chairman Thomas Hoenig of the FDIC’s proposal that would focus the regulatory relief “on activity and complexity, not strictly size” is “absolutely sound and should be taken very seriously.”
Panelists
- Harris Simmons, Chairman and Chief Executive Officer, Zions Bancorporation
- Dr. James Barth, Professor of Finance, Auburn University
- Dr. Paul Kupiec, Resident Fellow, American Enterprise Institute
- Satish Kini, Partner, Debevoise & Plimpton LLP
- Dr. Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, Massachusetts Institute of Technology
Due to House floor votes, the hearing was shortened and started with the Question and Answer portion.
Question and Answer
Determining Systemic Risk
Chairman Randy Neugebauer (R-Texas) asked about the calculation for determining systemic risk. Dr. James Barth from Auburn University stated that under Section 165 of Dodd-Frank, the size of the bank is 100 percent of the calculation, but that size is an “inappropriate” way to designate systemically important financial institutions (SIFIs). He continued that for designating a global systemically important banking (GSIB) organization, there are five factors, where size only accounts for 20 percent of the calculation.
Rep. Ruben Hinojosa (D-Texas) stated his opposition of a bright line test due to the uncertainty and inconsistency that is exposed. He asked if the $50 billion threshold is a good measurement for designation. Dr. Simon Johnson from the Massachusetts Institute of Technology stated that calculations must go beyond consolidated assets and incorporate derivatives, credit lines, and others. He continued that any financial institution close to one percent of gross domestic product (GDP) should be paid attention to.
Hinojosa asked if the concentration of large amounts of banking assets is a systematic concern. Barth confirmed that the concentration of assets is a concern, as six of the largest bank holding companies (BHCs) control 68 percent of all BHC assets in the U.S., with the top 11 BHCs controlling approximately 80 percent. He continued that regular banks should not be designated as a SIFI because they do not pose a systemic threat.
Rep. Mick Mulvaney (R-S.C.) asked if there is any evidence that the $50 billion threshold is the “right number.” Johnson explained that each bank above the $50 billion threshold has a total risk exposure over $100 billion except for two firms. Barth stated that there is “no basis” for using size as an indicator or the $50 billion number, and cited multiple studies that prove regional banks do not pose systemic risk.
Rep. Denny Heck (D-Wash.) asked what the appropriate size is for measuring systemic risk. Johnson stressed that when a company’s systemic footprint risk exposure reaches one percent of gross domestic product (GDP), “you should open your eyes” and think about the effect it could have on the financial system.
SIFI Designation
Rep. Keith Rothfus (R-Pa.) stated that if a company is going to be a SIFI, they should “go big” since the company would have more money to cover the costs associated with the designation. Barth agreed but stated that there are no offsetting benefits unless the assets are “much bigger” in order to spread the costs evenly throughout the company.
Rep. Blaine Luetkemeyer (R-Ga.) re-stated former Congressman Barney Frank’s concern that the SIFI designation went “way beyond what they intended,” as the designation was supposed to apply to the largest banks, not regular banks. Harris Simmons from Zions Bancorporation said there is very little inter-connectedness with regular banks, and thus it is difficult for one to impact the other. However, he continued, a community bank in a small community will have a systemic impact on that community, but that the language of Dodd-Frank is for the national economy, not one particular region.
Regulatory Approaches
Ranking Member William Lacy Clay (D-Mo.) asked for examples of how regulators have differentiated regulatory approaches for financial institutions above the $50 billion threshold. Johnson stated that Dodd-Frank set a threshold above which there has to be prudential supervision, at the discretion of the regulators. He gave examples of differentiation including tailoring the content of stress tests, adjusting living wills among large and regional banks, and setting different capital standards. Johnson continued that there should be a category of banks that are not the largest, too-big-to-fail institutions, but are on the way to that territory, such as regional banks due to their “robust and resilient” growth rate.
Rep. Carolyn Maloney (D-N.Y.) asked the panel if it would be helpful for the Federal Reserve indicator based test to be extended to all banks over the $50 billion threshold. Satish Kini from Debevoise & Plimpton LLP stated that a more nuanced alternative than flat asset size is “worth considering.” Johnson noted that he was not in favor of modifying the bright line approach of Dodd-Frank, but agreed that the Federal Reserve should use a multiple indicator approach. Barth stated his support for a multi-factor approach by the Federal Reserve and stressed his opposition to solely using size as an indicator. He continued that if the Federal Reserve can make a tailored approach to banks over the $50 billion threshold and apply it to all banks, there would be “no need for the designation of SIFIs.”
Rep. Brad Sherman (D-Calif.) stated that the focus on asset size in Dodd-Frank “is wrong,” and that regulators should focus on the size of the liabilities of institutions. He asked if the current law requires that the Financial Stability Oversight Council (FSOC) impose “significant” additional standards on “regular” institutions that fall over the $50 billion threshold. Johnson stated that “regular” banks do not have the SIFI designation; they are just subject to additional scrutiny like stress tests.
Rep. Stephen Lynch (D-Mass.) asked Johnson about the proposal Vice Chairman Thomas Hoenig of the Federal Deposit Insurance Corporation (FDIC) put forth that would focus the regulatory relief “on activity and complexity, not strictly size.” Johnson stated that “Hoenig has many good ideas and that is one of them.” He explained that once a financial institution has over $100-150 billion in total assets there should be a level of scrutiny and concern, but it should not prevent them from growing or running their business. Johnson continued that Hoenig’s proposal is “absolutely sound and should be taken very seriously.”
Heck stated that there is merit in Hoenig’s approach in making determinations in the level of risk activity, which Johnson agreed and stated it creates a “safe haven” for community banks.
Rep. Mia Love (R-Utah) asked the panelists whether regulators would still have the supervisory tools necessary to make sure banks are operated in a safe and sound manner, if the SIFI thresholds are raised or eliminated. All panelists agreed that regulators have always had the tools, but Johnson stated that the unwillingness of regulators to use the tools was the motivation for the threshold.
Rep. Ed Royce (R-Calif.) asked Kini where the $50 billion threshold has been applied other than SIFI designation. Kini explained that regulators have dictated that certain exchange compliance rules apply under the Volcker Rule without the statutory directive to do so, as well as applying it to certain risk management standards.
Royce then asked if the Federal Reserve could raise the Comprehensive Capital Analysis and Review (CCAR) level to $100 billion or more, as a higher number would make more sense for stress testing. Kini replied that while the Federal Reserve could vary different types of stress testing, it has to apply enhanced capital requirements to firms above $50 billion in assets.
Royce asked if the Federal Reserve advocated for a bright line $50 billion asset based threshold when the Basel Committee was designing methodology for determining risk regulation. Kini stated that he was unaware if the Federal Reserve advocated for the $50 billion and explained that the Basel Committee used a more nuanced indicator approach.
Tailored Approach
Vice Chairman Stevan Pearce (R-N.M.) challenged the idea of a tailored process, stating it would not work from a regulatory perspective. He asked if banks would purposely stay under the threshold in order to avoid enhanced capital standards and regulations. Simmons stated that it may have that effect.
Maloney stressed that the prudential standards intended to mitigate risk should be tailored to a bank’s systemic risk, and that while the Federal Reserve has the discretion to tailor enhanced prudential standards, they have not done so. She proposed requiring regulators to calculate each bank’s systemic risk based on an indicator test that goes beyond asset size and require a higher capital surcharge by banks that pose a higher systemic risk, and lower capital surcharge for those that pose a lower systemic risk.
Restrictions on Risk
Sherman asked what limits there are on bank holding companies (BHCs) issuing credit default swaps (CDS). Johnson explained that there are a “variety” of restrictions on the amount of risk BHCs can take and that there are additional concerns and scrutiny by regulators the kind of open positions and exposure taken through derivatives such as CDS.
Transparency
Rep. Robert Pittenger (R-N.C.) asked the panel if the SIFI designation has been helpful or a hindrance. Simmons stated that the SIFI designation has been a hindrance to his company and said he is in favor of any legislation that will move beyond the asset size threshold. He added that stress testing is a useful tool in risk management but that the lack of transparency in the Federal Reserve modeling process is a “great frustration,” which leads his business to curtail some lending. Barth stressed that the SIFI designation “has not been worthwhile or beneficial” as it misleads the actual systemic risk of institutions. Dr. Paul Kupiec from American Enterprise Institute stated the need to identify operations that must continue if a SIFI fails, and said that rather than focusing on a SIFI threshold level, the focus should be on operations that make financial market work.
Impact on Business
Rep. Roger Williams (R-Texas) asked Simmons how the SIFI designation has impacted his business model and if it has impacted the services provided to customers. Simmons responded that their seven subsidiary banks are consolidating into a single charter in order to reduce the cost of regulation and have consistency in data generation for regulators.
Love asked Simmons who bears the cost of compliance in firms. Simmons replied that the cost is divided between customers and shareholders, and added his concern that the additional costs are making the “entire regulated industry less competitive.”
Rep. Andy Barr (R-Ky.) asked what impact Dodd-Frank law has on community banks. Kupiec stated that “it is not a good environment to be a banker,” and added that when a bank, of any size, fails it likely has negative impacts on businesses that were being served by the bank.
For more information on this event, please click here.