Senate Banking on Regional Bank Regulation
Senate Committee on Banking, Housing, & Urban Affairs
“Examining the Regulatory Regime for Regional Banks”
Thursday, March 19, 2015
Key Topics & Takeaways
- SIFI Threshold: Sen. Tim Scott (R-S.C.) said that legislation is not perfect, but that the Senate Committee on Banking can look at ways to improve in “both directions.” Gruenberg said the “asset amount is a starting point.” Sen. Richard Shelby (R-Ala.) pushed Tarullo to elaborate on raising the SIFI threshold. Tarullo suggested focusing on the stress testing threshold instead.
- Non-Banks & Systemic Risk: Shelby asked if the witnesses agree with the idea that “non-systemically risky banks should be regulated like a bank that is systemically risky.” Tarullo disagreed and said that variations of systemic risk exist. Gruenberg also disagreed.
- Strengthening Dodd-Frank & Commodities: Sen. Elizabeth Warren (D-Mass.) said the “let the banks run free mindset” started the last crisis and that it is important to look at areas where the Dodd-Frank Act can be strengthened. Tarullo suggested changing how civil money penalties are calculated for safety and soundness. He also recommended ending the exemption that some banks have on commodity activities.
- Methodology in OFR Report: Shelby asked for comments on the methodology used to examine systemic risk, as described in the Office of Financial Research’s (OFR) 2014 Annual Report. Tarullo replied that systemic risk can be viewed as a high stress failure that might lead to systemic risk. In his view, the OFR report is “focused on institutions at the very top of the scale” and “everyone is trying to determine the institutions that will pose systemic risk.”
Witness
- Honorable Thomas J. Curry, Comptroller , Office of the Comptroller of the Currency
- The Honorable Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation
- The Honorable Daniel K. Tarullo, Governor, Board of Governors of the Federal Reserve System
Opening Remarks
In his opening statement, Chairman Richard Shelby (R-Ala.) was critical of the current regulatory construct and whether it should be imposed on regional institutions, which he believes are the “fuel that drives local and regional economic growth.” He said these banks are “unfortunately part of an arbitrary asset threshold designed in the Dodd-Frank Consumer Protection Act” (Dodd-Frank Act) to assess systemic risk. Shelby said this threshold of $50 billion in assets was intended for “big banks” and suggested that it is “time to revisit suitability” for regional banks. He argued that these banks “do not pose macroprudential risk and should not have macroprudential regulation.” Shelby emphasized that the threshold for systemically important financial institutions (SIFI) is an area of common interest on the Senate Banking Committee.
In his opening statement, Ranking Member Sherrod Brown (D-Ohio) said it is important “not to over-regulate,” but added that “Dodd-Frank did not go as far as [he] would.” However, he acknowledged that the Dodd-Frank Act did direct regulators not to take a “one size fits all” approach. He said that a “$50 billion bank is not the same as J.P. Morgan.” He continued that the “enhanced prudential standards are important, not just to respond to the last crisis, but also to prevent the next one.” Brown concluded that the Senate Banking Committee should anticipate these problems.
In his testimony, Federal Reserve Governor Daniel Tarullo commented on the threshold in Section 165 of the Dodd-Frank Act for application of enhanced prudential standards to bank holding companies. He explained that the Federal Reserve has implemented the prudential regulations based on the “size, scope, and range of activities.” For its supervisory and regulatory practices, Tarullo said the Federal Reserve is pursuing a “tiered approach” to prudential oversight. Tarullo discussed the “regulatory differentiation in the Dodd-Frank Act” and said the Federal Reserve has implemented the Section 165 requirement of graduated stringency for enhanced prudential standards by creating categories of risk.
Tarullo said the Federal Reserve is working on two regulatory requirements that will vary among the designated globally systemically important banking organizations (G-SIBS), including: 1) risk-based capital surcharges; and 2) a long-term debt requirement designed to support an effective orderly resolution process. He said the proposed rulemaking for the latter requirement will likely be issued in the “coming months.”
Regarding tiered regulatory and supervisory experience, Tarullo said the Federal Reserve will organize the firms based on their asset size into the following four groups: 1) community banking organizations (with total assets between $10 billion and $50 billion); 3) large banking organizations (total assets over $50 billion but that are not among the largest and most complex banking organizations); and 4) firms overseen by the Large Institution Supervision Coordinating Committee (LISCC) (the largest and most complex banking organizations).
He acknowledged that asset size is the “principal determinant of the general supervisory program for a banking organization,” but that other factors such as activities are also appropriate. With this in mind, Tarullo discussed the role of LISCC firms and their balance sheets on the greater financial system.
Tarullo then turned to the role of statutory thresholds and the Federal Reserve’s work to tailor supervision of banking organizations while also applying the statutory discretion that was granted under the Dodd-Frank Act. He discussed the 50 billion level established by Section 165 and suggested that “it might be worth thinking about the level of this threshold” for the following reasons: 1) “consideration of potential increases in the threshold for mandatory prudential measures should not remove the discretion of the banking agencies to require additional measures – including such things as more capital or liquidity – for specific firms or groups of firms in appropriate circumstances; 2) any consideration of raising the threshold should not extend to “removal of the application of enhanced standards and other rules to the largest banking organizations.” Tarullo concluded that the Federal Reserve will avoid a “one size fits all approach.”
In his testimony, Thomas Curry, Comptroller at the Office of the Comptroller of the Currency (OCC), said the OCC’s only “direct rulemaking authority under section 165 is with respect to the company-run stress test requirements under Section 165(i)(2).” He clarified that the OCC’s role is otherwise consultative. He discussed the key provisions of Section 165 that apply to bank holding companies and how they complement the OCC’s supervisory role. He referred to his written testimony for his views on heightened risk to the financial system and stated that “bank asset size is rarely, if ever, the sole determinant.” According to Curry, the appropriate degree of supervisory rigor is applied.
In his testimony, Martin Gruenberg, Chairman of the Federal Deposit Insurance Corporation (FDIC), explained the type of companies impacted by the enhanced prudential standards requirement under the Dodd-Frank act, described how regulators have implemented the requirements, and reviewed various considerations relevant to changing these requirements. Gruenberg noted that the companies that meet the threshold are a significant portion of the U.S. banking industry. For example, he stated that as of December 31, 2014, 37 companies with combined assets of $15.7 trillion reported total assets greater than $50 billion and 73 percent of the FDIC-insured institution assets were owned by these companies.
Therefore, Gruenberg emphasized that resolution plans are an important tool for protecting the economy and provide critical information to the regulators. He also contended that stress testing, as required by the Dodd-Frank Act, provides “forward looking information to supervisors to assist in their overall assessments of a covered bank’s capital adequacy and to aid in identifying downside risks and the potential impact of adverse outcomes on the covered bank.” He added that the concept of enhanced regulatory standards for the largest institutions is “sound” and “consistent with [the FDIC’s] longstanding approach to bank supervision.” However, Gruenberg highlighted the role of “size” and “complexity” when forming regulatory standards.
Question and Answer
Shelby asked if the witnesses agree with the idea that “non-systemically risky banks should be regulated like a bank that is systemically risky.” Tarullo disagreed and said that variations of systemic risk exist. Gruenberg also disagreed.
Shelby Shelby asked for comments on the methodology used to examine systemic risk, as described in the Office of Financial Research’s (OFR) 2014 Annual Report. Tarullo replied that systemic risk can be viewed as a high stress failure that might lead to systemic risk. In his view, the OFR report is “focused on institutions at the very top of the scale” and “everyone is trying to determine the institutions that will pose systemic risk.”
Multi-Factor Approach to Assessing Systemic Risk
Shelby asked if a “multi-factor approach” is a valid way to determine systemic risk. Tarullo replied that the Basel Committee and the Federal Reserve tried to construct a set of indicators to address size, interconnectedness, and cross-border risk. He said this model was tested on a “broad range of large internationally active banks.”
Safety and Soundness
Brown asked if the Senate Banking Committee should be concerned with the regulators’ ability to monitor safety and soundness. Tarullo said it has been a longstanding practice to have three agencies with the discretion to apply stronger expectations and “any constraint upon that would be highly problematic.” Curry said that “any limitation on the ability to use those tools on a selective basis would be problematic.” Gruenberg said the regulators should pay attention to safety and soundness of the markets.
Living Wills
Sen. Dean Heller (R-Nev.) asked Tarullo if it is necessary for a bank to have a living will every year, even if no changes occur. Tarullo responded that he does not think it is necessary to update a living will every year.
Strengthening Dodd-Frank & Commodities
Sen. Elizabeth Warren (D-Mass.) said the “let the banks run free mindset” started the last crisis and that it is important to look at areas where the Dodd-Frank Act can be strengthened. Tarullo suggested changing how civil money penalties are calculated for safety and soundness. He also recommended ending the exemption that some banks have on commodity activities.
Impact on Credit
Sen. Mike Rounds (R-S.D.) asked about the impact of SIFI designation on credit. Tarullo said that is why he advocated raising the threshold and continues to look for ways to reduce compliance burdens on smaller institutions. Curry said the FDIC issued a paper on collaboration, which he thinks is particularly important for smaller institutions.
Stress Tests & Cost of Compliance
Sen. Tim Scott (R-S.C.) said that banks can either choose to be less risky on their own or rely on regulators to tell them to reduce risk. He continued that stress testing has certain fixed compliance costs that “a big bank can weather more easily than a smaller bank,” making it “like a regressive tax.” Tarullo responded that stress testing is “more binary” and “either you are in or you are out.”
Scott said legislation is not perfect, but that the Senate Committee on Banking can look at ways to improve in “both directions.” Gruenberg said the “asset amount is a starting point.”
Shelby pushed Tarullo to elaborate on raising the SIFI threshold. Tarullo suggested focusing on the stress testing threshold instead.
Harmonization
Scott asked Tarullo for ways to harmonize reporting requirements. Tarullo said that “regulation by definition is something people have to abide by” and that there is “discretion in supervision.”
For more information on this event, please click here.
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Senate Committee on Banking, Housing, & Urban Affairs
“Examining the Regulatory Regime for Regional Banks”
Thursday, March 19, 2015
Key Topics & Takeaways
- SIFI Threshold: Sen. Tim Scott (R-S.C.) said that legislation is not perfect, but that the Senate Committee on Banking can look at ways to improve in “both directions.” Gruenberg said the “asset amount is a starting point.” Sen. Richard Shelby (R-Ala.) pushed Tarullo to elaborate on raising the SIFI threshold. Tarullo suggested focusing on the stress testing threshold instead.
- Non-Banks & Systemic Risk: Shelby asked if the witnesses agree with the idea that “non-systemically risky banks should be regulated like a bank that is systemically risky.” Tarullo disagreed and said that variations of systemic risk exist. Gruenberg also disagreed.
- Strengthening Dodd-Frank & Commodities: Sen. Elizabeth Warren (D-Mass.) said the “let the banks run free mindset” started the last crisis and that it is important to look at areas where the Dodd-Frank Act can be strengthened. Tarullo suggested changing how civil money penalties are calculated for safety and soundness. He also recommended ending the exemption that some banks have on commodity activities.
- Methodology in OFR Report: Shelby asked for comments on the methodology used to examine systemic risk, as described in the Office of Financial Research’s (OFR) 2014 Annual Report. Tarullo replied that systemic risk can be viewed as a high stress failure that might lead to systemic risk. In his view, the OFR report is “focused on institutions at the very top of the scale” and “everyone is trying to determine the institutions that will pose systemic risk.”
Witness
- Honorable Thomas J. Curry, Comptroller , Office of the Comptroller of the Currency
- The Honorable Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation
- The Honorable Daniel K. Tarullo, Governor, Board of Governors of the Federal Reserve System
Opening Remarks
In his opening statement, Chairman Richard Shelby (R-Ala.) was critical of the current regulatory construct and whether it should be imposed on regional institutions, which he believes are the “fuel that drives local and regional economic growth.” He said these banks are “unfortunately part of an arbitrary asset threshold designed in the Dodd-Frank Consumer Protection Act” (Dodd-Frank Act) to assess systemic risk. Shelby said this threshold of $50 billion in assets was intended for “big banks” and suggested that it is “time to revisit suitability” for regional banks. He argued that these banks “do not pose macroprudential risk and should not have macroprudential regulation.” Shelby emphasized that the threshold for systemically important financial institutions (SIFI) is an area of common interest on the Senate Banking Committee.
In his opening statement, Ranking Member Sherrod Brown (D-Ohio) said it is important “not to over-regulate,” but added that “Dodd-Frank did not go as far as [he] would.” However, he acknowledged that the Dodd-Frank Act did direct regulators not to take a “one size fits all” approach. He said that a “$50 billion bank is not the same as J.P. Morgan.” He continued that the “enhanced prudential standards are important, not just to respond to the last crisis, but also to prevent the next one.” Brown concluded that the Senate Banking Committee should anticipate these problems.
In his testimony, Federal Reserve Governor Daniel Tarullo commented on the threshold in Section 165 of the Dodd-Frank Act for application of enhanced prudential standards to bank holding companies. He explained that the Federal Reserve has implemented the prudential regulations based on the “size, scope, and range of activities.” For its supervisory and regulatory practices, Tarullo said the Federal Reserve is pursuing a “tiered approach” to prudential oversight. Tarullo discussed the “regulatory differentiation in the Dodd-Frank Act” and said the Federal Reserve has implemented the Section 165 requirement of graduated stringency for enhanced prudential standards by creating categories of risk.
Tarullo said the Federal Reserve is working on two regulatory requirements that will vary among the designated globally systemically important banking organizations (G-SIBS), including: 1) risk-based capital surcharges; and 2) a long-term debt requirement designed to support an effective orderly resolution process. He said the proposed rulemaking for the latter requirement will likely be issued in the “coming months.”
Regarding tiered regulatory and supervisory experience, Tarullo said the Federal Reserve will organize the firms based on their asset size into the following four groups: 1) community banking organizations (with total assets between $10 billion and $50 billion); 3) large banking organizations (total assets over $50 billion but that are not among the largest and most complex banking organizations); and 4) firms overseen by the Large Institution Supervision Coordinating Committee (LISCC) (the largest and most complex banking organizations).
He acknowledged that asset size is the “principal determinant of the general supervisory program for a banking organization,” but that other factors such as activities are also appropriate. With this in mind, Tarullo discussed the role of LISCC firms and their balance sheets on the greater financial system.
Tarullo then turned to the role of statutory thresholds and the Federal Reserve’s work to tailor supervision of banking organizations while also applying the statutory discretion that was granted under the Dodd-Frank Act. He discussed the 50 billion level established by Section 165 and suggested that “it might be worth thinking about the level of this threshold” for the following reasons: 1) “consideration of potential increases in the threshold for mandatory prudential measures should not remove the discretion of the banking agencies to require additional measures – including such things as more capital or liquidity – for specific firms or groups of firms in appropriate circumstances; 2) any consideration of raising the threshold should not extend to “removal of the application of enhanced standards and other rules to the largest banking organizations.” Tarullo concluded that the Federal Reserve will avoid a “one size fits all approach.”
In his testimony, Thomas Curry, Comptroller at the Office of the Comptroller of the Currency (OCC), said the OCC’s only “direct rulemaking authority under section 165 is with respect to the company-run stress test requirements under Section 165(i)(2).” He clarified that the OCC’s role is otherwise consultative. He discussed the key provisions of Section 165 that apply to bank holding companies and how they complement the OCC’s supervisory role. He referred to his written testimony for his views on heightened risk to the financial system and stated that “bank asset size is rarely, if ever, the sole determinant.” According to Curry, the appropriate degree of supervisory rigor is applied.
In his testimony, Martin Gruenberg, Chairman of the Federal Deposit Insurance Corporation (FDIC), explained the type of companies impacted by the enhanced prudential standards requirement under the Dodd-Frank act, described how regulators have implemented the requirements, and reviewed various considerations relevant to changing these requirements. Gruenberg noted that the companies that meet the threshold are a significant portion of the U.S. banking industry. For example, he stated that as of December 31, 2014, 37 companies with combined assets of $15.7 trillion reported total assets greater than $50 billion and 73 percent of the FDIC-insured institution assets were owned by these companies.
Therefore, Gruenberg emphasized that resolution plans are an important tool for protecting the economy and provide critical information to the regulators. He also contended that stress testing, as required by the Dodd-Frank Act, provides “forward looking information to supervisors to assist in their overall assessments of a covered bank’s capital adequacy and to aid in identifying downside risks and the potential impact of adverse outcomes on the covered bank.” He added that the concept of enhanced regulatory standards for the largest institutions is “sound” and “consistent with [the FDIC’s] longstanding approach to bank supervision.” However, Gruenberg highlighted the role of “size” and “complexity” when forming regulatory standards.
Question and Answer
Shelby asked if the witnesses agree with the idea that “non-systemically risky banks should be regulated like a bank that is systemically risky.” Tarullo disagreed and said that variations of systemic risk exist. Gruenberg also disagreed.
Shelby Shelby asked for comments on the methodology used to examine systemic risk, as described in the Office of Financial Research’s (OFR) 2014 Annual Report. Tarullo replied that systemic risk can be viewed as a high stress failure that might lead to systemic risk. In his view, the OFR report is “focused on institutions at the very top of the scale” and “everyone is trying to determine the institutions that will pose systemic risk.”
Multi-Factor Approach to Assessing Systemic Risk
Shelby asked if a “multi-factor approach” is a valid way to determine systemic risk. Tarullo replied that the Basel Committee and the Federal Reserve tried to construct a set of indicators to address size, interconnectedness, and cross-border risk. He said this model was tested on a “broad range of large internationally active banks.”
Safety and Soundness
Brown asked if the Senate Banking Committee should be concerned with the regulators’ ability to monitor safety and soundness. Tarullo said it has been a longstanding practice to have three agencies with the discretion to apply stronger expectations and “any constraint upon that would be highly problematic.” Curry said that “any limitation on the ability to use those tools on a selective basis would be problematic.” Gruenberg said the regulators should pay attention to safety and soundness of the markets.
Living Wills
Sen. Dean Heller (R-Nev.) asked Tarullo if it is necessary for a bank to have a living will every year, even if no changes occur. Tarullo responded that he does not think it is necessary to update a living will every year.
Strengthening Dodd-Frank & Commodities
Sen. Elizabeth Warren (D-Mass.) said the “let the banks run free mindset” started the last crisis and that it is important to look at areas where the Dodd-Frank Act can be strengthened. Tarullo suggested changing how civil money penalties are calculated for safety and soundness. He also recommended ending the exemption that some banks have on commodity activities.
Impact on Credit
Sen. Mike Rounds (R-S.D.) asked about the impact of SIFI designation on credit. Tarullo said that is why he advocated raising the threshold and continues to look for ways to reduce compliance burdens on smaller institutions. Curry said the FDIC issued a paper on collaboration, which he thinks is particularly important for smaller institutions.
Stress Tests & Cost of Compliance
Sen. Tim Scott (R-S.C.) said that banks can either choose to be less risky on their own or rely on regulators to tell them to reduce risk. He continued that stress testing has certain fixed compliance costs that “a big bank can weather more easily than a smaller bank,” making it “like a regressive tax.” Tarullo responded that stress testing is “more binary” and “either you are in or you are out.”
Scott said legislation is not perfect, but that the Senate Committee on Banking can look at ways to improve in “both directions.” Gruenberg said the “asset amount is a starting point.”
Shelby pushed Tarullo to elaborate on raising the SIFI threshold. Tarullo suggested focusing on the stress testing threshold instead.
Harmonization
Scott asked Tarullo for ways to harmonize reporting requirements. Tarullo said that “regulation by definition is something people have to abide by” and that there is “discretion in supervision.”
For more information on this event, please click here.