Senate Banking on the Regulatory Regime for Regional Banks
Senate Committee on Banking, Housing, & Urban Affairs
“Examining the Regulatory Regime for Regional Banks”
Tuesday, March 24, 2015
Key Topics & Takeaways
- Changes to SIFI Threshold: Sen. Bob Corker (R-Tenn.) said that he is “very open to making changes” to the SIFI threshold, but will “not make changes with groups of people where people say ‘get them not us.'” He said that he is interested in ensuring a “healthy financial system” but not on “groups of people that want relief,” and that it is important to “properly regulate banks of all levels.”
- Problems with Alternative Solutions: Sen. Elizabeth Warren (D-Mass.) said the SIFI threshold left out about 40 banks in the United States and that Congress gave the Fed the ability to tailor standards for the smallest banks, but noted the “alternatives to current thresholds raise a whole new set of problems.” Warren concluded that she “would rather err on the side of being careful” and capture banks that may not pose as much risk “since the American taxpayers are on the hook.”
- Impact on the Economy:Sen. Tim Scott (R-S.C.) said SIFI designation is “like a tax on labor and capital” with a “dynamic negative growth effect on our economy.” He added, “we now have as many folks on the regulatory side as you do on the lending side, which suggests the climate is not conducive to having an impact on the economy.”
Witness
- Mr. Oliver I. Ireland, Partner, Morrison and Foerster
- Mr. Deron Smithy, Executive Vice President and Treasurer, Regions Financial Corporation
- Mr. Mark Olson, Co-Chair, Bipartisan Policy Center Financial Regulatory Reform Initiative’s Regulatory Architecture Task Force
- Mr. Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship
MIT Sloan School of Management
Opening Remarks
In his opening statement, Chairman Richard Shelby (R-Ala.) explained that there are alternative ways to assess risk to the financial system, other than capturing all firms with assets in excess of $50 billion. He said that the existing statutory requirements limit regulators’ ability to tailor rules to the level of an institution’s systemic risk to the financial system. Instead, Shelby argued that the regulatory system should allow for maximum level of economic growth while also ensuring the safety and soundness of the markets.
In his opening statement, Ranking Member Sherrod Brown (D-Ohio) contended that with passage of the Dodd-Frank Act, Congress directed agencies to implement standards to lower the likelihood and cost of large bank holding company failures. Brown added that the Dodd-Frank Act also “directed regulators not to take a one-size-fits-all approach.” He continued that he does not think regional banks are systemic and that he would like to see broad bipartisan consensus regarding regulatory relief for these firms.
In his testimony, Oliver Ireland, Partner at Morrison and Foerster, acknowledged that “the overall size of a banking institution is a factor in the likelihood that such an institution could pose a risk to the financial stability of the United States” but added that “supervisors globally have increasingly focused on a broader, more nuanced array of systemic risk measurements.” According to Ireland, factors other than size could be used to identify banking organizations that pose systemic risks to the United States. He suggested that taking a tailored approach in the implementation of Section 165 of the Dodd-Frank Act could address concerns with cost, but “does not solve the issue of what the appropriate thresholds are for such requirements to kick in.” If a tailored risk-based approach to supervision were adopted by the regulators, Ireland said statutory changes to Section 165 would be needed. He concluded that he is “not sure that there is a neat way to put a statutory floor on supervision and regulatory requirements.”
In his testimony, Deron Smithy, Executive Vice President and Treasurer of Regions Financial Corporation, explained that regional banks are not as complex and do not have meaningful interconnections with other financial firms. In his view, “more stringent regulatory oversight should focus on those that destabilize the economy.” He said that since data regarding the scope of the Dodd-Frank Act and the nature of systemic risk is now available, it is important to tailor the rules appropriately but maintained that supervisory powers should not be weakened by reforms. Smithy said he would also support the Office of Financial Research’s (OFR) 2014 Annual Report finding that regional banks are different than complex banks and contended that “better standards would ensure safety and soundness while ensuring economic growth.”
In his testimony, Mark Olson, Co-chair of the Bipartisan Policy Center Financial Regulatory Reform Initiative’s Regulatory Architecture Task Force, provided an update regarding the task force’s recommendations to “raise the ‘bank SIFI’ [systemically important financial institution] asset threshold from $50 billion to $250 billion, while giving regulators more flexibility to determine whether or not an institution should be subject to more rigorous oversight.” In April 2014, the task force released a report that included more than 20 recommendations to accomplish the following goals: 1) clarify the U.S. regulatory architecture to close gaps that could contribute to a future crisis or financial stress event; 2) improve the quality of regulation and regulatory outcomes; 3) better allocate, coordinate, and efficiently use scare regulatory resources; 4) ensure the independence and authority of financial regulators to allow them to anticipate and appropriately act on threats to financial stability; and 5) increase the transparency and accountability of the regulatory structure.
Next, Olson highlighted that the task force suggested the asset threshold be raised because it: 1) is arbitrary; 2) includes institutions that are not systemically important; 3) focuses only on size; 4) produces undesirable incentives; 5) is not indexed; and 6) diverts scarce regulatory resources. Olsen emphasized that raising the threshold would improve the current standard and avoid one-size-fits-all regulation.
In his testimony, Simon Johnson, Professor of Entrepreneurship at the MIT Sloan School of Management, argued that a “better measure of potential importance to the financial system as a whole is ‘total exposure’ of a bank holding company, as defined in the Systemic Risk Report form.” He explained that “this requires a bank to report both its on-balance sheet and off-balance sheet activities, including derivatives exposures and credit card commitments, in a comparable ways.” Johnson emphasized that the regional bank models are pretty substantial and as large as some of the banks that have failed in the past.
Question and Answer
OFR Report
Shelby asked the witnesses if the recent OFR Report is a better way to assess risk than the current $50 billion asset threshold. Olson replied that suitability factors are better at determining risk factors.
Tailoring Section 165
Shelby asked if tailoring Section 165 based on bank size would address systemic risk. Ireland said that the approach under Section 165 does not accurately reflect the scope and differences in risk. Smithy agreed that the Fed has used efforts to tailor risk, but only in one direction. He said that regional banks do not take on the same risks as global systemically important banks (G-SIBS) and most deposits taken at regional banks are used to fund lending, rather than broker-dealer activities.
SIFI Threshold
Shelby asked for comments on the “arbitrary threshold” and whether raising the threshold would hinder the Fed’s supervisory role. Olsen replied that the threshold should be flexible and that their task force did not find advocates for maintaining the $50 billion threshold.
Sen. Mike Crapo (R-Idaho) noted that he asked Federal Reserve Board Governor Tarullo last year about the $50 billion asset threshold and said Tarullo agreed that it is arbitrary. Crapo suggested increasing the threshold to $250 billion or using an activity test and asked the witnesses for their views. Smithy said that Regions opposes the arbitrary nature of the threshold and supports an activity-based approach to look at the sources of risk, which would help provide a roadmap for regulators. Olson said the task force tried to calculate a higher number ($250 billion) that would isolate the largest institutions, but said if there is a more appropriate number, then they would be willing to consider it, assuming there is real flexibility.
Sen. Bob Corker (R-Tenn.) said that he is “very open to making changes” to the SIFI threshold, but will “not make changes with groups of people where people say ‘get them not us.'” He said that he is interested in ensuring a “healthy financial system” but not focusing on “groups of people that want relief.” Corker concluded the remainder of his time by saying that it is important to “properly regulate banks of all levels.”
Sen. Elizabeth Warren (D-Mass.) said the SIFI threshold left out about 40 banks in the United States and that Congress gave the Fed the ability to tailor standards for the smallest banks, but noted the “alternatives to current thresholds raise a whole new set of problems.” Warren concluded that she “would rather err on the side of being careful” and capture banks that may not pose as much risk “since the American taxpayers are on the hook.”
Moral Hazard
Brown asked if it is realistic to expect the $50 billion asset threshold to avoid moral hazard. Johnson said that it was a good idea, but that the Basel Committee is founded on too-big-to-fail ideas. Smithy said the indirect costs to the firms’ management and boards take time and attention away from serving customers.
Cost of Compliance
Brown said that risk officers along with strong rules in management can ensure that risky practices do not become harmful in the long term. He asked the witnesses to speak on behalf of onerous rules that they think cost too much. Smithy said that he thinks stress tests are a good idea, but that the Fed’s Comprehensive Capital Analysis and Review (CCAR) process and stress tests have become more challenging. He said that a real cost to customers exists and leads to firms asking if they “really want to participate” in certain markets.
Sen. Mark Warner (D-Va.) asked about the costs associated with the $50 billion asset threshold. Smithy said that stress testing leads to expenses in technology and personnel.
Impact on the Economy
Sen. Tim Scott (R-S.C.) said SIFI designation is “like a tax on labor and capital” with a “dynamic negative growth effect on our economy.” He added, “we now have as many folks on the regulatory side as you do on the lending side, which suggests the climate is not conducive to having an impact on the economy.” Scott asked Smithy to respond. Smithy said he has seen “a lot of improvement and risk management practices” and that if a firm is deemed systemically important then additional “cost that is not commensurate with the system is added.” Smithy said that firms should focus on innovation and technology to serve the needs of customers.
Brown-Vitter
Brown asked about capital requirements. Johnson noted that capital requirements are higher than they have been in the past, but that he liked the enhanced capital requirements in Brown-Vitter and finds this appropriate for regional banks.
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”
Tuesday, March 24, 2015
Key Topics & Takeaways
- Changes to SIFI Threshold: Sen. Bob Corker (R-Tenn.) said that he is “very open to making changes” to the SIFI threshold, but will “not make changes with groups of people where people say ‘get them not us.'” He said that he is interested in ensuring a “healthy financial system” but not on “groups of people that want relief,” and that it is important to “properly regulate banks of all levels.”
- Problems with Alternative Solutions: Sen. Elizabeth Warren (D-Mass.) said the SIFI threshold left out about 40 banks in the United States and that Congress gave the Fed the ability to tailor standards for the smallest banks, but noted the “alternatives to current thresholds raise a whole new set of problems.” Warren concluded that she “would rather err on the side of being careful” and capture banks that may not pose as much risk “since the American taxpayers are on the hook.”
- Impact on the Economy:Sen. Tim Scott (R-S.C.) said SIFI designation is “like a tax on labor and capital” with a “dynamic negative growth effect on our economy.” He added, “we now have as many folks on the regulatory side as you do on the lending side, which suggests the climate is not conducive to having an impact on the economy.”
Witness
- Mr. Oliver I. Ireland, Partner, Morrison and Foerster
- Mr. Deron Smithy, Executive Vice President and Treasurer, Regions Financial Corporation
- Mr. Mark Olson, Co-Chair, Bipartisan Policy Center Financial Regulatory Reform Initiative’s Regulatory Architecture Task Force
- Mr. Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship
MIT Sloan School of Management
Opening Remarks
In his opening statement, Chairman Richard Shelby (R-Ala.) explained that there are alternative ways to assess risk to the financial system, other than capturing all firms with assets in excess of $50 billion. He said that the existing statutory requirements limit regulators’ ability to tailor rules to the level of an institution’s systemic risk to the financial system. Instead, Shelby argued that the regulatory system should allow for maximum level of economic growth while also ensuring the safety and soundness of the markets.
In his opening statement, Ranking Member Sherrod Brown (D-Ohio) contended that with passage of the Dodd-Frank Act, Congress directed agencies to implement standards to lower the likelihood and cost of large bank holding company failures. Brown added that the Dodd-Frank Act also “directed regulators not to take a one-size-fits-all approach.” He continued that he does not think regional banks are systemic and that he would like to see broad bipartisan consensus regarding regulatory relief for these firms.
In his testimony, Oliver Ireland, Partner at Morrison and Foerster, acknowledged that “the overall size of a banking institution is a factor in the likelihood that such an institution could pose a risk to the financial stability of the United States” but added that “supervisors globally have increasingly focused on a broader, more nuanced array of systemic risk measurements.” According to Ireland, factors other than size could be used to identify banking organizations that pose systemic risks to the United States. He suggested that taking a tailored approach in the implementation of Section 165 of the Dodd-Frank Act could address concerns with cost, but “does not solve the issue of what the appropriate thresholds are for such requirements to kick in.” If a tailored risk-based approach to supervision were adopted by the regulators, Ireland said statutory changes to Section 165 would be needed. He concluded that he is “not sure that there is a neat way to put a statutory floor on supervision and regulatory requirements.”
In his testimony, Deron Smithy, Executive Vice President and Treasurer of Regions Financial Corporation, explained that regional banks are not as complex and do not have meaningful interconnections with other financial firms. In his view, “more stringent regulatory oversight should focus on those that destabilize the economy.” He said that since data regarding the scope of the Dodd-Frank Act and the nature of systemic risk is now available, it is important to tailor the rules appropriately but maintained that supervisory powers should not be weakened by reforms. Smithy said he would also support the Office of Financial Research’s (OFR) 2014 Annual Report finding that regional banks are different than complex banks and contended that “better standards would ensure safety and soundness while ensuring economic growth.”
In his testimony, Mark Olson, Co-chair of the Bipartisan Policy Center Financial Regulatory Reform Initiative’s Regulatory Architecture Task Force, provided an update regarding the task force’s recommendations to “raise the ‘bank SIFI’ [systemically important financial institution] asset threshold from $50 billion to $250 billion, while giving regulators more flexibility to determine whether or not an institution should be subject to more rigorous oversight.” In April 2014, the task force released a report that included more than 20 recommendations to accomplish the following goals: 1) clarify the U.S. regulatory architecture to close gaps that could contribute to a future crisis or financial stress event; 2) improve the quality of regulation and regulatory outcomes; 3) better allocate, coordinate, and efficiently use scare regulatory resources; 4) ensure the independence and authority of financial regulators to allow them to anticipate and appropriately act on threats to financial stability; and 5) increase the transparency and accountability of the regulatory structure.
Next, Olson highlighted that the task force suggested the asset threshold be raised because it: 1) is arbitrary; 2) includes institutions that are not systemically important; 3) focuses only on size; 4) produces undesirable incentives; 5) is not indexed; and 6) diverts scarce regulatory resources. Olsen emphasized that raising the threshold would improve the current standard and avoid one-size-fits-all regulation.
In his testimony, Simon Johnson, Professor of Entrepreneurship at the MIT Sloan School of Management, argued that a “better measure of potential importance to the financial system as a whole is ‘total exposure’ of a bank holding company, as defined in the Systemic Risk Report form.” He explained that “this requires a bank to report both its on-balance sheet and off-balance sheet activities, including derivatives exposures and credit card commitments, in a comparable ways.” Johnson emphasized that the regional bank models are pretty substantial and as large as some of the banks that have failed in the past.
Question and Answer
OFR Report
Shelby asked the witnesses if the recent OFR Report is a better way to assess risk than the current $50 billion asset threshold. Olson replied that suitability factors are better at determining risk factors.
Tailoring Section 165
Shelby asked if tailoring Section 165 based on bank size would address systemic risk. Ireland said that the approach under Section 165 does not accurately reflect the scope and differences in risk. Smithy agreed that the Fed has used efforts to tailor risk, but only in one direction. He said that regional banks do not take on the same risks as global systemically important banks (G-SIBS) and most deposits taken at regional banks are used to fund lending, rather than broker-dealer activities.
SIFI Threshold
Shelby asked for comments on the “arbitrary threshold” and whether raising the threshold would hinder the Fed’s supervisory role. Olsen replied that the threshold should be flexible and that their task force did not find advocates for maintaining the $50 billion threshold.
Sen. Mike Crapo (R-Idaho) noted that he asked Federal Reserve Board Governor Tarullo last year about the $50 billion asset threshold and said Tarullo agreed that it is arbitrary. Crapo suggested increasing the threshold to $250 billion or using an activity test and asked the witnesses for their views. Smithy said that Regions opposes the arbitrary nature of the threshold and supports an activity-based approach to look at the sources of risk, which would help provide a roadmap for regulators. Olson said the task force tried to calculate a higher number ($250 billion) that would isolate the largest institutions, but said if there is a more appropriate number, then they would be willing to consider it, assuming there is real flexibility.
Sen. Bob Corker (R-Tenn.) said that he is “very open to making changes” to the SIFI threshold, but will “not make changes with groups of people where people say ‘get them not us.'” He said that he is interested in ensuring a “healthy financial system” but not focusing on “groups of people that want relief.” Corker concluded the remainder of his time by saying that it is important to “properly regulate banks of all levels.”
Sen. Elizabeth Warren (D-Mass.) said the SIFI threshold left out about 40 banks in the United States and that Congress gave the Fed the ability to tailor standards for the smallest banks, but noted the “alternatives to current thresholds raise a whole new set of problems.” Warren concluded that she “would rather err on the side of being careful” and capture banks that may not pose as much risk “since the American taxpayers are on the hook.”
Moral Hazard
Brown asked if it is realistic to expect the $50 billion asset threshold to avoid moral hazard. Johnson said that it was a good idea, but that the Basel Committee is founded on too-big-to-fail ideas. Smithy said the indirect costs to the firms’ management and boards take time and attention away from serving customers.
Cost of Compliance
Brown said that risk officers along with strong rules in management can ensure that risky practices do not become harmful in the long term. He asked the witnesses to speak on behalf of onerous rules that they think cost too much. Smithy said that he thinks stress tests are a good idea, but that the Fed’s Comprehensive Capital Analysis and Review (CCAR) process and stress tests have become more challenging. He said that a real cost to customers exists and leads to firms asking if they “really want to participate” in certain markets.
Sen. Mark Warner (D-Va.) asked about the costs associated with the $50 billion asset threshold. Smithy said that stress testing leads to expenses in technology and personnel.
Impact on the Economy
Sen. Tim Scott (R-S.C.) said SIFI designation is “like a tax on labor and capital” with a “dynamic negative growth effect on our economy.” He added, “we now have as many folks on the regulatory side as you do on the lending side, which suggests the climate is not conducive to having an impact on the economy.” Scott asked Smithy to respond. Smithy said he has seen “a lot of improvement and risk management practices” and that if a firm is deemed systemically important then additional “cost that is not commensurate with the system is added.” Smithy said that firms should focus on innovation and technology to serve the needs of customers.
Brown-Vitter
Brown asked about capital requirements. Johnson noted that capital requirements are higher than they have been in the past, but that he liked the enhanced capital requirements in Brown-Vitter and finds this appropriate for regional banks.
For more information on this event, please click here.