SunTrust and other big banks would be the biggest winners of draft legislation introduced in the Senate Banking Committee, which would spare them from heavy regulation.
But the provision in the bill that would lower the threshold for the definition of a big bank is also the one that has Wall Street critics and defenders of the 2010 Dodd-Frank financial reform law worried about Republican Chairman Richard Shelby’s legislation ahead of a scheduled mark-up next week.
It’s among the measures that led Shelby’s Democratic counterpart on the committee, Ohio Sen. Sherrod Brown, to call the reform package a “sprawling industry wish list of Dodd-Frank rollbacks.” Brown’s office declined Friday to go into further detail about his objections.
Shelby’s proposal would lift the definition of a bank as “systemically important” and in need of tighter regulation from its current $50 billion in assets to $500 billion. A group of top financial regulators would have the option of declaring banks below the $500 billion threshold threats to the financial system if they have risky lines of trading or derivatives business.
That proposal, said Public Citizen financial policy advocate Bartlett Naylor, is the “most outstanding problem” with Shelby’s bill.
Lifting the asset threshold from $50 billion to $500 billion would bring about 20 regional banks under the cap. If they were not singled out by regulators as systemic threats, they would be exempted from some tougher regulations and stress tests conducted by the Federal Reserve.
The $500 billion threshold would exclude all but the six biggest U.S. banks: JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley.
It would exclude some banks that have been identified by a group of international regulators as systemically important, namely State Street and Bank of New York Mellon. Together, those eight U.S. banks are subjected to stricter oversight from the Fed than other banks with $50 billion in assets.
The $500 billion threshold would leave out regional banks like SunTrust, which has about $190 billion in assets, according to Federal Reserve data. Headquartered in Atlanta with branches spread throughout the South, SunTrust is bigger than a typical community bank, but isn’t comparable to a megabank with investment banking and other lines of business. Similarly, Zions, which is based in Salt Lake City and has more than $57 billion in assets, serves the West and Southwest, but does not pose the same risks as a Citigroup or Goldman Sachs.
The Regional Bank Coalition, a group of regional banks that includes Zions and SunTrust and is pushing for the government to ease the burden, on Thursday released documents arguing that an arbitrary asset threshold doesn’t make sense as a gauge of riskiness and that the $50 billion line was set essentially by accident.
“Regional banks show none of the risk characteristics of the large money-center banks, yet they are regulated like them,” William Moore, the group’s executive director, argued on releasing the paper.
Top regulators and outside experts have suggested that the threshold might need to be raised. Federal Reserve Governor Daniel Tarullo, the central bank’s point man on regulation, suggested a $100 billion cut-off earlier this year. The Bipartisan Policy Center suggested it be set at $250 billion.
But others have expressed concern that any cutoff that excluded regional banks would fail to capture some banks that do pose risks to the economy.
Speaking at a Senate Banking Committee hearing in March, Federal Deposit Insurance Corporation Chairman Martin Gruenberg pointed to the 2008 failure of the Southern California-based bank IndyMac as an example of a regional bank failure that could have had disastrous consequences.
“It goes to the point that an institution, even of that size, could have certainly significant consequences for the Deposit Insurance Fund and considerations for the financial system more broadly,” Gruenberg said.
And relying on regulators to make individual judgments about the riskiness of banks below $500 billion assets would bring its own challenges.
“If there’s another chance for the banks to argue — as MetLife, for example is — in court, it’s going to be more cumbersome” for regulators to maintain oversight of potentially dangerous banks, Naylor said. MetLife, a life insurer, is one of the handful of non-bank companies that regulators have labeled systemically important. MetLife has challenged that designation in court.
