While sifting through many recommendations to reform our taxes, politicians in D.C. shouldn’t neglect other smart, sound policy changes that can boost economic growth beyond the Beltway. One great example is fixing the Systemically Important Financial Institution (SIFI) designation process.
Since Dodd-Frank mandated all financial institutions with more than $50 billion in assets as SIFIs in 2010, the country has struggled to rebound from the recession that followed the 2007-2008 financial crisis. With a SIFI designation dictating more stringent regulation by the government, financial institutions — including those not responsible for the financial crisis — are plagued with higher compliance burdens. This means less capital is available for commercial lending.
This epidemic is most tangible among mid-sized, regional banks. Regional banks are a vital component in the country’s economic health. These banks provide lending to small and medium-sized businesses that add jobs and increase our GDP. Following Dodd-Frank’s adoption, regional bank lending has decreased by an estimated $14 to $20 billion over a five-year span, according to a report by Federal Financial Analytics.
In keynote remarks made at the American Banker Association annual convention last week, Director of the National Economic Council Gary Cohn discussed the arbitrary asset threshold used to determine SIFI designation and accompanying regulation and alluded to a potential increase of up to $250 billion. While his comments made it clear he recognizes that an issue exists, what is most important is his acknowledgment that just one factor isn’t enough to determine bank risk: “I don’t love the fact that we’re just creating an artificial line.”
The crux of the problem in using an arbitrary asset threshold to determine which banking institutions are systemically important and, in turn, are subject to greater regulation is that there is much more to risk evaluation than asset size alone. The Basel Committee and Financial Stability Board developed an approach that employs a number of factors, including institution complexity and global activity, to determine a bank’s actual risk to the financial system and how they should be regulated.
This smart, data-focused method has been adopted in bipartisan legislation to reform SIFI designations in Dodd-Frank in both the House and the Senate, H.R. 3312 and S. 1893.
Tailoring regulations to address a bank’s risk potential would keep the safety and soundness of the financial system in check without burdening financial institutions focused on traditional bank activities, including commercial lending with strict, unnecessary regulations. Small and medium-sized businesses would in turn have greater access to the capital needed to start and expand, and more importantly spur economic growth, which should be a main goal when considering regulations.
Cohn’s remarks display an understanding of the problem with the current SIFI designation process and the merits of a multi-factored approach, which he endorsed as the right approach for national regulations. We urge members of Congress to follow Cohn’s lead and support a smarter, more accurate way to regulate our banks. Merely raising the asset threshold fails to address the myriad of risk factors and simply isn’t the right way forward.
David Williams is the President of the Taxpayers Protection Alliance.
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