What’s a big bank?
That’s a question members of Congress will have to answer in the months ahead as they contemplate regulatory relief for small banks.
The 2010 Dodd-Frank financial reform law drew the line at $50 billion in assets. The 36 U.S. banks bigger than that are considered “systemically important” and are subject to stricter supervision.
The Federal Deposit Insurance Corporation, meanwhile, defines community banks generally as any bank with less than $10 billion in assets. Those roughly 6,400 small banks are exempt from some federal regulations.
But the roughly 75 banks with between $10 billion and $50 billion fall into a regulatory no man’s land.
They are not the megabanks like Citigroup and JPMorgan Chase, which each have more than $1 trillion in assets, that regulators worry could bring down the economy if they fail.
Instead, like Firstmerit Bank in Akron, Ohio, with $25 billion in assets, or First Hawaiian Bank in Honolulu, with $18 billion in assets, they are mid-sized regional banks that largely perform the same functions as community banks.
Industry lobbyists are pushing Congress for regulatory relief for community banks, including for the mid-size regional banks. Senators and House members on both sides of the aisle have indicated in recent weeks that they are amenable to providing it.
But some liberals have warned that they will oppose changes to the Dodd-Frank law that would benefit big banks such as JPMorgan.
“We should be very skeptical of regulatory relief bills that are promoted as helping small banks but that are pushed by [American Banking Association] lobbyists for the big banks,” said Wall Street critic Sen. Elizabeth Warren, D-Mass., during a Senate hearing last week.
White House officials, too, have warned that they will veto Dodd-Frank rollbacks, including ones attached to other bills. The veto threats have come as Republicans took over both the House and Senate in January for the first time since the law was passed in the aftermath of the financial crisis in 2010.
Despite the stated opposition, however, Congress has passed legislation that changes parts of Dodd-Frank, including in December when Democrats still held the Senate majority.
That is cause for hope for the industry seeking to provide relief for mid-sized regional banks.
“A $10.1 billion bank is no different from a $9.9 billion bank, and no one’s been able to explain why that number is the cutoff,” said James Ballentine, the American Bankers Association’s executive vice president for congressional affairs.
Industry lobbyists have said that they want to raise the exemption to $50 billion and redefine “community banks” based on activities rather than small size, for a number of purposes. One is for the Volcker Rule, the Dodd-Frank provision that prevents banks from speculative trading with deposits insured by the federal government. They would also like to exempt banks under that threshold from examinations by the Consumer Financial Protection Bureau, itself a creation of Dodd-Frank. Another goal is to gain an exemption from some capital requirements and from “stress tests” performed by regulators to see whether banks could survive adverse financial conditions.
Ballentine acknowledged, however, that any changes that could be viewed as weakening Dodd-Frank would draw opposition from Warren and other liberals, who have ratcheted up their scrutiny of Wall Street as Republicans gained the majority.
“How do they go about changing that definition without digging into Dodd-Frank is the conflict right now as much as anything,” Ballentine said.
“It’s a ridiculous proposition to believe that a piece of legislation that was as substantial as that bill was the perfect bill that should never be touched,” he added.
Nevertheless, Warren last week cited the strong financial performance of community banks in 2014 as evidence that ”Congress and the regulators, I think, have done a pretty good job of tailoring the rules to protect community banks.”
Separately, Republicans have expressed some interest in raising the $50 billion threshold defining big banks to capture fewer banks.
That idea has support among many regulators, including Federal Reserve Governor Daniel Tarullo, who suggested last year that the threshold could rise to $100 billion.
