= Subscriber content; or subscribe now to access all American Banker content.

Only Congress Thinks Main Street Banks Are TBTF

No one is shedding tears over banks being designated systemically important under Dodd-Frank, but they should. Most designees had nothing to do with the financial crisis and don't pose a threat to economic stability, but they're subject to the full brunt of Dodd-Frank's rules.

The result? There's less competition and supervision for banks widely regarded as "too big to fail" – the exact opposite of what policymakers intended. Fortunately, there's a simple fix: change how banks are designated.

For nonbanks, such as AIG and GE Capital, there is an extensive list of criteria for receiving the Dodd-Frank-created systemically important financial institution designation, such as interconnectedness, liquidity and existing regulatory scrutiny. For banks, there's only one: size. If a bank has over $50 billion in assets, it's automatically a SIFI. 

SIFI is not synonymous with Wall Street. While the six big-name Wall Street banks are included, the other twenty-seven SIFIs are Main Street banks, like M&T Bank out of Buffalo, KeyCorp out of Cleveland and Regions Financial out of Birmingham. These banks bear none of the traditional markings of being "too big to fail". They operate regionally with limited interconnectedness. They generally don't have complicated business strategies or trading operations. They receive little-to-none of the supposed $83 billion subsidy that accrues to "too big to fail" banks according to an oft-cited study. Even from a size perspective, they're relatively small. Their assets combined are half the size of the big six.

To be sure, it would be terrible if any of these regional banks failed. But no one thinks PNC or Zions Bank pose an existential danger to the U.S. economy.  After disposing of hundreds of bad banks during the financial crisis, the Federal Deposit Insurance Corp. could handle their failure in a weekend. 

Dodd-Frank turns a blind eye to these differences. It lumps together regional banks with banking behemoths and treats them basically like equals. SIFIs of all sizes must comply with the biggest guns Dodd-Frank has to brandish, Sections 165 and 166, which prescribe extensive capital, liquidity, exposure requirements and more. They must undergo public stress testing and create living wills – an extensive planning process showing regulators how to wind down firms in a time of crisis. And while smaller banks have carve-outs from complying with the 398 rules resulting from Dodd-Frank, SIFIs have none.

SIFI compliance costs a lot of money, which disproportionately impacts the "small SIFIs." Just filling out paperwork for the Dodd-Frank rules proposed or passed so far will take 58.3 million hours or 29,192 full-time employees industrywide. Standard & Poor's estimates that Dodd-Frank compliance will cost the biggest eight banks alone up to $34 billion.  Big banks like JPMorgan Chase or Bank of America have teams of people (and budgets) to handle such compliance; small SIFIs don't. Several of them also don't have full-time Washington lobbyists on staff.

Not surprisingly, there aren't many banks jumping up and down to enter the SIFI club. In fact, there are now about ten U.S. banks hanging just below the $50 billion threshold. The high cost of dealing with the attendant rules will dissuade these firms from growing bigger. Translation: current SIFIs are safe from competition. In this way, the SIFI designation protects big banks, hardly what the authors of Dodd-Frank intended. Banks that are really good at serving businesses and individuals should be allowed to grow free of an artificial, government-imposed cap.

For those banks already designated, SIFI rules are a wet blanket on business. This is bad news for the economy. The SIFIs are responsible for the vast majority of credit. Unduly paralyzing these institutions with new rules will slow economic growth and keep credit tighter for longer. Given that the majority of SIFIs did nothing to warrant the additional scrutiny, they should be encouraged to innovate and serve customers, instead of spending their resources on Washington.

The broad SIFI designation brings yet another complication – it distracts regulators from firms that actually pose a systemic risk.Dodd-Frank put in place an expansive new regulatory structure to oversee systemic risk, including an entirely new regulatory body, the Financial Stability Oversight Council.  But, instead of concentrating their efforts on understanding firms commonly thought of as "too big to fail," FSOC is required by law to supervise regionals.  Even regulators privately admit the threshold is a distraction.

If Congress is serious about protecting us from the next financial crisis, I propose they repeal the arbitrary $50 billion cutoff for banks and instead use similar criteria to that for nonbanks banks to determine which are systemically important. Criteria good enough to determine if AIG is systemic should be good enough to determine if Comerica Bank is.

Removing the arbitrary size designation would reduce costly regulation for firms that had nothing to do with the crisis. It would allow banks to compete without artificial size restraints, draining the "moat around JPMorgan Chase" CEO Jamie Dimon famously claimed Dodd-Frank created. And it would allow regulators to concentrate their efforts on firms that actually warrant their attention as systemically important. 

As for those who claim banks like the SIFI designation because it gives some sort of implicit benefit, this would be the perfect test: Allow banks to opt-out of their SIFI designation based on size and instead be reviewed based on systemic risk factors. Let's see how many opt-out and how many get re-designated.

Abby McCloskey is program director of Economic Policy at the American Enterprise Institute. She was a staffer for Senator Richard Shelby during financial reform and director of research at the Financial Services Roundtable.


(5) Comments



Comments (5)
Increased regulations on the Regional Banks under $100 Billion in assets is another added way in choking off the credit available to Middle Market companies and Small Businesses, the true job creators.

Let Dodd-Frank regulate and discipline the JPM Chase, BofA, Citibank and Wells Fargo's of the world.

Congress needs to raise the SIFI asset level to $100 Billion or more. $50 Billion hurts more than it helps.
Posted by UniversalExports | Monday, August 26 2013 at 10:52PM ET
The real criteria for Congress is simple to understand. The bigger the bank's lobbying expenses and political support, the "more important" it is and therefore should not be allowed to fail.
Posted by frankarauscher | Wednesday, August 07 2013 at 8:14AM ET
The key is reasonable regulation that does not respond to the immediate situation. If we keep waiting for the next emergency, the power controls. Reasonable anticipation, discussed with those involved for the greater good, provides alternatives that avoid stress on the system. When "smaller" institutions can be steered, the big guys take the opposite side. A new way of thinking may be called for; large institutions hedge banks don't have that opportunity so they struggle to survive and do not serve the community.
Possibly, the monsters must help rather than rape and pillage? They could still stay profitable, maintain investors and pay big salaries to the inside group...everybody wins...hmmmn!
Posted by kevmo | Wednesday, August 07 2013 at 12:18AM ET
There has to be more regulation than just dipping their toes in the water. After the great crash, we put regulations in place to save us from these ridiculous tertiary banking investment scams. It won't be ok until we put ALL of those protections back, and then some, providing for all the new technological advancements. As we could get better at serving the needs of our citizens, we get worse and worse at protecting them from buying snake oil , and better and better at supporting the criminal selling the brooklyn bridge.

Banks can't be allowed to give themselves oversight. Americans are beginning to wake up and pay attention. Perhaps there is a way to limit the potential for financial damage to banks from this looming legislation, but if there is, Morgan, and Chase, and UBS, and Wells better start lobbying for that soon.

our take:
Posted by The Policy Geek | Tuesday, August 06 2013 at 10:30PM ET
Short-hand, rules of thumb, perhaps even arbitrary categories can sometimes have a place when pressed for time or when details do not matter so much. They do not have a place in trying to identify systemic risk. The author points to a serious problem that raises risks of its own. It is a good example of a small but important change to the Dodd-Frank Act that should not be controversial and the sooner it is addressed, the better. Fortunately, Congressman Blaine Leutkemeyer has just introduced a bill to do just that.
Posted by WayneAbernathy | Tuesday, August 06 2013 at 3:33PM ET
Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.