WASHINGTON — Momentum is building to replace the hard-target $50 billion asset systemic risk threshold for banks with an indicator test, but it remains unclear whether it will be enough to get Congress to act.

The Office of Financial Research endorsed such a move in a report last week, suggesting that using a risk-based method of five different measures to determine which banks should be considered a threat to the U.S. economy and therefore subject to tougher rules. Regional banks prefer this method rather than just raising the existing threshold, which they argue is arbitrary and unfair.

Yet at the same time, key Democrats signaled they would fight such a maneuver, making it uncertain whether such a provision could be part of a regulatory relief package being developed by the top leaders of the Senate Banking Committee.

Sen. Sherrod Brown, D-Ohio
“This is a congressional decision, not a Gary Cohn decision, so we are talking about everything. He doesn’t know what we are doing in discussions,” said Sen. Sherrod Brown, D-Ohio, disputing comments made by NEC Director Gary Cohn. Bloomberg News

Senate Banking Committee Chairman Mike Crapo told reporters on Thursday that he would like to see a change to the threshold included in the deal and has advocated in the past for a risk-based approach rather than a simple size threshold.

“My position … I for years have contended we need a change” to the threshold, Crapo said.

Exactly what lawmakers can agree on is up in the air, however. National Economic Council Director Gary Cohn told bank executives recently that a deal would likely raise the threshold to $200 billion or $250 billion.

But Sen. Sherrod Brown, the top Democrat on the banking panel, dismissed those comments in a recent interview with American Banker.

“This is a congressional decision, not a Gary Cohn decision, so we are talking about everything. He doesn’t know what we are doing in discussions,” Brown said.

Brown added, however, that he and Crapo are working closely on an agreement, without spelling out any details.

“We hope we are getting there. Senator Crapo and I talk all the time and the staffs talk all the time,” Brown said.

One complicating factor is criticism by Sen. Elizabeth Warren, D-Mass., who argued in an op-ed piece published Thursday that the $50 billion threshold should be kept.

Yet she is in the minority, even among Democratic policymakers. Former Rep. Barney Frank, co-author of the Dodd-Frank bill that established the threshold, has signaled it could be changed, as has former Federal Reserve Board Gov. Daniel Tarullo, who suggested a $100 billion target.

Some suggested that lawmakers could split the difference and raise the threshold while also establishing a test.

“There will be a number,” said Ian Katz, a policy analyst at Capital Alpha Partners. “It will likely be a hybrid model with some tailoring, but I expect it will have a number.”

Though regional bankers have long sought an increase in the limit, they favor the indicator test over a straight hike. To that end, the Office of Financial Research’s report was helpful as it said size alone was a poor measure of systemic risk. It outlined its own test based on one used by Basel to judge global systemically important banks.

“OFR has confirmed what regulators and legislators from both sides of the aisle have said for years: asset size alone cannot fully capture a banking institution’s risk level,” said Matt Well, spokesman for the Regional Bank Coalition. “The Federal Reserve already uses a multifactored test to make serious regulatory determinations; it’s time to use that approach in all instances where systemic risk is being measured.”

Yet critics argue that regional banks are just trying to escape higher standards laid out by the Fed. They argue the indicator test puts the onus on the Fed to prove which banks are systemically important, potentially tying its hands and keeping it from regulating banks that fight the designation.

“What the big regional banks are after is actually restricting the Federal Reserve's authority to regulate them, in one way or another,” said Marcus Stanley, policy director at Americans for Financial Reform.

Brown, a progressive Democrat, is viewed as the key cog in the negotiations. He has been a staunch defender of Dodd-Frank, but also represents a state with large regional banks.
Raising the threshold to $200 billion or $250 billion would be a boon for large regionals in Ohio such as KeyBank, Fifth Third and Huntington, but would leave out U.S. Bank, which has roughly $450 billion.

Using an indicator test instead might help U.S. Bank, however. According to the OFR report, U.S. Bank poses less of a systemic risk than Illinois-based Northern Trust, which is less than a third of its size.

James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association, said he remains optimistic an indicator test can pass.

“We think that is the best approach, we think that is the most honest approach,” he said. “We believe the regulatory agencies have the wherewithal to designate” banks based on risk and business model.

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