Dodd-Frank Battle Lines Intensify on Verge of Five-Year Mark

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WASHINGTON — The debate over whether the Dodd-Frank Act should be revered or overhauled was in full force in the nation's capital on Wednesday, just days before the law's five-year anniversary.

As lawmakers explore rolling back certain provisions of the financial reform law, Treasury Secretary Jacob Lew said in an appearance at the Brookings Institution that drastic changes would be a "great mistake." But on Capitol Hill, House Financial Services Committee members discussed raising the law's $50 billion asset cutoff for "systemically important" financial institutions. A hearing witness, Zions Bancorp. chief executive Harris Simmons, said the threshold unfairly groups regional banks like his with much bigger banks.

"While we are proud of the services we provide to our customers, and believe we incrementally make a real difference in the local markets in which we operate, we certainly do not consider ourselves to be systemically important to the United States economy," Simmons said in prepared remarks to the House Subcommittee on Financial Institutions and Consumer Credit. (Zions has $58 billion in assets.)

Under Dodd-Frank, bank holding companies above the threshold that are designated as SIFIs face added regulatory oversight from the Federal Reserve Board. But a regulatory relief bill sponsored by Senate Banking Committee Chairman Richard Shelby, R-Ala., would among other things raise that cutoff from $50 billion to $500 billion, relieving regional-sized banks that have argued they do not fit the "systemic" definition. Regulators would identify institutions below the $500 billion line that would still be subject to stricter capital standards.

But Lew, speaking at a Brookings Institution event commemorating Dodd-Frank's anniversary, which is July 21, said regulators must "remain vigilant" against efforts at making drastic changes "that are really designed to get at the heart of" the law.

"As the memories of the 2008 crisis fade, the temptations to roll back regulations, weaken the rules of the road and ease up on oversight is bound to increase," Lew said. "It would be a great mistake to assume that banks can self-regulate, that excessive risk-taking is a thing of the past and that Wall Street cannot harm Main Street."

He credited Dodd-Frank with improving banking industry stability, transparency and consumer protections, but said the law's relatively short tenure has been overshadowed by "an aggressive campaign to repeal it."

"I hope we don't get the ultimate test, which is a financial crisis, to see how the system works," he said. "We have made a world of progress, and I think we have done the things we need to do to protect the financial system."

Yet the House hearing underlined how Dodd-Frank provisions such as the SIFI threshold are still a moving target.

Simmons said Zions backs legislative efforts to replace the general asset threshold with more subjective analysis by regulators about which medium-sized institutions pose a systemic threat.

"We are supportive of an approach to the determination of systemic importance that removes the hard-coded $50 billion asset threshold currently incorporated in the Dodd-Frank Act, and that substitutes banking regulators' thoughtful and transparent analysis, consistently applied, taking into account an institution's complexity, interconnectedness with the domestic and international financial system, funding structure, asset risk profile and other such factors," Simmons said.

He noted that the added regulatory requirements for companies above the current threshold, such as mandated stress tests managed by the Fed, are "time consuming and costly" and soak up resources that could otherwise be deployed elsewhere. After falling below a mandated capital ratio set by the 2014 Dodd-Frank-required stress test, Zions reached just above the minimum in this year's test.

"I view stress testing as a fundamentally important tool in the management of a bank's risk and the assessment of its capital adequacy," Simmons said. But, he added, "The value of the insights it yields, however, does not increase in linear proportion to the investment made in the exercise, and this is particularly true for the smaller and less complex regional banking institutions."

Simmons said the bank has added 500 full-time employees to help comply with the heightened regulatory burden imposed by the law. "In an effort to manage costs, these increases have been accompanied by offsetting reductions in other areas of the organization, including many customer-facing functions," he said.

Rep. Randy Neugebauer, R-Texas, who chairs the House Financial Services subcommittee on financial institutions, said the current $50 billion threshold applies a "de facto designation that each of these institutions is 'systemically important.'" But the consequence of that, he said, is higher regulatory cost.

"Another perverse outcome of the current Dodd-Frank construct is that it encourages some financial institutions to continue getting larger to achieve economies of scale," he said. "For example, one bank CEO, whose institution is just below the $50 billion threshold, publicly stated, 'If you are going to go over $50 billion anyways, it's better to be $70 billion than $52 billion,' to achieve economies of scale. That certainly can't be the intention of Dodd-Frank."

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