WASHINGTON — Acting Comptroller of the Currency Keith Noreika on Thursday called for steps to ease the asset thresholds that determine whether banks are subject to certain provisions of the Dodd-Frank Act.

In prepared remarks to a meeting of bankers in Dallas, Noreika said “arbitrary thresholds often have the perverse effect of acting as competitive barriers.”

Dodd-Frank established a much-criticized $50 billion asset cutoff. Banks above that marker must follow a heightened supervision program run through the Federal Reserve, including expanded stress tests, and submit living wills, among other requirements. The law also set a $10 billion threshold for other requirements, including supervision by the Consumer Financial Protection Bureau and a simpler stress test procedure.

Keith Noreika
Acting Comptroller of the Currency Keith Noreika said “arbitrary thresholds" in Dodd-Frank that are based on asset size "often have the perverse effect of acting as competitive barriers.” Bloomberg News

Noreika said the thresholds artificially affect banks’ growth strategies, motivating banks either to stay below the cutoff or to grow more aggressively than they would otherwise.

“We see … phenomena in which banks want to stay at $9 billion or $49 billion because they would incur additional costs and unwelcome scrutiny merely crossing that threshold. In practice what we see are banks either remaining below the threshold or leaping far beyond the threshold,” Noreika said.

“So rather than becoming an $11 billion bank, the incentive is to rapidly scale to $20 billion or $30 billion to offset the increased cost just north of the threshold. That’s an artificial reason to grow so quickly and could present operational and other risk issues for banks that do.”

Noreika highlighted the Dodd-Frank measure requiring annual stress tests for all banks with more than $10 billion. The Treasury Department’s recent “core principles” report for reforming regulatory policy recommended raising that stress test threshold to $50 billion, and allowing regulators to further adjust the cutoff for institutions above the higher mark.

“In certain circumstances, the burden of annual stress testing, particularly in accordance with prescriptive statutory requirements, is not commensurate with the systemic risks presented by an institution,” he said. “There is tremendous diversity in the business models of banks around $10 billion, and regulators need the ability and authority to tailor their supervision to the unique risks presented by individual banks.”

Noreika said one option is for Congress to authorize regulators to tailor the stress testing requirement by regulation “without regard to an asset threshold.”

“This approach would avoid the potential for over- and underinclusiveness associated with fixed asset thresholds,” he said.

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Joe Adler

Joe Adler

Joe Adler is the Washington bureau chief for American Banker and editor of BankThink.