WASHINGTON — The House passed a bill 247-171 on Thursday that would raise the threshold for a Federal Reserve Board exemption that helps banks raise Tier 1 capital.
The Federal Reserve’s Small Bank Holding Company policy statement was originally designed to allow institutions under a certain size to take on more debt when acquiring another bank. But the policy statement, which exempts banks from Basel III requirements, has proved to be more useful for raising high quality capital at the bank holding company level and down-streaming it by purchasing stock in the subsidiary bank.
The bill, which was debated and passed on Thursday, would raise the asset threshold for the exemption to $5 billion from $1 billion. The threshold was just raised last year, when lawmakers passed a bill to double it to its current level.
Reps. Maxine Waters, D-Calif., the top Democrat on the House Financial Services Committee, opposed the most recent bill, arguing Republicans were reneging on a deal worked out last year.
"I am trying to understand why my colleagues are reneging on that compromise and undermining the careful and considerate policy that we enacted," she said. "It is important that this threshold is carefully calibrated, so it cannot be abused by speculative investors."
If the bar is raised too high, she said, it "will lead to mergers and acquisitions, riskier banking activities, and a reduction in banking services and credit availability to rural, low-income, minority, and underserved communities."
But Financial Services Committee Chairman Jeb Hensarling, R-Texas, argued that "this is a bill that will help small banks to survive. They will merge together instead of disappear from our rural communities."
However, Paul Merski, executive vice president and chief economist at the Independent Community Bankers of America, said raising the threshold "doesn’t have anything to do with mergers and acquisitions."
Instead, he said it gives community banks flexibility to attract capital because it is easier to issue debt at the bank holding company level.
The Obama administration is also opposed to the bill. It sent a veto threat Monday, saying, "Raising the threshold to $5 billion less than a year later would be an unnecessary and risky change."
Separately, the House also passed the Financial Stability Oversight Council Reform Act by a vote of 239-179. The bill would subject FSOC and the Office of Financial Research to the congressional appropriations process. The two are currently funded through assessments on the largest financial institutions.
"The best tool to aid Congress in holding federal agencies accountable for their actions is the power of the purse," Rep. Scott Tipton, R-Colo., said in a statement. "As FSOC has repeatedly demonstrated, independently-funded agencies routinely disregard the law, their duty to the American people, and Congress — with no fear of repercussions for doing so."
But Waters responded to the bill, saying the "Republicans say they want ‘accountability’ by overseeing regulators’ budgets — but what they really want is control so that they can eliminate funding for these agencies altogether."
Americans for Financial Reform, a coalition of more than 200 consumer groups, said the bill was dangerous and would put the economy at risk.
"The failure to spot and address emerging financial risks was a major contributor to the financial crisis of 2008 and its disastrous impact on the U.S. and world economy," AFR said in a letter to Congress on Wednesday. "These changes would create numerous additional ways for Wall Street interests to block the crucial work of the FSOC and OFR in analyzing emerging financial risks."
Industry groups supported the measure.
"While designed to be nimble in responding to perceived threats, neither the FSOC nor OFR have the necessary oversight or transparency to ensure effective, tailored regulations are appropriately applied, leading to measure that unnecessarily hamper economic growth," said Francis Creighton, executive vice president of government affairs at the Financial Services Roundtable.