WASHINGTON — The House approved a bill Tuesday to transform how large banks qualify for enhanced supervision under the Dodd-Frank Act, but the lower chamber may end up having to vote again on a much different vision of reform.
The House bill, which passed by a vote of 288 to 130, would move away from Dodd-Frank's numeric asset threshold that determines whether a bank is a "systemically important financial institution." Under the Systemic Risk Designation Improvement Act introduced by Rep. Blaine Luetkemeyer, R-Mo., the SIFI threshold would be based on activities-based triggers.
Luetkemeyer’s bill actually picked up some bipartisan support from Democrats. Fifty-nine members of the minority voted for the bill, 39 more than the number of Democrats who supported the bill when it passed in 2016.
But the bill is still expected to give way to a less drastic Senate approach that would simply raise the Dodd-Frank threshold, which is currently set at $50 billion, to release some midsize and regional banks from having to face tougher supervision from the Federal Reserve Board. While Republicans would like to go further and possibly adopt the activities-based approach that the House endorsed on Tuesday, such a plan would likely fall flat in Senate.
“It simply doesn’t make sense to subject small, regional and mid-sized banks with only $50 billion in assets to the same expensive and cumbersome SIFI regulatory regime as a bank like JPMorgan Chase, which has $2.5 trillion in assets,” said House Financial Services Committee Chairman Jeb Hensarling, R-Texas.
The idea behind the more ambitious Luetkemeyer bill is that an even wider scope of larger regional banks should not have to follow the same SIFI requirements as the industry's biggest banks.
The bill would move away from an asset threshold for measuring riskiness and instead use an indicator test that would take into account the size of a bank holding company, its interconnectedness with the other financial firms, the availability of substitutes for its services, how intertwined it is globally, and the complexity of its business model.
The model was endorsed by the Treasury’s Office of Financial Research, which is headed by an Obama administration appointee and weighed in on the policy debate in October.
“Assessing an institution through various factors, as opposed to asset size only, will allow for a more comprehensive assessment of risk to the overall financial system,” wrote Tim Pawlenty, president and chief executive officer at the Financial Services Roundtable, in a letter to House Speaker Paul Ryan, R-Wis., and House Minority Leader Nancy Pelosi, D-Calif.
While a Senate version of the Luetkemeyer bill was introduced in September with the support of two Democrats, it still lacks the necessary votes needed to pass.
Rather, House lawmakers may end up having to vote on a Senate deal that retains a numeric asset threshold, albeit a lower one than devised in Dodd-Frank.
Senate Banking Committee Chairman Mike Crapo, R-Idaho, negotiated a deal earlier this month between 11 Republicans and 12 Democrats to increase the Dodd-Frank systemic threshold to $100 billion and then increase it again to $250 billion after 18 months.
The legislation, which includes other targeted regulatory relief measures, already has enough support to clear the 60-vote requirement for avoiding a filibuster.
The threshold increase in the Senate bill would exempt banks between $10 billion and $250 billion from having to conduct company-run stress tests and increases the threshold for stress tests conducted by the Federal Reserve Board. However, Crapo's bill does provide the Fed with some leeway to use an indicator test to reevaluate the potential SIFI status of banks between $100 billion and $250 billion.
The industry is likely to back the Senate regulatory relief plan, which has a greater chance of passage.
If enacted, the Senate bill would grant a regulatory reprieve to 37 banks. But it would maintain the SIFI status of larger institutions such as U.S. Bank ($450 billion of assets), PNC ($371 billion), and Capital One ($348 billion). Those banks have argued that despite their size, their more traditional commercial bank model makes them less risky.
Regardless, conventional wisdom suggests that the House will eventually adopt the Senate’s bill even though it has already expressed a desire to go much further to repeal Dodd-Frank. That is because House Republicans and the industry would rather see a small step than no step at all to lighten regulations.