WASHINGTON Just as lawmakers say the Dodd-Frank Act subjects too many big banks to its most rigorous provisions, another debate is brewing over whether more institutions should qualify for exemptions in the law benefiting community banks.
Congress is expected this term to consider changing Dodd-Frank's $50 billion-asset threshold. Banks above that level are deemed "systemically important financial" institutions subjecting them to the toughest compliance regime of the reform law. But critics say that cutoff should be higher to focus only on the industry's biggest players, excluding regional banks.
Now some are also pushing to raise the law's separate $10 billion-asset threshold. Community banks below that threshold are exempt from Dodd-Frank interchange rules and supervision by the Consumer Financial Protection Bureau, among other things. But observers say extending that to institutions considered community banks by many, but with a higher asset level, may get another look.
"The $50 billion threshold is on the table and getting a lot of discussion, but I think the $10 billion threshold will be reviewed as well eventually," said Thomas Michaud, chief executive of Stifel's Keefe, Bruyette & Woods unit.
Joe Stieven, whose Stieven Capital holds positions in more than 50 banks, said some "influential small bankers" are working with their larger bank cohorts to link attempts to raise the two thresholds together.
"If they are taking the SIFI designation" to "$100 billion or $200 billion, why don't we take the $10 billion [threshold] to $25 billion or $50 billion?" Stieven said of the conversations.
In Dodd-Frank, the $10 billion threshold is used to determine when banks are examined by the CFPB as well as when they must conduct their own stress tests. Banks below that cutoff were also exempted from the so-called Durbin amendment, a provision added by Sen. Richard Durbin, D-Ill., requiring limits on debit interchange fees, and having to pay extra premiums to the Federal Deposit Insurance Corp. to boost the agency's reserves.
Critics of the $50 billion threshold have argued that using such a bright line is arbitrary for determining systemic risk. It is possible some advocates of regulatory relief may start to extend that argument to include other cutoffs as well.
"All of us involved in the Dodd-Frank legislation know that the threshold numbers had no real rationale behind them, and when something does not have a strong rationale and you see that put into practice, you begin to see how difficult and challenging it can be to live within those particular thresholds," said James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association.
The $50 billion cutoff subjects firms above the threshold to a new prudential supervision regime, which includes additional stress tests conducted by the Federal Reserve Board and new capital requirements. Raising that bar has garnered ample attention from regulators and lawmakers in both parties amid a broader debate about making Dodd-Frank changes, increasing the potential that other asset cutoffs may be addressed as well.
While some changes to the law favored by Republicans are too controversial to gain much traction, such as changing the internal structure of the CFPB, there is growing support for bipartisan tweaks that provide regulatory relief to smaller institutions.
"There's some sentiment in Congress on both sides of the aisle that some of these thresholds that are built into the regulations are too low they have not evolved with the growth of the banking system," said Camden Fine, president and chief executive of the Independent Community Bankers of America.
One scenario could be that lawmakers raise the $10 billion line only for certain targeted provisions.
"Maybe that threshold isn't changed for everything maybe Durbin stays where it is but other aspects can be easily dealt with in other means," said Michaud.
Advocates of a higher threshold say it is particularly needed in the area of stress tests. While those over $50 billion undergo Fed-run tests, regulators also require banks with between $10 billion and $50 billion in assets to complete their own stress tests annually.
But critics of that provision have argued that smaller banks have less experience and fewer resources to conduct these kinds of exams, and they are not systemically important enough to require that level of oversight.
"What is the ultimate value of the stress test?" said Ballentine. "That's what needs to be examined" along with "the costs associated" for smaller institutions.
There has already been some legislative movement to raise the threshold. For example, Sens. Pat Toomey, R-Pa., and Joe Donnelly, D-Ind., introduced legislation last summer to raise the line over which the CFPB examines a bank from $10 billion to $50 billion.
Critics of the current $10 billion cutoff say the CFPB examination process has become overly burdensome for even some smaller banks.
"There are some banks, if you added up all the days they have outside examiners, it can equal as much as three months out of a 12-month period that they have examiners crawling all over them," said Fine. "That might be OK for a $2 trillion bank, but when you're a $12-to-$13 billion institution, that's extremely burdensome."
Meanwhile, just as a discussion of higher thresholds gains traction, some policymakers are considering adding another exemption for smaller banks, leaving them out altogether of the law's proprietary trading ban known as the Volcker Rule. (It was named for former Fed Chairman Paul Volcker, who proposed it.)
In a speech last month in Las Vegas, Thomas Curry, comptroller of the currency, called for eliminating Volcker Rule requirements for banks with assets of less than $10 billion, and Fed Gov. Daniel Tarullo has also been supportive of exempting smaller institutions from the regulation. While such a move would be welcomed by the industry, it could further provoke a fight over a setting a bright-line threshold for institutions that get the exemption.
Analysts suggested that a Volcker exemption for small banks would be unlikely to stir up the same opposition from Democrats that hindered other attempts to roll back provisions in the law.
"Because it's so limited to small banks, I don't think it'd be seen as a fundamental attack on Volcker," said Brian Gardner, an analyst at Keefe, Bruyette & Woods.
Still, others warned that some provisions of Dodd-Frank that contain a $10 billion threshold are generally too controversial to allow discussion of raising the cutoff.
"The things that are most impactful are the most politically unpalatable to touch," said Edward Mills, a policy analyst at FBR Capital Markets.
Isaac Boltansky, of Compass Point Research & Trading, added that, while the $50 billion threshold applies to a relatively compact though consequential set of provisions, the $10 billion threshold cuts across many different, unrelated parts of the law.
"When I look at the Dodd-Frank web, there are a lot of strings that are connected to the $10 billion threshold, which makes it much more difficult to move, whereas the $50 billion threshold is much more localized," he said. "The $10 billion cutoff impacts more people, and therefore has more issues."
Any substantive changes to the CFPB's power are likely to be off limits for Democrats, fearful that Republicans will use their majority in Congress to weaken the agency's powers. President Obama vowed in his State of the Union address earlier this month that he would veto any bill "unraveling" core elements of Dodd-Frank.
Democrats "just don't want to open up the floodgates on any issue as it relates to CFPB," said Mills.
But Gardner said narrowing the focus of lawmakers simply on the asset threshold could be a bargaining chip to avoid making more structural changes to the agency's leadership structure or funding.
"If you're looking to make significant changes to CFPB you don't want to elevate the threshold for smaller banks and exempt more banks, because that's taking away pressure to do more substantial changes to the bureau," said Gardner.
Analysts also said there is little chance Congress will take another look at the $10 billion cutoff for the Durbin amendment. The interchange issue pits retailers against banks, two strong political constituencies. There remains little appetite for another legislative battle on that issue, particularly after the Supreme Court recently rejected a challenge by retailers of how the Fed implemented the provision.
"When it comes to discussion of Durbin there is a very clear battle between industries the political dynamic is completely different," Gardner added.