WASHINGTON — The biggest legacy of the current regulatory relief effort may be the increasing focus on whether organizing banks in supervisory buckets by asset size makes sense.
Yet the bill to reform the Dodd-Frank Act deals with just one of the two big asset thresholds in the law: the $50 billion cutoff for banks facing enhanced Federal Reserve supervision. The other key trigger — the $10 billion level under which community banks enjoy regulatory exemptions — has largely gone unaddressed.
Some observers say future regulatory discussions could focus on whether the $10 billion threshold should be raised to extend to more banks the benefits now available to smaller institutions, such as avoiding Consumer Financial Protection Bureau oversight. But many say going down that road would be even harder than getting the current regulatory relief bill enacted.
“These thresholds need to be reviewed from time to time. Most of them were created out of thin air,” said Lawrence Kaplan, who chairs the bank regulatory practice at Paul Hastings. “But while going above $50 billion prompts questions about the burden versus the benefit, it is harder to argue a higher burden-versus-benefit for banks with going above the $10 billion threshold.”
Under Dodd-Frank, community banks with assets of less than $10 billion feel less regulatory bite in certain key areas. They are exempted from CFPB supervision, with the prudential regulators continuing to examine them for consumer compliance. They are also exempt from a price cap on debit interchange fees that was imposed on larger institutions through the so-called Durbin amendment.
Industry representatives have argued for a higher threshold, but the pending Senate regulatory relief bill negotiated by Banking Committee Chairman Mike Crapo, R-Idaho, and moderate Democrats instead focused on raising the cutoff for “systemically important financial institutions” from $50 billion to $250 billion.
Kaplan said policymakers likely view an increase in the $50 billion threshold as delivering a bigger payoff to banks just above that line, which under Dodd-Frank are considered SIFIs along with global megabanks even though they are very different kinds of institutions.
“Once you hit $50 billion, you start triggering the Fed’s enhanced regulation. That requires significant staffing and more monitoring with questionable benefit,” he said. “With the $10 billion threshold, there are new regimes to comply with, but it is not as dramatic and burdensome. A $15 billion bank is treated as a mature operating bank subject to an appropriate amount of regulation. But a $60 billion bank does not pose the same systemic risk as a global SIFI.”
But others think the $10 billion threshold is ripe for policymakers to revisit in a future regulatory debate. They say the distortions involving institutions that rest above and below the $10 billion threshold are just as unfair as for the higher cutoff.
“A bank with $15 billion in assets could have a relatively simple profile while a $5 billion bank might be more complex. But the smaller bank is the only one viewed as having less risk,” said Wayne Abernathy, executive vice president for financial institutions policy and regulatory affairs at the American Bankers Association. “Policymakers are recognizing that these problems exist and these thresholds cause problems and need to be addressed. They’re not quite sure how to address them so they are taking baby steps and that is progress. … Almost every speech now by a policymaker mentions tailoring regulations. It’s just a question of how they carry that out. These thresholds are one area where they can do that.”
Paul Merski, group executive vice president for congressional relations and strategy for the Independent Community Bankers of America, estimated that there are 123 institutions with over $10 billion in assets, including 81 with assets of $10 billion to $50 billion.
“There is no real magic to setting the threshold at 10 billion. In the future, it should be revisited because banks have grown in asset size and will likely continue to grow in assets size just due to economic growth and increased business at the bank,” Merski said. “An asset threshold is a statutory convenience for Congress on financial legislation. It’s a lot easier to pick an asset threshold than to define the bank business model that would qualify or not qualify for certain regulation.”
Rather than adjust the $10 billion threshold, the Senate reg relief bill would expand the benefit of falling below that threshold. Banks under that line could meet several capital requirements simply by maintaining a community bank leverage ratio between 8% and 10%. Being smaller than $10 billion also means your on-balance-sheet mortgages are in compliance with CFPB underwriting rules, you are exempt from the Volcker Rule, and escrow requirements for higher-cost mortgages are eliminated.
Banks above $10 billion would get a solid victory in the Senate bill, however, from a provision that eliminates requirements for smaller banks to conduct Dodd-Frank stress tests. Currently, company-run stress tests are required for banks with at least $10 billion in assets, but that trigger would increase to $250 billion.
Edward Mills, a Washington policy analyst and managing director at Raymond James, said the higher stress test trigger takes “a lot of the pressure off” of banks just above the $10 billion threshold.
“You always want more. You always need more,” Mills said. “But if you asked a lot of these banks, What is the single biggest thing in Dodd-Frank that you don’t like?," the Dodd-Frank Act Stress Tests "would have been on that list as No. 1 for banks between $10 and $20 billion.”
A future discussion of raising the $10 billion threshold more explicitly would only have traction in a different policy environment, many observers say.
Indeed, comprehensive reform of Dodd-Frank has still proven elusive with moderate Democrats holding the line at the targeted changes agreed to in the Crapo bill. Democrats supporting the bill have signaled they would not go any further.
“We think that there are a lot of good arguments to be made to increase the $10 billion threshold to $20 billion or even higher, but there is a trade-off with the potential of losing the bipartisan coalition that supported the bill in the Senate,” said Tom Killian, a partner in the investment banking group at Sandler O'Neill. “If the $10 billion ceiling is kept in the new bill and if its implementation produces positive results, it may be possible that policymakers would want to come back for a future discussion years from now to see if there is any room for more flexibility.”
Mills said that the $10 billion asset threshold “should be higher” but that raising it could prove too challenging politically.
That $10 billion cutoff in Dodd-Frank is what determines compliance with the Durbin amendment and which institutions are subject to CFPB examinations, two provisions that Mills said cause plenty of partisan rancor.
“The problem is the most politically contentious aspects of Dodd-Frank get triggered at that threshold,” he said, adding that another potential factor is political projections showing Democrats picking up seats in Congress. “This is probably the last major bill moving that’s providing regulatory relief for the banks potentially for years. If you’re not in this, it’s going to be really hard for you to get the next provision.”