No financial firm wants to be labeled "systemic," but some won't have a choice. The Dodd-Frank Act specified that all banks with assets of more than $50 billion be subject to "enhanced supervision."

Barbara A. Rehm

That term will be defined this summer by the Federal Reserve Board, which has until Jan. 21, 2012, to start holding these larger banks to these higher standards.

No one, not even Congress, thinks Zions Bancorp. or Huntington Bancshares Inc., which are just over the $50 billion asset threshold, poses much of a threat to the financial system. Heck, most people don't even think the fifth-largest commercial bank in the country, U.S. Bancorp at $311 billion, is systemically important.

But lawmakers purposely drew their line low so it wouldn't be obvious which banks are too big to fail and which aren't.

"There was a strong belief that it would take a figure way above that [$50 billion] for an institution to be systemically important," said Amy Friend, who helped write the law as a senior member of Sen. Chris Dodd's staff and is now a managing director at Promontory Financial Group.

"Title 1 deliberately established a universe of companies that could conceivably be considered too big to fail, but clearly Congress did not believe that every company within that universe would be considered systemically important."

However well intentioned, the law leaves the big-but-not-that-big banks in limbo.

"They feel like they are being hit by both sides," said Wayne Abernathy, executive vice president for financial institution policy at the American Bankers Association. "They are not really big enough to get the special TBTF treatment by the markets that the big guys are getting today, but big enough to deal with all the regulation that comes with it."

How light or how tough the Fed decides to go on these $50 billion-plus banks will have a big impact on the sector, and in turn, on the industry's concentration. These banks may be forced to consolidate to gain the scale needed to deal with "enhanced supervision."

"If the regulators decide to impose significant increased supervision on, call them the middle tier, I can see them deciding to merge, and that just creates more concentration in a banking system that I think is already too concentrated," said William Isaac, who among the many hats he wears in the industry is chairman of the $110 billion-asset Fifth Third Bancorp. "I don't think anyone is paying attention to the structure of the industry when they write all these rules."

Beyond concentration levels, these banks are important because they finance businesses that are too big for community banks to handle and too small to interest the megabanks. They also serve as a talent pool for both smaller and larger companies.

Since everyone knows which banks are too big to fail, it would be more efficient to simply designate them and then train the closest regulatory eye on that handful of companies.

But that's not how it's going to work. Instead the Fed will write elaborate rules that will cover the roughly 35 banking companies with more than $50 billion in assets. (By yearend, policymakers will also designate some nonbanks, but Congress specified an asset-size threshold only for banks.)

Fed officials have pledged to scale supervision to a bank's size and complexity. That should mean that banks with $50 billion in assets don't face the same burdens as banks with $500 billion or $2 trillion.

"They will be graded on a scale, so to speak," Fed Chairman Ben Bernanke told an audience at the Chicago Fed earlier this month. "We're going to be very careful not to have a discrete drop, a discrete change, a discrete difference between $49 billion and $51 billion banks."

But what about between $75 billion or $150 billion or $300 billion? How will supervision of those banks differ? That's what the Fed is grappling with now and Mark Van Der Weide, a senior associate director in the Fed's supervision division, said at the same Chicago Fed conference that making the "regulatory framework proportional to the systemic footprint for firms above $50 billion is not an easy task."

The Fed declined a request for a follow-up interview with Van Der Weide or anyone else working on this.

The law specifically instructs the Fed to hold all banks over $50 billion to higher standards on capital, liquidity, leverage and risk management. The bigger you are, the more capital and liquidity regulators will require, the less leverage they will allow and the better risk management they will demand.

Of those, only management is subjective, and it will likely be crucial. How well is the bank run, and how responsive is the management team to feedback from examiners? What's their track record? How involved is the board? Has the bank been investing in technology? Does it have an integrated platform or a hodgepodge collected from various mergers? The answers to these questions will determine how "enhanced" a bank's supervision will be.

The law requires the Fed to do annual stress tests on these larger banks under at least three scenarios — baseline, adverse and severely adverse — and the banks themselves must conduct internal stress tests twice a year. Stress-testing results will be summarized and made public, and the Fed will have to report annually to Congress on how all this "enhanced supervision" is working.

The banks over $50 billion are also likely to face an annual assessment to fund the Office of Financial Research, which was created by Dodd-Frank to gather data related to systemic risk.

But the law — Section 165 of Title 1 — does give the Fed the power to "differentiate among companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities, [or] size."

And it specifies which requirements the Fed does not have to apply to the smaller big banks: living wills, contingent capital, credit exposure reports, concentration limits, extra public disclosures and limits on short-term debt.

Compliance with each of those will be intensive and expensive, so if the Fed decides to apply them only to the four largest banks, then the $50 billion-asset banks will celebrate.

But that remains a big if. The Federal Deposit Insurance Corp. will have a say on some of these issues, particularly which companies must explain how they could be quickly unwound in a failure, and its officials have made it clear they favor a broader net than the Fed.

FDIC officials also declined a request for an interview.

As policymakers figure out what "enhanced supervision" means and how it should be applied, the midsize banks are waiting and hoping.

"Everybody is in limbo right now and trying to deal with the uncertainty," said Don Truslow, who runs the Financial Stability Industry Council, set up by the Financial Services Roundtable to deal with issues facing systemically important companies. "How do you craft strategy? How do you make plans for the next two years? We are stymied until all this gets worked out, and in the meantime everyone is holding their breath for the worst."

Barb Rehm is American Banker's editor at large. She welcomes feedback to her weekly column at

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