Regional banks' reg relief triumph gives way to new battle
WASHINGTON — Regional banks notched a huge win earlier this year when the regulatory relief law ensured only the biggest banks sit in the Federal Reserve's toughest regulatory tier. But midsize institutions have not rested on their laurels as another battle has ensued over the law's implementation.
With questions over how the Fed will craft a regulatory program for banks between $100 billion and $250 billion of assets, regional banks have let their voices be heard, several observers said. But their lobbying has largely been behind the scenes, with trade groups and lawmakers representing areas with a regional bank presence delivering a more public message.
“The regional banks in particular have been pushing hard to get a better regulatory framework as well as easier regulations in some areas,” said Ian Katz, a director at Capital Alpha Partners.
The law enacted in May raised the asset threshold for "systemically important financial institutions" — which face enhanced post-crisis supervisory standards — from $50 billion to $250 of assets. But the Fed retained discretion to keep tabs on certain institutions above $100 billion of assets that it deems risky, and the central bank says it is developing a proposal for how it will supervise institutions in that middle range.
Concerns by regional banks over how the Fed will exercise its authority drew attention in August when Sen. David Perdue, R-Ga., spearheaded a letter to the Fed raising alarm over signs that the central bank still planned to apply stress test and other enhanced standards "designed for systemically important financial institutions on non-systemic financial companies."
"Congress did not ask the Fed to create a third layer of treatment between financial institutions above and below $100 billion in total assets," Perdue wrote. In the House, Republican Barry Loudermilk, also of Georgia, led a similar effort, garnering signatures from almost all of the Republicans on the House Financial Services Committee.
Their visibility is notable since the state's dominant institution, SunTrust Banks, falls in the middle tier most affected by the Fed's forthcoming rules. SunTrust declined to speak for this article, but Georgia Bankers Association CEO Joe Brannen said the Atlanta bank has remained engaged on the issue of the SIFI threshold.
“Obviously for banks like SunTrust, one of the most significant issues was raising the SIFI threshold to something higher than $50 billion,” said Brannen. “The bank did a good job telling their own story and we’ve simply amplified their message by including that issue on our broader list of issues of importance to all our members.”
Brannen said a key issue for the industry is when the regulators will bring more certainty in the form of concrete proposals. The timing of the Fed's rulemakings was raised at a recent Senate Banking Committee hearing to discuss the law, known as S 2155.
"As far as implementation, in conversations with members and staff alike both on the Hill and with the agencies, all we’ve asked is for the regulators to get on with implementation — sooner rather than later," he said. "We need to see their proposed rulemaking so we’ll know more about how they’ll be approaching things, especially the Fed. That was pretty much the theme of the Senate hearing a couple of weeks ago as the supporters of S 2155 want to see movement."
Similarly, the Ohio Bankers League includes three banks — Fifth Third, KeyBank, and Huntington National Bank — that all fall in the $100 billion to $200 billion category. The group has been in communication with both lawmakers and regulators in an attempt to get those banks relieved of SIFI-like standards.
“We are supporting the efforts of the regional banks in the state,” said James Thurston, vice president of public relations at the Ohio Bankers League. “We know that all three are fully engaged with the Federal Reserve in its deliberations."
Thurston said how the Fed develops stress test and liquidity standards for those mid-range institutions are particular areas of focus. "Easing how liquidity requirements are applied to these regional institutions is going to be important in continuing to make sure that not only the banking industry is healthy but they are providing the lending that’s necessary for businesses,” he said.
Jeff Quayle, senior vice president for government relations at the Ohio Bankers League, said the group is planning a trip to Washington after the November midterm elections to continue to push the message.
One of Ohio’s senators, Sherrod Brown, is the ranking Democrat on the Senate Banking Committee who opposed S 2155. Quayle said Sen. Rob Portman, R-Ohio, has been engaged with the group, even though he is not on the banking panel. Ohio also has three representatives on the House Financial Services Committee —Republicans Steve Stivers and Warren Davidson, and Democrat Joyce Beatty.
“We’ve been engaged and we are supporting not only the efforts of the three regionals that are here but also the implementing regs as it relates to the other two dozen sections of the reg relief bill,” Quayle said.
The American Bankers Association, meanwhile, provided the Fed with recommendations for safety and soundness principles for the supervision of regional banks earlier this month.
Industry groups and Republican lawmakers have argued that regional banks, which do not impose the same risk as true SIFIs, still face an uncertain regulatory future.
“If you look at the measures that the Federal Reserve has used to identify systemic risk, … not one of these regional banks comes even near the level the regulators consider to be systemic risk,” said Wayne Abernathy, executive vice president for financial institutions policy and regulatory affairs at the ABA.
Many have suggested the Fed should go even further and ease requirements for banks above the $250 billion threshold. They worry the central bank could apply the same standards to all SIFIs even though the eight largest U.S. banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Morgan Stanley, Goldman Sachs, State Street and BNY Mellon — belong to their own category as “globally systemically important banks.” GSIBs face even stricter standards, such as a capital surcharge.
"There's been a lot of movement recently with regard to discussions in Washington around the $250 billion level," said BB&T CEO Kelly King in an earnings call this week. (The bank had $216 billion of assets as of the second quarter.) "Independent of M&A, we will get to $250 billion at some point."
King called the $250 billion threshold "a meaningless number." But he said he believes Fed Vice Chairman of Supervision Randal Quarles "has a really good handle on this issue."
"I talked to him directly and heard him in meetings. He really understands this and he gets that there are number of institutions, including BB&T — I'm not speaking for him and that's my opinion — but institutions like BB&T that are above $250 billion that do not have the same kind of risk as some of the larger, more globally, systemically important institutions," King said. "He gets that. And so, I'm very optimistic that he is going to be moving towards modifying the prudential regulatory standards above $250 billion."
But others cautioned that Congress in S 2155 clearly did not intend to let regional banks completely off the hook, by allowing the Fed discretion to still apply tough standards to certain banks below the $250 billion threshold.
“Clearly this statutory language is a compromise,” said Daniel Crowley, a partner at K&L Gates. “Given that they weren’t able to get anything stronger, I think it’s a little unreasonable to expect the Fed to do more than Congress mandated. If Congress wanted them to exempt banks immediately, the statute should have said that and it doesn’t.”
“The Fed is not just going to flip a switch and say that no bank under $250 billion is systemically risky," he added. "That would almost be irresponsible based on everything that has happened over the past decade.”
Katz suggested that senior officials at the Fed are more in sync with the industry as it develops its framework.
“I do think that the Fed is probably closer to where those banks are than maybe those banks think or fear,” Katz said. “I think between Quarles and [Fed Chairman Jerome] Powell, they’ve made it clear many times that banks that they are concerned about for potential systemic risk are primarily the biggest banks, the G-SIBs.”