Senate Panel Spars Over $50B Systemic Threshold

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WASHINGTON — The debate about how big a bank needs to be before it poses a threat to the economy heated up again Thursday as lawmakers battled over the $50 billion systemic threshold imposed by the Dodd-Frank Act.

During a Senate Banking Committee hearing on the issue, Republicans supported Chairman Richard Shelby's efforts to raise the threshold to $500 billion of assets.

"Medium-sized banks have been saddled with all kinds of costs and regulations, which mean they are necessarily lending less than they otherwise would be," said Sen. Pat Toomey R-R.I.

While many Democrats acknowledge that a $50 billion bank with a traditional business model probably does not pose a systemic risk to the entire financial system, they worry about what would happen if there were a series of failures.

"We all agree that a regional bank is not systemic in the same way a money center bank is," said Sen. Sherrod Brown, D-Ohio, the panel's lead Democrat. "The failure of a single large institution can create systemic risk, but so can multiple failures of similar small or midsized institutions."

Sen. Elizabeth Warren, D-Mass., said rather than make structural changes to the law, the Fed should do a better job of using its powers to adjust regulation to banks above $50 billion.

"If the Fed isn't doing a good job of using its existing authority for tailoring the rules appropriately then Congress should demand that the Fed do a better job," Warren said. "I am willing to hold the Fed's feet to the fire to do what the statute says, but simply raising the $50 billion threshold and cutting a whole bunch of big banks loose is a dangerous overreaction."

Shelby's regulatory reform bill, which included the systemic threshold hike, cleared the banking panel in May along party lines. It was separately approved by the Appropriations Committee on Thursday as part of a funding bill for certain government agencies.

During the hearing, some witnesses supported a $500 billion limit.

"The Shelby bill would reduce from 36 to six the number of financial institutions subject to the automatic cutoff," said Jonathan Macey, a professor at the Yale Law School. "I support his new approach."

Macey listed a number of reasons he opposes the current approach, including that it disincentivizes banks from growing as they approach $50 billion of assets.

But Robert DeYoung, a professor in financial markets institutions at the University of Kansas School of Business, said that a "single-factor, bright-line approach is far too simple."

"The Shelby bill would redraw the bright line at $500 billion in assets, and rely on the Federal Reserve and the Financial Stability Oversight Council to evaluate the systemic importance of banking companies below this asset size threshold," DeYoung said.

DeYoung instead supports a "multifactor" approach that looks at a number of risk weights along with different components and activities of a bank.

Shelby said in his opening remarks that the current threshold captures banks "whose failure would not lead to systemic contagions," and that "doing so is a cost to the financial system."

"Systemic risk is difficult to measure, but five years after Dodd-Frank — the law that mandates persistent risk regulation — we have better tools to assess it, and we should use them," Shelby added.

But Brown said that "If our goal is to have something into law, I think we need to take a more modest approach."

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