WASHINGTON — The Senate Banking Committee laid more groundwork Thursday for legislation that would make changes to the Dodd-Frank Act, holding the first of two highly anticipated hearings on supervising regional banks.

Sen. Richard Shelby, R-Ala., chairman of the panel, said that he would like to see the $50 billion threshold for systemically important institutions lifted, and that he is seeking support from the banking regulators for such a change.

"The threshold should be moved up — we're going to see what we can do," Shelby told reporters after the hearing, noting that the agencies should retain discretion to go after troubled institutions.

It remains unclear what precise form any changes might take, including whether lawmakers will seek to raise the threshold or scrap it altogether. But Shelby is aiming to vote on a regulatory reform package next month, which will likely include the threshold as a key part. The panel will hold a second hearing on the $50 billion line with industry officials and academics on Tuesday.

Below are three major takeaways from the Banking Committee hearing, which included commentary from regulators representing the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Federal Reserve.

The Fed wants more flexibility when it comes to stress tests and living wills

Overall, regulators were quick to emphasize their discretion to tailor prudential standards for banks over $50 billion of assets, though they left the door open to several potential changes.

Fed Gov. Daniel Tarullo was particularly vocal about the need to reconsider the standards around annual stress tests for banks over $50 billion, suggesting that the cutoff could be raised to $100 billion without undermining safety and soundness.

"That's the one area where the administrative flexibility we've got seems not to allow us to do something that we think is a win-win on all sides," Tarullo said of the stress test requirements.

He later elaborated: "What I described as a win-win situation, I think because, this is not a case where we have to trade off some safety and soundness benefits against compliance costs. I think this is a case where in the case of a $50 [billion] or $60 [billion] or $70 billion bank, our normal supervisory processes, the capital requirements that we've all put into place, the examinations that one of the three agencies does, will provide adequate protection for that kind of institution."

FDIC Chairman Martin Gruenberg suggested a similar openness to working with lawmakers on making the stress testing process more flexible.

"The statutory language covering stress testing is more detailed and prescriptive than the statutory on other prudential standards, leaving the regulators with less discretion to tailor the stress testing process," he said. "The FDIC would welcome the opportunity to work with the committee on language that would permit greater flexibility in the stress testing process."

Tarullo also indicated he would consider pulling back annual living will requirements for some institutions and potentially seeing the threshold be subject to indexing over time.

"Resolution plans, some other things, may be susceptible to [biennial], rather than annual" requirements, he said, though he noted that for the largest institutions, yearly living wills would likely still be needed to account for changes to the business.

He added that indexing the systemic threshold is "probably worth considering," though he underscored that doing so raises questions about whether the figure should be indexed to inflation, gross domestic product or some other measure. He offered that GDP might be best, though said he'd like to "think about it a little bit more."

Comptroller of the Currency Thomas Curry and Gruenberg both signaled they'd be open to at least thinking about indexing as well. Former Rep. Barney Frank, one of the lead authors of the financial reform law, has also supported indexing the threshold.

Still, regulators were overall careful to point to the flexibility already embedded in the law. Curry in particular reiterated several times that regulators already consider asset size as just one of many factors when setting standards for different financial institutions. The regulators also expressed concern with the notion of losing discretion as part of any reforms, and there's been some debate in the industry about whether there'd be a safe harbor for any banks under a specific threshold, should a new line be set.

It's still unclear where many Democrats stand

Republican members of the panel generally seemed supportive of efforts to raise the $50 billion line, but Democrats remain more circumspect. Just three lawmakers from the minority party joined the hearing — Sens. Sherrod Brown of Ohio, Elizabeth Warren of Massachusetts, and Robert Menendez of New Jersey — and none indicated outright support for changing the current language.

Brown, the lead Democrat on the panel, pointed to the regulatory flexibility already given to the banking agencies, and discussed several mid-sized bank failures and their economic consequences in his opening statement.

"The failure of a single large institution can create systemic risk, but so can multiple failures of similar small or mid-sized institutions," he said, echoing concerns raised by consumer advocates.

Warren took perhaps the harshest approach against proposals to change the Dodd-Frank SIFI threshold, though she ultimately pressed regulators for ideas on how to strengthen the reform law, rather than grilling them on their views about the $50 billion line. She argued that efforts to exempt certain regional banks from the enhanced standards could set a dangerous precedent.

"That's a recipe for missing the buildup of excessive risk in the financial system, and it reflects the kind of 'let the banks run free' mindset that created the last financial crisis — I just don't want to go there again," she said.

Menendez, meanwhile, took perhaps the most open approach to the discussion, noting that he understood the difference between regional and mid-sized banks and their Wall Street counterparts. He added that "no legislation is perfect."

Still, he emphasized the need to "strike the right balance of reducing compliance costs without undermining regulatory objectives."

There appears to be some bipartisan agreement on regulating physical commodities

Lawmakers also showed some support for changing a 1999 banking law provision that allows Goldman Sachs and Morgan Stanley to hold physical commodities.

The law permits those firms "to engage in the extraction, transportation of potentially highly combustible materials with substantial risks associated with them," Tarullo said, when asked by Warren about other regulatory improvements he thinks could be made. "So I think it would be very much worth considering treating those two firms the way we treat all other bank holding companies."

Brown has been involved on the issue of banks holding physical commodities for several years, and Shelby raised his own questions at the hearing as well.

"Could that pose a risk, a systemic risk to the banking system?" Shelby asked Tarullo after the regulator's exchange with Warren.

Tarullo said it is difficult to manage the risk associated with some of the permitted activities, such as owning oil tankers or copper mines.

"They're the sort of things that are very hard to get a risk management handle on as a banking regulator — you're talking about oil spills and collapses in mines," he said.

Brown then thanked Shelby for raising the issue.

"The comment you made about risk to the financial stability of the system is really important," he said.

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