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Senator Crapo Seeks Increase in $50 Billion Bank Systemic Risk Threshold

Senate Banking Committee Chair Mike Crapo wants to raise the Dodd-Frank Act’s $50 billion asset threshold for designating banks as systemically important. In his view the threshold unfairly subjects regional banks to regulations intended for larger institutions.

Senate Banking Committee Chair Mike Crapo on June 15, 2017, took aim at the Dodd-Frank Act’s $50 billion asset threshold for designating banks as systemically important.

Crapo and other critics say the threshold unfairly subjects regional banks to restrictions intended for larger institutions.

Under Dodd-Frank, banks that hit the $50 billion mark are automatically designated as systemically important financial institutions (SIFIs) and subjected to higher capital requirements, tighter supervision, tougher rules on the liquidity of their assets, regular testing of their ability to withstand a financial crisis, and the creation of so-called “living will” resolution plans.

The threshold has been subject to broad criticism since the passage of the 2010 Wall Street reform law. Former Rep. Barney Frank, one of the Democratic architects of Dodd-Frank, last year acknowledged the $50 billion trigger was a “mistake” and suggested the proper asset threshold should be at least $125 billion, and indexed for inflation.

Crapo focused on the $50 billion figure during a recent Banking Committee hearing, suggesting the issue could be central to his upcoming financial regulatory reform efforts.

“While there are different views on what to replace the threshold with, it seems to be there is general bipartisan agreement that a bank is not systemically important simply because its assets exceed $50 billion,” he said during the short hearing on regulation of mid-sized banks.

Crapo’s predecessor as chairman, Sen. Richard Shelby, in 2015 drafted a package of bills whose core provision would raise the $50 billion threshold to $500 billion, which would relieve all but a handful of the largest U.S. banks from automatic SIFI designation. Democrats, including moderates on the Senate Banking Committee, balked at the new figure and vowed to block the Shelby bill. The measure, dubbed the “Financial Regulatory Improvement Act,” advanced out of the panel on a party-line vote but never reached the Senate floor.

In June 15 testimony before the banking committee, Cornell University Law School professor Saule Omarova warned against replacing the asset threshold with an “indicator-based” test in which the Financial Stability Oversight Council (FSOC) weighs the merits of a SIFI designation for each individual bank.

“While this ‘flexible’ and ‘individually tailored’ approach may sound good in theory, it will significantly undermine the entire post-crisis regulatory framework for safeguarding systemic stability,” Omarova stated in her written testimony. Such a tailored designation process would overwhelm regulators, she argue.

While “reasonable people may disagree and argue” about the current threshold, Omarova argued that “$50 billion is by no means an insignificant number,” adding that only 38 bank holding companies today exceed that asset threshold.

Crapo has yet to introduce his package of proposed financial reforms but has been dropping clues recently as to what could be in the legislation. Earlier this month, he argued in favor of exempting smaller banks from the Volcker Rule, another move likely to garner bipartisan support. The rule, finalized by five regulatory agencies in 2013, restricts federally insured banks from engaging in short-term proprietary trading activities, and it prohibits the institutions from taking ownership in private equity funds and hedge funds. The SEC issued the rule as Release BHCA-1, Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds.

Supporters of a Volcker Rule exemption for banks with less than $10 billion in assets say the rule unfairly hits community banks and credit unions that do not engage in the sort of risky trading activities as larger banks.

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