Midsize Banks May Get Some Relief From Dodd-Frank

From Law360
By Evan Weinberger
May 12, 2014


New York — A recent speech by the Federal Reserve’s regulations point man suggesting that banks with less than $100 billion in assets should be exempt from some stringent post-financial crisis regulations, may herald regulatory relief for midsize financial institutions and a dialing back of some post-financial crisis mandates on smaller institutions.

The speech by Fed Gov. Daniel Tarullo created a stir in the banking world, as it highlighted the need to create a sort of middle class for banks within $50 billion and $100 billion in assets that would be exempt from some of the toughest rules meant for the largest and most systemically important financial institutions. It also showed that the Fed believes it has a stronger handle on the state of the financial system than it did prior to the financial crisis, and that there is some room to pull back on the rules for banks that do not threaten the economy should they fail.

“You can call it ratcheting back, or you can call it recognizing reality,” said Cornelius Hurley, the director of Boston University‘s Center for Finance, Law & Policy.

Speaking at the Federal Reserve Bank of Chicago’s Bank Structure Conference, Tarullo said that despite advances among policymakers in recognizing that banks of different sizes need different sets of rules, more work needs to be done.

One measure Tarullo suggested was exempting all banks at $1 billion or less in total assets from the Volcker Rule, the Dodd-Frank Act’s ban on proprietary trading, a measure that has widespread support.

A more groundbreaking suggestion Tarullo made was changing the level at which banks are subject to heightened prudential regulations, including supervisory stress tests, capital plan submissions and resolution planning. Dodd-Frank set that standard for banks with $50 billion in total consolidated assets or more.

Tarullo said the standard should be moved up, with the line for enhanced supervision drawn at $100 billion or possibly even higher, given the limited systemic risk posed by such midsize banks.

“If the line were redrawn at a higher figure, we might explore simpler methods for promoting macroprudential aims with respect to banks above $10 billion in assets but below the new threshold,” he said, according to prepared remarks.

Tarullo’s remarks immediately drew a positive response from banking industry trade groups, which have long claimed that the $50 billion marker was an “arbitrary” standard.

“Moving from an arbitrary to a more tailored supervisory program will improve our safety and soundness supervision, and will more effectively address risks to America’s financial system,” American Bankers Association President and CEO Frank Keating said in a Thursday statement.

Tarullo’s comments get at what Hurley believes is one of Dodd-Frank’s original sins.

Lawmakers’ decision to set $50 billion as a marker for enhanced capital, leverage, stress testing and resolution planning requirements set a too-low standard for what it means to be a threat to the broader financial system, he said.

“Along comes Dodd-Frank, and it trivializes what it is to be too big to fail,” Hurley said.

That decision also failed to take into account the wide variance in business models between a regional bank that focuses on commercial banking and a global banking conglomerate like JPMorgan Chase & Co. that has complex trading operations and international scope attached to a traditional depository institution.

“There’s no question that we have a different focus than some of the largest banks, and I’m not sure the regulators always take that into account,” M&T Bank Chairman and CEO Robert G. Wilmers said in an interview with Law360 on Thursday.

Buffalo, New York-based M&T had around $83 billion in total assets as of June 2013, according to the bank.

The new focus from Tarullo is a recognition that the central bank and other regulators have gained a solid understanding of the threats that individual banks pose to the broader financial system — and which banks do not pose such a threat.

“The theme that I took from his speech is that we need to be nuanced about this,” said Justin Schardin, the associate director of the Bipartisan Policy Center’s financial regulatory reform initiative.

Although Tarullo talked a good game about easing the rules for banks with between $50 billion and $100 billion in total assets, the Fed’s ability to act on that realization is limited.

Dodd-Frank mandates a host of requirements for the banks with $50 billion in assets or more, and a legislative fix along the lines of what Tarullo wants to see is unlikely, Hurley said…


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