On July 27, 2017, Treasury Secretary Steven Mnuchin told House lawmakers in questioning at a House Financial Services Committee hearing, that the asset threshold that classifies banks as Systemically Important Financial Institutions (SIFIs) should be raised to at least $250 billion, and that he wants to address the issue “quickly.”1 Earlier in June, the Treasury Department released its first report in response to the Trump administrations’ Core Principals Executive order, and recommended raising the threshold, currently set at $50 billion by the Dodd-Frank Act, but did not specify a dollar figure.2
What This Means
The June Treasury report, the first of four, addressed The Depository System covering banks, savings associations and credit unions, and the role of the Financial Stability Oversight Council (FSOC) in designating large companies as SIFIs.3 “A sensible rebalancing of regulatory principles is warranted in light of the significant improvement in the strength of the financial system and the economy,”4 the report said. Federal Reserve Governor Daniel Tarullo has also expressed the need for recalibration and reconsideration of parts of Dodd-Frank. In his April 4 “Departing Thoughts” speech, Governor Tarullo said, “There are clearly some changes that can be made without endangering financial stability. Foremost among these are the various bank size thresholds established in the Dodd-Frank Act or in agency regulations for the application of stricter prudential requirements.”5 Tarullo’s view for several years has been that the threshold of $50 billion in assets established in the Dodd-Frank Act for banks and financial institutions to be identified as “systemically important,” and thus subject to a range of more stringent regulations, was set too low.6 He also touched on “the fact that community banks are subject at all to some of the Dodd-Frank rules seems unnecessary to protect safety and soundness, and quite burdensome on the very limited compliance capabilities of these small banks.”7.
The Treasury Secretary, in response to the House Financial Services Committee, referred to bipartisan discussions on raising the limit designating SIFIs that were held before the Trump administration took office, and hoped that those conversations could continue, and that a conclusion could be accomplished in a short period. 8 Bipartisan legislation introduced by Representative Blaine Luetkemeyer earlier in July would undo the Dodd-Frank Act requirement that all banks with more than $50 billion in assets are automatically considered a SIFI.9 Leutkemeyer said that the proposed bill would allow the Fed to apply enhanced standards on banks based on actual risk rather than on asset size alone, so including interconnectedness, global presence and complexity.10 Secretary Mnuchin, in his testimony also said the same, in that the Fed should be allowed to exempt simple and uncomplex banks even if their asset size was in the $250 billion range.11 This is in line with the recommendations in the June Treasury report to provide regulatory relief for smaller and less complex banks and financial institutions.12
Randy Quarles, President Trump’s nominee to replace Governor Tarullo and head bank supervision at the Fed, also supported tailoring regulation to the character of a financial institution rather than being based solely on its size.13 At his confirmation hearing on July 27, Quarles was questioned about asset thresholds used for regulatory purposes, and told senators, “I do think we should look very carefully at tailoring capital regulation and other types of regulation to the particular character of the institutions, and that includes size and includes other aspects.”14 He added, “some refinements will undoubtedly be in order” for post-crisis bank regulatory policy.15
As we have touched on, Treasury Secretary Mnuchin, together with bipartisan support in Congress, and President Trump’s nominee to the Fed Board, are all in agreement that changes to the SIFI thresholds are desirable. The Financial Stability Oversight Council (FSOC) is principally responsible for designating SIFIs and thus forcing them under the regulatory umbrella of the Fed. These designation powers are governed by interpretive guidance and official procedures, and by adopting changes to the FSOC charter the Treasury Department could implement reforms that have been considered in Congress.16 This rethink of the FSOC’s process for designating SIFI’s is likely already underway.17
1. “Mnuchin: Bank ‘Systemic Risk’ Label Should Start at $250 Billion,” Bloomberg BNA, July 27, 2017. Access at: https://www.bna.com/mnuchin-bank-systemic-n73014462373/
3. A Financial System That Creates Economic Opportunities – Banks and Credit Unions,” U.S. Department of the Treasury, June 2017. Access at: https://www.treasury.gov/press-center/press-releases/Documents/A%20Financial%20System.pdf
4. “Mnuchin calls for major rollbacks of Dodd-Frank financial reforms,” Los Angeles Times, June 12, 2017. Access at: http://www.latimes.com/business/la-fi-treasury-dodd-frank-20170612-story.html
5. “Departing Thoughts,” Speech, Governor Daniel K. Tarullo, Board of Governors of the Federal Reserve System, April 4, 2017. Access at: https://www.federalreserve.gov/newsevents/speech/tarullo20170404a.htm
8. “Mnuchin: Bank ‘Systemic Risk’ Label Should Start at $250 Billion,” Bloomberg BNA, July 27, 2017. Access at: https://www.bna.com/mnuchin-bank-systemic-n73014462373/
12. “Mnuchin calls for major rollbacks of Dodd-Frank financial reforms,” Los Angeles Times, June 12, 2017. Access at: http://www.latimes.com/business/la-fi-treasury-dodd-frank-20170612-story.html
13. “Mnuchin: Bank ‘Systemic Risk’ Label Should Start at $250 Billion,” Bloomberg BNA, July 27, 2017. Access at: https://www.bna.com/mnuchin-bank-systemic-n73014462373/
16. “Trump can rein in financial bureau without help from Congress,” The Hill, May 9, 2-17. Access at: http://thehill.com/blogs/pundits-blog/finance/332537-trump-can-rein-in-financial-bureau-without-help-from-congress
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