AFR Misses the Facts & Fails the Credibility Test

A recent Americans for Financial Reform (AFR) paper fails the credibility test in asserting that the Dodd-Frank law does not treat America’s regional banks similar to the very largest Wall Street money center banks. AFR alleges regional banks are not regulated like “systemically important financial institutions” (SIFIs) and take on too much risk. AFR’s fiction is refuted by the facts.

Dodd-Frank regulates regional banks as SIFIs

AFR says that under Dodd-Frank, regulators do not oversee regional banks with assets of $50 billion in the same category as giant Wall Street money center banks with trillions in assets, quoting Federal Reserve Board (FRB) Governor Daniel Tarullo to make their point. But Governor Tarullo specifically spoke to this issue in his speech quoted by AFR, saying, “The key question is whether $50 billion is the right line to have drawn,” questioning whether “resolution planning and the quite elaborate requirements of our supervisory stress testing process” are necessary for all banks over the arbitrary $50 figure.

Others have joined Tarullo – including Dodd-Frank authors Chris Dodd, Barney Frank and FRB leaders Janet Yellen and Ben Bernanke – in suggesting that the $50 billion threshold is not the best way to capture systemic risk and that changes would improve the regulatory framework.

 “SIFI tax” on regional banks verifies classification

Further proof of the status of regional banks is evident in 12 CFR Part 246, which imposes a “SIFI tax” to compensate the FRB’s expenses for enhanced regulation of banks with $50 billion or more in total assets. The FRB applies a higher surcharge on the largest Wall Street money center banks than it does on lower risk regional banks. No one disputes the rule, but if AFR were correct that regional banks are not regulated as SIFIs, regional banks would pay nothing. The AFR is wrong again – regional banks pay millions for being overseen in the same category as Wall Street money center banks.

Yet studies show regional banks don’t pose the same risk as Wall Street banks

When it comes to risk, AFR should take a look at the Department of Treasury Office of Financial Research Brief Series 15-01, which examines the systemic risk of the largest U.S. banks. The study uses risk criteria of size, interconnectedness, complexity, global activity, and dominance in certain customer services (substitutability). The study concludes that JP Morgan Chase has a systemic risk score of 5.05 percent and Citigroup a score of 4.27 percent. None of the regional banks listed in the report have systemic risk scores exceeding 0.35 percent, mainly because the business model that regional banks operate is one of traditional lenders. From almost every risk perspective, regional banks are safe and sound. AFR is wrong again.

Risk-based approach would make financial system safer and sounder

Instead of the one-size-fits-all regulatory method favored by AFR, a more thoughtful, analytical approach would make for a safer and sounder financial system while freeing billions of capital for investment in good-paying American jobs. In some cases, regulators have some ability to lift thresholds but it has proved a cumbersome process.

A bipartisan group of lawmakers has recommended that any arbitrary number, whether $50 or $100 billion, is an inappropriate approach to categorizing banks. They suggest giving regulators an enhanced ability to oversee banks based on systemic risk, so decisions would be based on the chance a financial institution’s failure would result in the collapse of an entire financial system.

If Congress adopts a standard based on risk rather than an arbitrary number, the evidence suggests more capital would be available for regional banks to invest in helping local communities grow their economies and provide good-paying jobs to American workers.