M&T Bank President Robert Wilmers on Tiered Regulation

While banks’ business models are different, government’s regulation of them is similar. At the same time, compliance has become ever more central to the business of banking.

When the Dodd-Frank Act was written, the principle that size correlates to riskiness was not outlandish. After all, it was the failure (or potential failure) of the largest institutions that threatened the financial system and the economy at large. Size makes for a simple, perhaps too convenient barometer — a bank either has over $50 billion in assets or it doesn’t. The complexity and systemic importance of an institution, on the other hand, is far more difficult to ascertain.

To avoid subjective debates about which regulations should apply to which institutions, using size as a primary determinant was, perhaps, a practical starting point. However, it is now time to review the objectives of the enhanced prudential standards and allow for the varying supervision needs of organizations with differing levels of complexity.

The goal of legislation and regulation is to protect consumers and the economy while facilitating commerce, not hampering it.

After all, the goal of legislation and regulation is to protect consumers and the economy while facilitating commerce, not hampering it.

Indeed, further adaptation of the regulations may be in store based on recent comments made by a member of the Federal Reserve Board. In suggesting the possibility of a “tiered approach to regulation and supervision of community banks,” Governor Daniel Tarullo noted, “[such banks] have a smaller balance sheet across which to amortize compliance costs.”

Adoption of a “tiered approach,” based on complexity as opposed to simply size, would be a welcome change while preserving the core intent of the Dodd-Frank regulations to minimize risks to U.S. financial stability.

Adoption of a “tiered approach,” based on complexity as opposed to simply size, would be a welcome change while preserving the core intent of the Dodd-Frank regulations to minimize risks to U.S. financial stability. Banks over $50 billion in size are required to go through semiannual stress tests, as well as to annually create so-called living wills — instructions on how to effectively wind down an institution if the capital and liquidity rules are insufficient to prevent its demise. Many Comprehensive Capital Analysis and Review standards are better suited to assess, monitor and estimate complex exposures and activities such as trading, derivatives and counterparty risk, which carry a higher level of volatility in stressed environments.

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