1. How many Wall Street banks benefit from Senator Shelby’s proposal to regulate banks based on risk, rather than on an arbitrary size threshold?
None. Shelby’s proposal wouldn’t change prudential regulation of systemically important Wall Street firms one bit. Every regulatory requirement imposed by Dodd-Frank on Wall Street banks would remain in place under the Shelby bill.
2. Why is so much of the debate over this bill focused on Wall Street then?
Good question. Wall Street banks don’t benefit from this bill, and they don’t appear to be supporting it. This bill is narrowly targeted to make it easier for community, mid-sized, and regional banks to serve families and small businesses across the country. Attacking this bill by talking about Wall Street is a red herring.
3. Then how does the bill address regulation of systemic risk?
It directs the Financial Stability Oversight Council to examine the business models of banks with assets between $50 billion and $500 billion. The FSOC will take into account size, interconnectedness, complexity, global activity, substitutability, or additional factors the FSOC concludes measure systemic importance, and determine which banks should be subject to enhanced systemic regulation based on how systemically important they are. There are no pre-determined outcomes, and banks with more than $500 billion in assets remain subject to automatic systemic risk regulation.
4. Maybe Wall Street firms themselves don’t benefit, but don’t many of the regional banks with assets above $50 billion also pose a systemic threat to the economy?
Not according to the Treasury Department. They’ve analyzed the factors regulators have determined indicate systemic risk and found that none of the regional banks pose substantial risks to the economy. Furthermore, Senator Shelby’s proposal keeps in place a robust regime of safety and soundness regulations of regional banks. And if a regional bank were to change its business model to move into more risky activities, the bill allows the Financial Stability Oversight Council to designate such firms as systemically risky and subject to enhanced regulation.
5. How are the regional banks impacted by this bill different from Wall Street banks?
Let us count the ways. The most important is that regional banks are traditional Main Street banks, focused on taking deposits and making loans. For example, in the fourth quarter of 2014, four big Wall Street firms combined devoted only 38% of their assets to loans; fourteen regional banks combined devoted 62% of assets to loans (according to data from SNL Financial). The Wall Street firms use 23% of their assets for trading, repos, and other complex financial activities. For regional banks, that number is 1%.
6. Even if regional banks aren’t systemically risky, what harm is there in having them comply with additional regulations that can only make the entire system safer?
First of all, treating banks that aren’t systemically risky as if they are systemically risky doesn’t make the system safer. It wastes resources and can divert regulators’ attention from actual systemic threats. Second, regional banks are collectively spending hundreds of millions of dollars to comply with these unnecessary regulations. Every dollar they spend complying with rules that don’t improve the safety and soundness of the financial system is a dollar they can’t loan to a small business trying to grow and hire new employees.
7. Shouldn’t people who support Dodd-Frank oppose any changes to it? We can’t let the camel’s nose under the tent.
That’s not what Barney Frank, who co-authored the law, thinks. He said last year that, “we should look at that $50 billion again. We never thought $50 billion was a forever number.” It’s not what Fed Governor Daniel Tarullo or former Fed Chairman Ben Bernanke think either. In fact the Regional Bank Coalition just examined the history of the $50 billion threshold and found Congress never intended for it to serve as a risk threshold. We also found a broad consensus from regulators, analysts, and academics that better measurements now exist to determine systemic risk. Those measurements are what this bill would put in place.
There are a lot of myths about Senator Shelby’s proposal to base systemic regulation on risk, and not size alone, but the facts are clear: the bill set to be considered by the Senate Banking Committee would promote safety and soundness, improve the economy, and allow regulators to focus on actual threats to the financial system.