Lawmakers Question $50B Yardstick for 'Systemic' Label

WASHINGTON — The Dodd-Frank Act may cast too wide a net when determining which institutions pose a systemic threat, lawmakers said Wednesday.

The 2010 reform law requires heightened regulation and resolution planning for firms capable of damaging the economy if they failed. Banks with at least $50 billion in assets — as well as nonbanks with a special "systemically important" designation — must face new Federal Reserve Board supervision and draft so-called living wills.

But at a hearing examining the systemic definition, senators said the $50 billion threshold catches some regional-size institutions that do not pose the kind of contagion threat — more commonly associated with money center banks — that is at the heart of the "too big to fail" problem.

"From what I can tell, none of these institutions would threaten the United States or the global financial system," said Sen. Sherrod Brown, D-Ohio, who chairs the Banking Committee's financial institutions subcommittee.

Brown was specifically referring to three regional banks in his state — Huntington Bancshares, KeyCorp and Fifth Third Bancorp — that all exceed the $50 billion cutoff but that, he said, would likely not cause the kind of shocks globally connected firms would.

"These banks operate under a traditional banking model," he said, adding that a chief executive at one of three banks has referred to its business as "core-funded." "They take deposits, they lend to families and businesses," Brown said.

The hearing touched on, among other things, whether the systemic definition for banks should focus on an institution's activities rather than its size, and whether regulators already had necessary tools before Dodd-Frank to clean up a failing regional bank without harming other institutions.

"The dollar amount of assets ... is really not the determination. It is the activities themselves," said University of Akron professor James Thomson, who testified at the hearing. "It just turns out that really large banks tend to be in all of the activities that lead us to consider them systemically important."

Sen. Patrick Toomey, R-Pa., the subcommittee's ranking member, joined Brown in voicing skepticism about how Dodd-Frank determines which institutions pose systemic threats.

"In my view, there is nothing magic about a $50 billion threshold, above which we ought to automatically assume every institution is systemically important and significant and dangerous," Toomey said. "That threshold gives no consideration to the activity of the bank."

"Subjecting financial institutions that are not in fact systemically risky to these very onerous regulations imposes a real cost," he added. 

"At the end of the day, it means credit is less available and less affordable for American consumers and businesses."

Witnesses testifying at the hearing agreed that the $50 billion figure may need to be revisited, but said that past failures of regional banks have come with their own costs.

"I certainly agree that the legislation sets the threshold way too low. There is nothing magical about $50 billion," said Richard Herring, a professor at the University of Pennsylvania's Wharton School.

Brown noted that past scenarios in which regional banks got into trouble suggested they could be dealt with while avoiding broad spillover effects.

When the Cleveland-based National City Corp. — facing huge losses in the subprime crisis — was sold to PNC Financial Services in 2008, "the system absorbed it without great damage obviously to the stability of the system," Brown said. He also mentioned the $307 billion-asset Washington Mutual, which was the largest institution ever to fail and which the Federal Deposit Insurance Corp. sold to JPMorgan Chase "at no apparent loss to U.S. taxpayers."

He asked the witnesses how regulators today would respond to a regional bank's failure. "Would we need a megabank like JPMorgan to absorb it, to rescue it?" he said.

Herring said such mergers come with their own risks.

"It's dangerous to rely on forced mergers arranged over a weekend as a way out. One of the huge mistakes that was made during the crisis was relying on government-assisted concentration in the system," he said. "We started with banks that were 'too big to fail,' and we ended with banks that were emphatically 'too big to fail,' which is a terrible mistake. The resolution process should make sure that the bank that emerges from the resolution process is no longer 'too big to fail' in any dimension. If that means breaking it up into smaller banks, that's a good thing to do."

Others stressed that a bank's size — and not just its activities — should be a factor in determining its systemic significance.

"We can't win the battle against 'too big to fail' just by attempting to make banks safer," said Sen. Elizabeth Warren, D-Mass.