Regional Bankers Detail Heavy Toll from $50B 'Systemic' Threshold

WASHINGTON — Regional banks above the Dodd-Frank Act's $50 billion threshold are paying a heavy cost for the added burdens placed upon them by the regulatory reform law, a top executive told Congress on Tuesday.

Deron Smithy, executive vice president and treasurer of Regions Financial, said compliance costs across the 20 regional banks that are above the target have jumped by $2 billion, with his bank alone spending roughly $200 million in added costs.

Speaking before the Senate Banking Committee, he said Regions has about 100 employees that are actively working on the Fed's stress tests, which all banks above the threshold must take, with another 150 partially involved in new compliance duties.

"One of the more important elements of this are the indirect costs, which are management and the board's time away from serving the needs of our customers and serving our communities," said Smithy, who represents the Regional Bank Coalition, a newly formed group of mid-sized banks.

His remarks came as the panel is prepping legislation expected to be introduced next month that would provide regulatory relief for banks, including raising or eliminating the $50 billion line. The hearing Tuesday was the panel's second one on just that subject, following a March 19 discussion with regulators who appeared favorable to adjusting parts of the prudential standards regime.

Under Dodd-Frank, banks that are above $50 billion of assets are subject to enhanced prudential requirements, including higher capital standards. Regional banks have argued that they are not systemically important and shouldn't be held to the same rules as the megabanks.

During the hearing, Smithy emphasized a point that Republicans have made about the target, arguing that the extra capital and liquidity standards hurt institutions' ability to lend.

"That frankly means there's less of those resources available for lending. For a company like Regions, that standard being lifted would likely liberate as much as 10% additional capacity for lending, which could be $8 billion to $10 billion," Smithy said.

Lawmakers appear open to addressing Smithy's concerns, but it's unclear how they want to proceed.

Some industry officials have pushed for lawmakers to take up a qualitative standard instead of raising the threshold. They point to assessments of the largest global banks by international regulators, who base regulations on complexity, interconnectedness and other factors, including size.

Rep. Blaine Luetkemeyer, R-Mo., recently reintroduced legislation in the House adopting this approach. The bill, which would designate the Financial Stability Oversight Council to oversee the evaluation process, won the support of more than 80 cosponsors last year, including 20 House Democrats.

Senate Banking Committee Chairman Richard Shelby has repeatedly expressed an interest in addressing the $50 billion limit, but apparently hasn't settled on an approach. Asked after the hearing whether he would like to see another, higher cutoff line in place versus a qualitative approach, Shelby told reporters, "We don't know yet."

But Sen. Bob Corker, R-Tenn., said he has reservations about a purely qualitative approach, though he acknowledged the $50 billion figure is "too low."

"I do have a degree of trepidation in punting again to the regulators. We did so much of that in Dodd-Frank, so the qualitative piece is interesting to me, but I'm not sure I want to punt again," he said. "Especially not to FSOC, which I don't even really believe is functioning — it's stovepipes of nothing."

Democrats, meanwhile, are even harder to gauge.

Sen. Mark Warner, D-Va., who is potentially a key swing vote on the committee, left the door open on the issue of raising the $50 billion threshold, while reiterating the need to keep strong banking rules in place.

He told Regions' Smithy that he is "sympathetic" to reducing compliance burdens for the regional banks, "but without sacrificing the standards."

The Virginia lawmaker pointed to several areas that could help support a larger deal, raising questions about why living wills need to be submitted annually if a bank's business model doesn't change, whether bank exam schedules could be consolidated and if daily requirements under the liquidity coverage ratio are necessary.

Still, he cited concerns about "geographic concentration," noting that if a bank failed "while it might not bring down the national economy, it could have systemic effects at least on a regional basis."

Meanwhile, Sen. Sherrod Brown, D-Ohio, the lead Democrat, remained guarded over the prospect of raising the $50 billion threshold, while not opposing the concept outright.

"I am open to solving real problems affecting actual institutions without undermining safety and soundness or consumer protection," he said in an opening statement, while reiterating that he plans to defend core Dodd-Frank provisions.

He added: "Regulation is necessary, and while it is our job to ensure that the regulations are appropriate, it is also important that we do not make it more difficult to monitor potential sources of risk or encourage unsafe practices."

Sen. Elizabeth Warren, D-Mass., took a tougher tone, warning what could happen if several regional banks were to collapse at the same time.

"When we're talking about the risks that the $50 billion banks pose to the economy, we need to consider that not just one bank could go south at a time, but that two or three or four could be following similar business practices and get caught short at the same time, which would pose a much bigger risk to the economy," she said.

She weighed the possibility of keeping the threshold at the current $50 billion level versus raising it higher to help some banks, and said she would "rather err on the side of being careful and covering a few banks who may not pose as much risk, rather than running the risk of another crisis that plunges our economy back into recession."