Scrapping $50B threshold will let 30 big banks off the hook

The House of Representatives is slated to vote on a bipartisan bill this week that would effectively deregulate 30 of the 38 largest banks in the country.

The bill, the Systemic Risk Designation Improvement Act, targets Section 165 of the Dodd-Frank Act, which requires regulators to subject bank holding companies with over $50 billion in assets to enhanced prudential regulations.

Yet it was clear in the aftermath of the financial crisis that the banking sector suffered from weak regulatory oversight and regulation. Subjecting the largest roughly 40 banks — out of 6,000 banks in the U.S. — to stronger loss-absorbing capital requirements, leverage limits, liquidity requirements, stress testing, living wills, and more, was a sensible policy response to the crisis.

Chris Ratcliffe/Bloomberg

The House bill repeals the $50 billion threshold and requires that regulators only apply the enhanced prudential regulations to the eight most systemically important banks in the U.S. that qualify as globally systemically important banks. The bill would provide cumbersome mechanisms for regulators to reapply these enhanced regulations to the 30 deregulated banks.

It is hard to imagine, however, that the Trump-appointed regulators keen on financial deregulation would exercise this authority aggressively. And even if regulators did utilize those mechanisms to reapply the regulations, banks could challenge those decisions in court — potentially resulting in drawn-out legal battles.

The 30 banks deregulated by this bill hold a combined $5.3 trillion in assets, or roughly 25% of the total assets in the banking sector. Collectively they received $65 billion in TARP bailout funds and hundreds of billions more in additional forms of government support. This universe of banks deregulated by the bill also includes the U.S. holding companies of systemically important foreign banks like Credit Suisse, Deutsche Bank and HSBC. These scandal-plagued foreign banks should be some of the last banks policymakers consider deregulating.

Proponents of this bill argue that an asset threshold, like the $50 billion threshold in Section 165 of Dodd-Frank, is a poor way to determine which banks should face heightened scrutiny. They also argue that currently, regulations are not sensibly tailored to the risk profiles of banks that are subjected to the enhanced regulations. Both claims are misguided.

The $50 billion threshold is a simple and transparent way to identify the largest 40 banks in the U.S. that should receive special attention from regulators. Regulators should, and currently do, consider other risk metrics like interconnectedness, complexity, substitutability and cross-jurisdictional activity when tailoring specific regulations for those banks that are above the $50 billion threshold. A global bank with $1.5 trillion in assets poses different risks than a bank with $150 billion in assets, and regulators currently apply different regulations to banks that pose different risks. For example, at least nine enhanced regulations do not currently apply to banks with between $50 billion and $250 billion in assets. Regulators already tier regulations appropriately. The House bill is simply a way to deregulate a massive swath of the banking sector while tying the hands of future regulators to reapply those regulations.

Deregulating these banks would weaken the safety and soundness of the banking sector. These banks are vital to the communities they serve. They fund loans to businesses of all sizes, to entrepreneurs, and help families afford homeownership. Allowing these banks to once again load up on debt, avoid stress testing, not plan for their orderly failure, and not hold enough liquid assets to meet their obligations during a period of stress simply makes the banking sector vulnerable to another shock. The failure of one or a handful of these banks during a period of severe stress in the financial system would threaten the economic well-being of regional economies across the country and could disrupt U.S. financial stability.

At a time when bank profits are at or near all-time highs, it is unclear why Republicans and Democrats in the House and Senate are keen on deregulating large portions of the banking sector. Bank deregulation unfortunately appears to be one of the only areas of bipartisan agreement on Capitol Hill. Financial instability and crises threaten the long-term economic growth of the U.S., so policymakers should be considering ways to strengthen financial stability safeguards, not undermine them.