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Legislation Reintroduced to Base SIFI Determination on Risk Rather Than Asset Size
On July 19, Representative Blaine Luetkemeyer (R-Mo.) reintroduced legislation designed to overhaul the process used to manage systemic risk by basing the regulation of financial institutions on risk rather than asset size alone. As set forth in a press release issued by Rep. Luetkemeyer’s office, the Systemic Risk Designation Improvement Act of 2017 would replace the $50 billion threshold for designating a bank holding company as a Systemically Important Financial Institution (SIFI) with a series of standards for evaluating risk. The legislation would require the Federal Reserve to evaluate an “institution’s size, interconnectedness, substitutability, global cross-jurisdictional activity, and complexity” before designating it as a SIFI. The legislation was previously introduced in the House, but discussion was delayed to provide Rep. Luetkemeyer with time to propose a method for funding the proposed changes, which are estimated to cost more than $115 million. (See previous InfoBytes summary here.)
“This legislation supports economic growth throughout the country because it will free commercial banks to make loans while allowing financial regulators the ability to apply enhanced standards on banks based on actual risk posed to the financial system–rather than on arbitrary asset size alone," Luetkemeyer pronounced.
Senators Introduce Bill to Provide Relief to Community Banks
On May 26, Senators Orrin Hatch (R-Utah), Angus King (I-Me.), and Bill Nelson (D-Fla.) introduced bipartisan legislation intended to provide regulatory relief to small financial intuitions. According to a press release issued by Sen. Hatch’s office, the Community Bank Relief Act (S. 1284) would increase the asset threshold from $1 billion to $5 billion, thereby expanding the number of institutions covered by the Small Bank Holding Company Policy Statement (Statement). Based on FDIC data, raising the asset threshold would affect 443 bank holding companies (BHC) and other financial institutions. Additionally, 96 percent of BHCs and savings and loan holding companies would be covered by the Statement compared to 87 percent as of December 31, 2016, according to the Federal Reserve (Fed). The legislators believe the bill will improve the Dodd-Frank Act “without compromising safety standards” and help “small financial institutions provide households and small businesses more quality-based loans” that will advance economic growth. Notably, the Fed will still be able to exclude any BHC or savings and loan company if it determines the action is warranted.
Fed Finalizes Debt-Minimum Rule to Help Banking System Weather Shocks
On December 15, the Fed finalized a rule requiring the biggest global banks to guard against potential collapse by holding minimum amounts of long-term debt and regulatory capital. The rule applies to bank holding companies, U.S. global systemically important banks (GSIB), as well as U.S. branches of foreign banks, and aims to shift the costs of bank failure to shareholders rather than taxpayers by requiring lenders to maintain sufficient amounts of long-term debt, which can be converted to equity to keep a failing bank’s key operations afloat. Specifically, the measure will establish minimum required levels for long-term debt and total loss-absorbing capacity, as well as restrictions on certain short-term debt financing arrangements by parents of GSIB-designated financial institutions. In prepared opening remarks, Fed Chair Janet Yellen explained that “[t]he rule is guided by common sense principles: bank shareholders and debt investors should place their own money at risk so depositors and taxpayers are well protected, and the biggest banks must bear the costs that come with their size.”
In a memorandum to the Board of Governors, the Fed’s staff noted that covered banks are currently about $70 billion short altogether of the new requirements. The Fed staff estimated that the aggregate increased funding of approximately $680 million to $2 billion annually would be required to make up the shortfall.
Fed Seeks Comments on Rating System for SLHCs
On December 13, nearly five and a half years after assuming supervisory responsibility for savings and loan holding companies (SLHCs), the Fed is seeking comments on a proposal to fully apply the same supervisory rating system to savings and loan holding companies as currently applies to bank holding companies—a rating system commonly referred to as the “RFI rating system.” The RFI rating system generally grades a holding company’s risk management (R), financial condition (F), and impact (I) of non-depository entities on subsidiary depository institutions. Although the proposal would fully apply the rating system to most SLHCs supervised by the Fed, it would not apply to SLHCs engaged in significant insurance or commercial activities. These firms would instead continue to receive indicative ratings. Comments on the proposal must be received by Feb. 13, 2017.