At a speech this morning at the Federal Reserve Bank of Chicago, Federal Reserve Board Governor Daniel K. Tarullo suggested that the level at which bank holding companies are automatically subject to more stringent prudential standards has been set too low. The Bipartisan Policy Center (BPC) applauds Governor Tarullo for taking a stand that may be unpopular but is also right. As BPC’s recent report, Dodd-Frank’s Missed Opportunity: A Road Map for a More Effective Regulatory Architecture, written by Mark Olson and Richard Neiman, found, raising the threshold level for banks would focus regulatory attention and resources on banks most likely to create systemic risk for the financial system.1
The Dodd-Frank Act automatically subjected all bank holding companies with more than $50 billion in assets to heightened prudential standards. Governor Tarullo this morning agreed with BPC’s report, saying that “experience to date suggests to me, at least, that the line might better be drawn at a higher asset level—$100 billion, perhaps. Requirements such as resolution planning and the quite elaborate requirements of our supervisory stress testing process do not seem to me to be necessary for banks between $50 billion and $100 billion in assets.”2
BPC recommends a new threshold at a higher level of $250 billion,3 which comports with the level at which financial institutions fall under the additional prudential requirements under the Basel agreements. The underlying principle, however, is the same: most smaller bank holding companies subject to heightened standards under Dodd-Frank do not present the same systemic threat as do the largest bank holding companies. These smaller institutions should, as a result, not automatically be treated the same, but instead be approached by regulators according to the risk profiles of each individual bank holding company.
Governor Tarullo’s speech also indicated that “there could be reasons for applying additional requirements to specific banks, even if they fall below the presumptive asset threshold.” This line of reasoning is sound as well. Since any threshold is necessarily arbitrary, and size alone does not determine which institutions generate the most systemic risk, regulatory agencies should be given flexibility in applying heightened prudential standards to individual institutions. Therefore, as Dodd-Frank’s Missed Opportunity recommends, a new level at $250 billion (or $100 billion) should not be an automatic threshold. Instead, institutions above the threshold “would be presumed to be systemically important, but could bring evidence to appeal their designations to the FSOC [Financial Stability Oversight Council].”4 Similarly institutions below the threshold “would be presumed to not be systemically important, but the FSOC could designate them as SIFIs based on available evidence.” In both cases, regulators would evaluate the size, interconnectedness, substitutability, leverage, liquidity risk, and maturity mismatch characteristics of each institution, as they do today when weighing whether to designate non-bank financial institutions as systemically important financial institutions (SIFIs).
Governor Tarullo appears to be saying that the new $100 billion threshold should be presumptive only for institutions below that line. While we agree, we believe the presumption should apply both above and below the threshold line.
As Dodd-Frank’s Missed Opportunity said, “adjusting the threshold should allow regulators to focus more resources on a smaller set of institutions that presents the greatest potential systemic risk.” We agree with Governor Tarullo that this is a change that should be made.
1 Richard H. Neiman and Mark Olson, “Dodd-Frank’s Missed Opportunity: A Road Map for a More Effective Regulatory Architecture,” Financial Regulatory Reform Initiative, Bipartisan Policy Center, April 10, 2014, p. 40. Available at:
2 Daniel K. Tarullo, Speech at the Federal Reserve Bank of Chicago Bank Structure Conference, May 8, 2014. Available at: http://www.federalreserve.gov/newsevents/speech/tarullo20140508a.htm.
3 Neiman and Olson, Ibid.