Dodd-Frank changes could be coming, but will they go far enough?

Lately, when Fed Chairman Janet Yellen makes her twice-annually speech in front of the U.S. Senate Committee on Banking, Housing and Urban Affairs, the first thing anyone wants to know about is the state of interest rates.

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But her two-and-a-half-hour-plus testimony last week before the committee contained this little nugget, according to the American Bankers Association:

“Fed Chairman Janet Yellen today told the Senate Banking Committee that the Fed is ‘very likely’ to exempt banks with less than $250 billion in assets from certain elements of the Dodd-Frank Act stress test regime.”

Earlier this month, Federal Reserve Board Governor Daniel Tarullo talked with Bloomberg TV, and it sounds like he and Yellen are on the same page:

“I think the direction in which we’re moving would be for banks that are under $250 billion in assets and are basically very traditional banks … to take them out of the qualitative side of the test.”

This is the movement community banks have been waiting for. The motive is sound and likely necessary, since community banks for the last few years have pointed to the cost of heightened regulation as a reason their profit margins have shrunk. Leaders at many community banks that have been acquired by larger banks have specifically pointed to the increasing regulatory costs that shrunk profits as a reason the bank sold off when it did. Without some kind of change to the burden of regulation for smaller banks, it’s not hard to envision a financial services world dominated by large, $100-billion-and-up asset banks.

There needs to be some kind of change to ease the regulatory and financial burden on banks that simply had very little to do with the factors that led to the recession and the creation of Dodd-Frank. Community bankers have correctly pointed out since the implementation of Dodd-Frank that the wrong people were being penalized with the increased regulations. The Fed apparently has heard the criticism and complaints from its community banks and realized that a change is necessary.

But at a $250 billion asset level cut-off, is the possible change of Dodd-Frank going far enough? The “too big to fail” banks certainly need to have regulatory eyes kept on them at all times. They’re just too important to the national and world economy to go out of business or run rampant enough to cause another recession.

Right now, however, we’re talking about nine financial institutions in the country above $250 billion in assets. Only two of them — PNC and Wells Fargo — have any major presence in the midstate. BB&T, Citizens Bank, M&T Bank, all considered very large banks, all with over $100 billion in assets, would be included in the bandied-about under-$250-billion benchmark that would relieve them from whatever aspects of the act are up for debate.

In its simplest form, Dodd-Frank attempts to protect against the worst-case scenario: A bank shutting its doors and going out of business. The TBTF banks, if they went out of business, would devastatingly affect the entire American economy. But saying that all $250 billion or less asset banks act “traditional” seems somewhat naive.

Admittedly, I have no answers for what the benchmark should be. $100 billion? $50 billion? $10 billion? A bank like First National Bank of Pennsylvania is at more than $20 billion in assets, in markets all across the state and into three other states. Is it important enough to be considered truly TBTF that it would cripple the economy in any region it serves? When you get down to $5 billion or so — think S&T, with nearly $6 billion in assets — you’ll start to see banks that have a major presence in one particular area, and there would be enough other banks to pick up the slack should the worst happen. So maybe that’s where the cut-off lies.

But really, I have no idea where that benchmark should be. I just know true community banks are in need of some kind of change, and while banks around $250 billion in assets may act “traditional,” like Tarullo said, the very large ones are too important to the wide range of customers and large regions they serve to disappear.

Feel free to hit up any ideas you might have in the comments on what any benchmark should be, or answer the survey:

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