The move is an encouraging example of common-sense deregulation and will be critical to the revival of a struggling regional and community bank sector. Currently, banks with $50 billion in assets are designated as systemically important financial institutions (SIFIs) and are subject to a swath of enhanced prudential and supervisory standards. This places medium-sized regional banks, which range somewhere between $50 billion and $250 billion in assets, under the same standards as much larger, multi-trillion dollar banks.
The current approach, instituted under Dodd-Frank, gives no consideration for a bank’s risk profile or business model. This is particularly inappropriate as regional banks overwhelmingly engage in traditional banking activities––such as taking deposits––with little exposure to derivatives or trading. They are far from the complex, “too-big-to-fail” giants of Wall Street. As a result, most of the banks designated under the SIFI limit pose no systemic threat at all.
Instead of an arbitrary asset threshold, the bill directs the Federal Reserve to look at interconnectedness, cross-border activities, and complexity when assessing their regulatory requirements. While piling on a mountain of new regulation is a bad idea, at the very least it makes sense to tailor it to the appropriate institutions. This will bring substantial relief to an industry that has seen nearly one in five banks disappear since Dodd-Frank was enacted.
Even while the rest of Washington struggles through partisan fights on health care and tax reform, it is encouraging to see some common-sense, bipartisan legislation on financial regulation. Removing these burdensome restrictions on regional and community banks will ensure financial stability while helping local communities prosper. Both the House and the Senate must pass the Systemic Risk Designation Improvement Act.