FACT SHEET: Regulatory Implementation of S. 2155[1]

S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, requires regulators to undertake certain, specific actions while providing them with ample discretion to implement other aspects of the law.  However, in all aspects, regulators are required to use their best judgment and expertise to ensure the safety, soundness and stability of the financial system.  After all, of the almost 6,000 banks in the U.S., S. 2155 applies to 26 of the 40 largest banks.

As regulators make decisions about how to best implement the law, they must keep foremost in mind that these decisions will impact financial stability, the likelihood of future bailouts and hardworking Americans who are still paying the bill for the last crash that they did not cause.  Consequently, those implementing the law need to consider the following:

1. As was the case with the $50 billion threshold,[2] the law’s new asset threshold of $100 billion is a trigger for consideration of enhance prudential regulation based on an individualized, multifactor risk analysis that includes sizes, activities, complexity, interconnectedness, leverage and other risk factors.  It is not and was not intended to automatically dictate that all banks with less than $250 billion are not and cannot be systemic risks, leaving only the top dozen banks in the United States as systemically risky.  Many banks with $100-$250 billion in assets availed themselves of the Fed’s various emergency rescue programs from 2007 through 2012, proving that systemic and contagion risk was significantly broader than those few banks with more than $250 billion in assets.[3]
2. Comprehensive Capital Analysis and Review (CCAR) stress tests are one of the Fed’s most significant and successful post-crash actions. Any effort to discontinue or dilute these critical tests would be as unwarranted as it would be unwise, particularly given the mountain of proof in favor of stress tests, much of it from the Fed itself.[4] Any effort to argue otherwise is unsupported by data or analysis, and the assertion that some financial institutions are non-systemic simply because of they are have less than $250 billion in assets should be given no weight by financial regulators.
3. The notion that financial institutions with between $100 billion and $250 billion in assets are by definition incapable of posing a risk to the financial system is unsupported by evidence, and in fact is directly contradicted by the historical record. As Stanford’s Anat Admati and other experts note, firms of this size “are not community banks.  The failure of one or more of them will cause significant disruption and collateral harm, particularly in the context of overall market turmoil.”[5]  That alone requires the Fed to undertake an individualized risk assessment rather than blindly exempting all such banks due to an uninformative asset size number.
4. Banks – including those with hundreds of billions of dollars in assets – face risks that are interlinked and complex.  By their very nature, these risks are difficult to predict. For that reason, reliance solely on stress tests can provide regulators with false assurances about the stability of the financial system as a whole, as well as the individual firms operating within it. For this reason, the Dodd-Frank Act relies on a set of interconnected financial stability rules to help reduce risky behavior by banks, make banks more resilient to financial shocks, help regulators detect threats on the distant horizon, and give regulators tools to unwind failing firms quickly.  But the interlocking system of financial stability rules will lose their effectiveness if they are improperly or incompletely applied, in whole or in part, as could happen if S. 2155 is implemented as a blunt instrument rather than a tailored application of appropriate measures.
5. A particularly dangerous suggestion is that the implementation of S. 2155 should automatically include the deregulation of most foreign banks operating in the US, many of which received very significant bailouts during the financial crisis. In fact, nine of the top twenty largest users of the Fed’s emergency lending facilities during the crisis were foreign banks.[6] Foreign banks operating in the U.S. are tied to their foreign parent company, which may have a risk profile and contractual commitments to counterparties that are opaque to U.S. regulators. This makes these banks uniquely dangerous to our financial system, and therefore, the Fed must do an individualized assessment of the unique risks each such bank poses to the U.S. before making any determination to apply any of the provisions of S. 2155 to any of these banks. 

As regulators consider the implementation of S. 2155, they must continue the prudently required policy of subjecting these banks to individualized risk assessments and robust stress testing.  Having suffered so much already, the American people deserve no less.