Hearing of the Senate Banking, Housing, and Urban Affairs Committee - Measuring the Systemic Importance of U.S. Bank Holding Companies

Hearing

"Today we will hear from experts on the best criteria and methods to determine the systemic importance of U.S. banks.

"For non-banks, Dodd-Frank set up a process governed by a council of federal regulators to determine if an institution is systemically important.

"As imperfect as this process is, there is no such process for banks.

"Instead, Dodd-Frank deems a bank systemically risky if it has $50 billion or more in total assets.
"Moreover, once a bank reaches this arbitrary threshold, it is automatically designated as systemically important.

"Under this automatic framework where there is no clear exit from designation, a bank has little incentive to reduce its level of systemic risk.

"Many experts have expressed concerns about the arbitrary $50 billion threshold as an automatic cut-off for systemic risk. Many of us share their concerns.

"In March, financial regulators testified that there are currently banks above $50 billion that are regulated as if they are systemically risky, even though they are not considered to be so.

"This regulatory framework should not capture institutions whose failure would not lead to systemic contagion. Doing so has a true cost to the financial system.

"First, it imposes a layer of regulation on financial institutions that lend primarily to small businesses and local or regional communities.

"Second, it unnecessarily spreads too thin the important resources of our financial regulators. This does not make the financial system safer.

"As I have said before, systemic risk is difficult to measure. But, five years after Dodd-Frank -- the law that mandates systemic risk regulation -- we have better tools to assess it and we should use them.

"Last week at a hearing before this Committee, Chair Yellen testified that she would support giving flexibility to the Federal Reserve to determine which banks should be subject to enhanced standards based on a set of multiple criteria.

"In fact, the Federal Reserve uses a similar approach to determine the systemic importance of banks in its regulation of bank capital.

"Earlier this week, the Fed finalized a capital surcharge rule for the nation's largest and most systemically risky banks.

"This rule incorporates a framework based on many factors, including not only size, but also interconnectedness, cross-jurisdictional activity, substitutability, and complexity.

"According to the Fed, these five broad categories "are viewed as good proxies for, and are correlated with, systemic importance.'

"I look forward to hearing the views of our panel of witnesses today on measures that can be used by regulators to determine if a bank poses a systemic risk.

"Improving such measures will allow our regulators to focus their resources on the most systemically important banks in order to protect American taxpayers and the U.S. economy from the next financial crisis."

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