Bipartisan legislation authored by senators Claire McCaskill (D-Mo.) and David Perdue (R-Ga.), the System Risk Designation Improvement Act of 2017, targets what they say are “commonsense fixes” for financial rules put in place by the Dodd-Frank Act, “rules that were never intended for banks that primarily engage in ordinary consumer banking practices.”
The bill gives the Federal Reserve the flexibility to exempt banks not designated as Globally Systemically Important Banks (G-SIBs) from reporting requirements and merger and acquisition limitations imposed by the Dodd-Frank law on institutions with more than $50 billion in assets. Currently, any financial institution with $50 billion in assets face stronger capital requirements and other regulatory burdens. The senators’ legislation would test larger financial institutions in a five-factor test: size, interconnectedness, substitutability, global cross-jurisdictional activity, complexity.
“When even some of the architects of Dodd-Frank agree the law is unnecessarily burdensome on regional banks, you know we’ve got a problem on our hands,” McCaskill said in a statement.
The post-Financial Crisis law overregulated these regional banks “by placing them into the same category as huge banks with a global reach,” Perdue said. This sent these banks’ compliance costs through the roof and limited their ability to do what they do best—support their communities. This legislation would actually test banks for systemic risk rather than forcing banks to comply with an arbitrary figure.”
Among those praising the legislation of the Financial Services Roundtable.
“This common sense and bipartisan bill will better tailor regulations to drive economic growth while still protecting consumers," said FSR's Head of Government Affairs Anthony Cimino. “The risk a financial institution poses should be determined by activities, not arbitrary thresholds. It is important to review the impact of Dodd-Frank and other financial regulations on banks of all sizes to ensure they are appropriately calibrated and are not unnecessarily holding back lending and impeding economic growth.”
Increased momentum for the bill comes amid a high-profile firm shedding its designation as a “systemically important financial institution.”
The Financial Stability Oversight Council, on Sept. 29, announced that it has rescinded its determination of American International Group as systemically important and it will no longer be held to heightened regulatory standards.
"The Council has worked diligently to thoroughly reevaluate whether AIG poses a risk to financial stability," said Treasury Secretary Steven Mnuchin. "This action demonstrates our commitment to act decisively to remove any designation if a company does not pose a threat to financial stability."
Section 113(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires FSOC, a multi-regulator body, to reevaluate its nonbank financial company determinations at least annually.
The Council approved the rescission of AIG's designation by a vote of six in favor and three opposed.
Those in favor were Steven Mnuchin, Secretary of the Treasury; Janet Yellen, chair of the Board of Governors of the Federal Reserve System; Keith Noreika, Acting Comptroller of the Currency; J. Christopher Giancarlo, chairman of the Commodity Futures Trading Commission; J. Mark McWatters, chairman of the National Credit Union Administration; and Roy Woodall, independent member with insurance expertise.
Those opposed were Richard Cordray, director of the Consumer Financial Protection Bureau; Martin J. Gruenberg, chairman of the Federal Deposit Insurance Corporation; and Melvin Watt, director of the Federal Housing Finance Agency.
Securities and Exchange Commission Chairman Jay Clayton was recused from this matter and did not participate in the vote. The Council has determined that a member who is recused from participating in a matter is not included in the vote tally.
“I welcome the decision by the Financial Stability Oversight Council to rescind AIG’s SIFI designation,” Brian Duperreault, AIG president and CEO, said in a statement. “The Council’s decision reflects the substantial and successful de-risking that AIG’s employees have achieved since 2008. The company is committed to continued vigilant risk management and to working closely with our numerous regulators to enable a strong AIG to continue to serve our clients.”
In June 2013, FSOC notified three non-bank financial companies (AIG, Prudential Financial, and GE Capital that they may be designated as "systemically important" and singled out for increased regulatory scrutiny because their size and scope make insolvency a threat to the broader financial marketplace.
They joined a list of similarly designated banks that includes Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup, Bank of America, Merrill Lynch, and Wells Fargo.
Among the criteria the FSOC relies upon in evaluating whether an entity poses systemic risk: having at least $50 billion of total assets, $30 billion in outstanding credit default swaps, $3.5 billion in derivative liabilities, or $20 billion of debt. Firms with a leverage ratio of more than 15-to-1 in assets to equity, or a short-term debt to asset ratio of 10 percent, also warrant consideration by the agency.
In conducting its three-stage SIFI analysis, the FSOC may also assess additional factors that relate to a company's size, interconnectedness, liquidity risk, and existing regulatory scrutiny.
SIFIs are required to conduct regular stress tests, prepare credit exposure reports, and draft “living wills” that document resolution and liquidation plans. They may also face enhanced prudential standards, including requirements regarding risk-based capital and leverage, liquidity, risk management, early remediation, and credit concentration.
FSOC’s decision to de-designate AIG as a SIFI reflects broad consensus that FSOC's designation authority should focus on updated methods for more effectively and efficiently mitigating risks to taxpayers and the economy, says the Financial Services Roundtable.
“The decision reflects FSOC's consideration of updated business and risk model information as well as the important responsibility to protect consumers, taxpayers and the economy," CEO Tim Pawlenty said in a statement. "The FSOC should also use a similar approach to thoughtfully consider rescinding the SIFI designations of other non-banks.”
In determining regulatory standards and approaches, FSR, like numerous other business groups, supports using an activities-based approach that considers a variety of risk measures rather than solely asset size as the only measure of risk.