ABA: Regulations Should Be Tailored Based on Risk, Business Model

Regulations based on asset size are “inappropriate and needlessly burdensome” for many banks with non-complex business models, and ultimately lead to higher costs and fewer choices for consumers, ABA said in written testimony submitted for a Senate Banking Committee hearing on regulatory relief for midsize and regional banks today.

While size-only regulations may provide regulators a simple framework for supervising financial institutions, ABA noted that “thresholds of any type are arbitrary and a poor substitute for effective regulatory policy. Rather than adding more thresholds, what is needed are better overall principles for bank regulation. The best solution is to tailor regulations according to the risks and business model of the bank.”

Voicing support for the recent Treasury Department report which called for proper tailoring of financial regulations, the association encouraged Congress and regulators to apply that approach to both existing rules and new regulatory initiatives going forward. Several bills in the current Congress would help to lessen banks’ regulatory burden and unleash economic growth, ABA noted. These include the Tailor Act; a bill to expand banks’ abilities to count municipal securities as high quality liquid assets under the Liquidity Coverage Ratio; a bill to require a risk-based analysis in order to make SIFI designations; and a bill to provide relief from Dodd-Frank Act stress tests.

Bankers testifying at the hearing described the implications of arbitrary asset thresholds. Robert Hill Jr., CEO of $11 billion South State Corporation in Columbia, S.C., said that in crossing the $10 billion asset threshold, his bank was subjected to heightened compliance requirements which now cost the bank more than $20 million per year.

Banker Harris Simmons, chairman and CEO of $65 billion Zion’s Bancorporation, also questioned the validity of the $50 billion threshold at which banks are designated systemically important financial institutions. He noted that as the smallest SIFI bank, Zions is subject to the same prudential standards as the nation’s largest banks — including onerous stress testing requirements — despite the fact that its size and lending portfolio are significantly smaller.