OCC’s Noreika: Arbitrary Thresholds Serve as Competitive Barriers

Arbitrary asset thresholds “often have the perverse effect of acting as competitive barriers,” and prevent banks from scaling organically, said Acting Comptroller of the Currency Keith Noreika in remarks to an audience of midsize bank chief risk officers today.

One example of the adverse effects of arbitrary asset thresholds is in the Dodd-Frank Act’s stress testing requirements for banks with more than $10 billion in assets, Noreika said. “In certain circumstances, the burden of annual stress testing, particularly in accordance with prescriptive statutory requirements, is not commensurate with the systemic risks presented by an institution,” he said.

He added that the compliance costs banks face when crossing arbitrary asset thresholds often incentivizes them either to remain just below the threshold, or scale rapidly to offset the costs, which “could present operational and other risk issues.”

Noreika noted that the recent Treasury Department report on financial regulation supported an increase in the stress testing threshold from $10 billion to $50 billion and recommended granting regulators authority to make further calibrations to the threshold based on banks’ risk profiles and complexity. He added that another possible solution would be “to give federal banking agencies broad authority to tailor by rule the statutory stress testing requirement, without regard to asset threshold. This approach would avoid the potential for over- and under-inclusiveness associated with fixed-asset thresholds.”