An influential member of the Federal Reserve’s board of governors on Thursday raised the possibility of letting about 80 banks off the hook from the toughest provisions of a law requiring greater scrutiny of financial institutions.
During a speech in Chicago, Daniel Tarullo suggested that many banks now subject to stress testing from regulators should be freed from tougher provisions of the 2010 revamp of financial regulation shorthanded as the Dodd-Frank Act.
Specifically, Tarullo, the Fed’s point man on financial regulation, spoke to the rule that requires stress testing, higher amounts of capital kept in reserve and a so-called living will that mandates banks with assets above $50 billion to draft a plan for their dissolution should they fall on hard times.
“Experience to date suggests to me, at least, that the line might better be drawn at a higher asset level--$100 billion, perhaps. Requirements such as resolution planning and the quite elaborate requirements of our supervisory stress testing process do not seem to me to be necessary for banks between $50 billion and $100 billion in assets,” Tarullo said. “If the line were redrawn at a higher figure, we might explore simpler methods for promoting …. (regulatory) aims with respect to banks above $10 billion in assets but below the new threshold.”
Translation: Let’s lower the regulatory requirements for banks with assets above $10 billion but under $100 billion. Tarullo signaled clearly Thursday that he’s open to legislation that amends some of the requirements mandated by the most sweeping rewrite of financial regulation since the Great Depression.
The banking industry has complained vociferously that compliance with Dodd-Frank regulatory requirements is costly and its one-size-fits-all approach keeps them from focusing on their core mission, lending.
Eight giant banks have been considered large enough to harm the financial system should they fail, and they are subject to a range of tougher measures. These banks enjoyed lower costs of funding because the financial markets presumed they were too big to fail and the government would step in should they ever be at risk of failure. Tougher new capital requirements and other rules in the Dodd-Frank Act have changed that funding advantage, Tarullo said.
But he also argued Thursday that the 80 or so banks with assets between $10 billion and $50 billion should not be subjected to the toughest measures of the act. Many of those with assets well above $50 billion are regional banks that engage in traditional lending to consumers and businesses, Tarullo said, and do not engage in the riskier activities of Wall Street banks. He also said the Fed was open to doing away altogether with some of the tougher restrictions when applied to community banks.