The Economic Growth, Regulatory Relief, and Consumer Protection Act (“S. 2155”), which was passed by Congress on a bipartisan basis and signed into law in 2018, directed federal financial regulators to “tailor” prudential Dodd-Frank regulations for banks based on their size and complexity. As a result, regulators established a framework that created four categories of large banks with different qualifying criteria and corresponding regulatory requirements. However, with the latest Basel proposal, much of tailoring has been reversed and, as a result, banks of all sizes would be subject to many of the same rules that were originally intended for the largest and most complex banks.
Reversing tailoring regulations for these banks will massively increase their regulatory burden, making it more difficult for them to compete with the largest banks—who benefit from increased size and scale—and nonbanks—who benefit from a comparatively much lighter regulatory burden. Ultimately, these changes would likely demand further consolidation in the banking industry as competitors seek the benefits of size and scale to manage regulatory costs, leading to an erosion of the healthy diversity in banking that American consumers currently enjoy, and a migration of banking activity to less regulated, less reliable and sometimes more expensive nonbanks.
It is important that the government try to preserve (and not harm) the current bank ecosystem, where regional and midsize banks play a vital role in lending in local communities. These banks account for more than half of small business loans originated in many of the 50 largest metropolitan areas, and 60 percent of the U.S. population resides in areas where the combined share of small business loans originated by these banks exceeds 50 percent.
Red text below signifies pending proposed regulatory changes.
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 Currently, the market risk capital rule applies to any institution with aggregate trading assets and trading liabilities equal to (i) 10% or more of total assets, or (ii) $1 billion or more, but all Category I and II institutions are subject to the rule, regardless of tailoring category. The proposal would make all institutions in Categories I-IV subject to the rule, regardless of the level of trading assets.
About Bank Policy Institute.
The Bank Policy Institute (BPI) is a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ almost 2 million Americans, make nearly half of the nation’s small business loans, and are an engine for financial innovation and economic growth.