H.R. 1309, Systemic Risk Designation Improvement Act of 2015

H.R. 1309

Systemic Risk Designation Improvement Act of 2015

Date
September 22, 2016 (114th Congress, 2nd Session)

Staff Contact
Communications

Floor Situation

On­­­­ Thursday, September 22, 2016, the House will possibly consider H.R. 1309, the Systemic Risk Designation Improvement Act of 2015, under a rule. H.R. 1309 was introduced on March 4, 2015, by Rep. Blaine Luetkemeyer (R-MO) and was referred to the Committee on Financial Services, which ordered the bill reported on November 4, 2015 by a vote of 39-16.

Bill Summary

H.R. 1309 authorizes the Financial Stability Oversight Council (FSOC) to subject a bank holding company to enhanced supervision and prudential standards by the Federal Reserve if it is determined that there is material financial distress at the bank or the bank threatens the financial stability of the United States.

Specifically, the legislation replaces the $50 billion asset threshold used in Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act to automatically designate banking companies as systemically important financial institutions (SIFIs) with the indicator-based measurement approach established by the Basel Committee on Banking Supervision when it identifies Global Systemically Important Banks (G-SIBs). The FSOC would make a determination that either material financial distress at the bank holding company, or the nature, scope, size, scale, concentration, interconnectedness or mix of its activities could threaten the financial stability of the United States.

Further, the bill deems any bank holding company designated as a G-SIB by the Financial Stability Board as already having been the subject of a final determination that it could pose a threat to U.S. financial stability. The FSOC is prohibited from making a final determination concerning a bank holding company under this Act until one year after its enactment.

Finally, the text considered by the Rules Committee will include a pay for, which will establish an exit fee for banks that are de-designated as SIFIs.

Background

The Dodd–Frank Wall Street Reform and Consumer Protection Act (P.L. 111- 203) contains two central elements designed to address systemic risk. First, it establishes the Financial Stability Oversight Council (FSOC), which is charged with monitoring systemic risk in the US financial sector and coordinating regulatory responses by its member agencies.  Second, it automatically designates banking companies with over $50 billion in assets as “systemically important financial institutions” and subjected to enhanced regulatory standards.

Title I, Subtitle A, of the Dodd–Frank Act created the FSOC and authorizes the new body “to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies (BHCs) or nonbank financial companies, or that could arise outside the financial services marketplace; [and] to respond to emerging threats to the stability of the United States financial system.”[1]  This authority allows the FSOC to designate non-bank institutions as systemically important financial institutions (SIFIs) and subject to increased supervision and regulation by the Federal Reserve Board.

In making its decision on whether to designate, the FSOC may consider several factors, including the firm’s leverage, its off-balance sheet exposures, its relationship with other financial institutions, the firm’s size and “interconnectedness,” the firm’s reliance on short-term funding, and “any other factors the [FSOC] deems appropriate.” According to the Committee, these determinative factors fundamentally lacked specificity.  While many factors are mentioned as being part of the evaluation process, no determinant is weighted more heavily, so as to signal or require designation, making the process appear highly subjective. In addition to the undifferentiated criteria upon which FSOC structures its evaluations, FSOC is further authorized to consider “any other risk-related factors the Council deems appropriate,” which broadens that authority. Therefore, the current process makes it difficult for companies to assess whether they risk SIFI designation and allows for broad changes in the direction of regulation when administrations change.

Section 165 of the Dodd-Frank Act requires the Federal Reserve Board to apply enhanced prudential standards to bank holding companies (BHCs) with total consolidated assets of $50 billion or more. These standards are designed to “mitigate risks to the financial stability of the United States from the material financial distress or failure, or ongoing activates, of large, interconnected financial institutions.” The enhanced prudential standards established by the Federal Reserve Board under Section 165 (including rules related to capital, leverage, liquidity, concentration limits, short-term debt limits, enhanced disclosures, risk management, and resolution plans) must be more stringent than those standards applicable to other bank holding companies.[2] The standards also increase in stringency based on several factors, including the size and risk characteristics of a company subject to the rule, and the Federal Reserve Board must take into account the difference among bank holding companies and nonbank financial companies based on the same factors.[3]  In practice, the application of enhanced prudential standards to BHCs with assets of $50 billion or more has created a de facto designation of these institutions as “systemically important financial institutions” (SIFIs).  Currently, there are 38 bank holding companies with assets greater than $50 billion that are subject to enhanced supervision.[4]

However, since the passage of the Dodd-Frank Act, discussion has focused on the appropriate measurement of systemic importance and the regulatory burden imposed by enhanced prudential standards once an institution has been designated. Specifically, there are major concerns regarding the arbitrary manner in which the Dodd-Frank Act designates bank holding companies as systemically important.

According to the bill sponsor, “Dodd-Frank was billed as the solution to curtailing risk in the financial system, yet the regulatory maze that resulted doesn’t bother to evaluate risk. I am pleased that my colleagues on the House Financial Services Committee understand the importance of my legislation, which would more closely tailor the regulation of financial institutions on actual risk rather than asset size alone. As a former bank examiner, I understand the importance of standards that account for risk and the varying structures of small, mid-size, regional and large financial institutions. Today’s bipartisan vote on H.R. 1309 and the amendment offered by Rep. Carolyn Maloney (D-NY), shows that there is near unanimous recognition from Financial Services Committee members that the process for designating bank holding companies as systemically important financial institutions, and Dodd-Frank itself, need to be changed.”[5]

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[1] See 12 U.S.C. 5322
[2] See 12 U.S.C. 5365(a)(1)(A).
[3] See 12 U.S.C. 5365(a)(1)(B). Under section 165(a)(1)(B) of the Dodd-Frank Act, the enhanced prudential standards must increase in stringency based on the considerations listed in section 165(b)(3).
[4] https://www.ffiec.gov/nicpubweb/nicweb/HCSGreaterThan10B.aspx
[5] See Rep. Luetkemeyer’s Press Release, November 4, 2015

Cost

The Congressional Budget Office (CBO) estimates that enacting H.R. 1309 would increase net direct spending by $98 million and increase revenues by $13 million over the 10 years, leading to a net increase in the deficit of $85 million over the 2017-2026. However, the CBO score was done without consideration of the new pay-for which would place an exit fee on banks de-designated as a SIFI.

Additional Information

For questions or further information please contact Jake Vreeburg with the House Republican Policy Committee by email or at 5-0190.