Thursday, August 22, 2013

House legislation would refocus Dodd-Frank SIFI definition towards risk

A key member of the House Financial Services Committee has proposed legislation that would refocus the definition of a systemically important financial institution in Title I of the Dodd-Frank Act to base the designation of a SIFI more on interconnected risk than some arbitrary asset size. Rep. Blaine Luetkemeyer (R-MO) introduced the Systemic Risk Designation Improvement Act (H.R. 3036) so that the heightened regulation of some financial institutions will be based on risk rather than on arbitrary asset size. He noted the importance of creating regulatory standards that appropriately account for risk and the varying structures of small, mid-size and large financial institutions, adding that federal financial regulation should not treat interconnected, global financial institutions with complex lines of business the same as financial institutions focused on traditional, retail and commercial banking.

The Systemic Risk Designation Improvement Act would enhance the criteria used to make SIFI designations to ensure that those with the SIFI designation, and therefore subject to stricter regulatory standards, are those institutions that are not only large in size, but also globally interconnected and complex. In turn, the legislation free traditional retail and commercial banks so that they are able to focus on making loans to customers, enhancing economic recovery. The Dodd- Frank Act used a numeric threshold of $50 billion to subject all financial institutions, regardless of business lines or complexity, to enhanced regulatory assessment through the SIFI designation. According to Rep. Leutkemeyer, Dodd-Frank does not consider the fact that community banks, mid-size banks and large banks often have completely different business models, resulting in regulatory scrutiny of companies based on size rather than activity. Ultimately, he believes that the legislation would support economic growth by allowing community and regional banks to lend without being burdened by the required regulation of reaching the $50 billion threshold.