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94–375 PDF 2016

S. HRG. 114–11

EXAMINING THE REGULATORY REGIME FOR

REGIONAL BANKS

HEARING

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

ON

EXAMINING THE IMPACT OF THE EXISTING REGULATORY FRAMEWORK 

ON REGIONAL BANKS

MARCH 24, 2015

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.fdsys.gov/


BANKI-41578DSA with DISTILLER
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana

WILLIAM D. DUHNKE III, Staff Director and Counsel 

MARK POWDEN, Democratic Staff Director

JELENA MCWILLIAMS, Chief Counsel 

BETH ZORC, Senior Counsel 

JACK DUNN III, Professional Staff Member

LAURA SWANSON, Democratic Deputy Staff Director 

GRAHAM STEELE, Democratic Chief Counsel

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor

(II)


BANKI-41578DSA with DISTILLER
CONTENTS

TUESDAY, MARCH 24, 2015

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2

WITNESSES 

Oliver I. Ireland, Partner, Morrison & Foerster ................................................... 4

Prepared statement .......................................................................................... 31

Response to written question of: 

Chairman Shelby ....................................................................................... 211

Deron Smithy, Treasurer, Regions Bank, on behalf of the Regional Bank 

Group .................................................................................................................... 5

Prepared statement .......................................................................................... 35

Mark Olson, Co-Chair, Bipartisan Policy Center Financial Regulatory Reform 

Initiative’s Regulatory Architecture Task Force ............................................... 7

Prepared statement .......................................................................................... 62

Responses to written questions of: 

Senator Reed .............................................................................................. 213

Senator Vitter ............................................................................................ 215

Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, Mit Sloan 

School of Management ......................................................................................... 8

Prepared statement .......................................................................................... 66

Response to written question of: 

Senator Reed .............................................................................................. 216

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter submitted by Bryan Jordan, Chairman, Mid-Size Bank Coalition of 

America ................................................................................................................. 71

Letter submitted by William Moore, Executive Director, Regional Bank Coalition ........................................................................................................................ 74

Wall Street Journal article, ‘‘Fed’s Lockhart Endorses Raising $50 Billion 

Level for Tougher Bank Rules,’’ submitted by Chairman Shelby .................... 76

Wall Street Journal article, ‘‘Deep in the Rust Belt, Regional Banks Fill 

Industrial Niche,’’ submitted by Chairman Shelby ........................................... 78

Banking Perspective article, ‘‘Section 165 Revisited—Rethinking Enhanced 

Prudential Regulations,’’ submitted by Chairman Shelby ................................ 88

M&T Bank Corporation’s 2014 Annual Shareholder letter submitted by Chairman Shelby ........................................................................................................... 97

Columbus Business First article, ‘‘Cleveland Fed Chief Mester open to adjusting tiered banking regulation,’’ submitted by Chairman Shelby ..................... 114

Prepared statement of Greg Becker, Chief Executive Officer, SVB Financial 

Group, Inc., on behalf of Silicon Valley Bank .................................................... 115

Letter submitted by Heid Mandanis Schooner, Professor of Law, The Catholic 

University of America, Columbus School of Law .............................................. 122

Letter submitted by Tayfun Tuzun, Executive Vice President and Chief Financial Officer, Fifth Third Bank ....................................................................... 125

Letter submitted by Sarah A. Miller, Chief Executive Officer, Institute of 

International Bankers ......................................................................................... 130

(III)


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Page

IV

Bipartisan Policy Center’s report, ‘‘Dodd-Frank’s Missed Opportunity: A Road 

Map for a More Effective Regulatory Architecture’’ .......................................... 133


BANKI-41578DSA with DISTILLER
(1)

EXAMINING THE REGULATORY REGIME FOR 

REGIONAL BANKS 

TUESDAY, MARCH 24, 2015

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10 a.m., in room SD–538, Dirksen Senate 

Office Building, Hon. Richard Shelby, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY 

Chairman SHELBY. The Committee will come to order. 

Last week, the Committee continued its examination of the existing regulatory framework for regional banks by hearing from the 

regulators. Today we will hear from a broad panel of experts, including those who have witnessed firsthand the impact of the current regulatory structure and those who have analyzed this issue 

in depth. 

Current law subjects all banks with assets of $50 billion or more 

to enhanced prudential standards, regardless of whether the bank 

has $51 billion, $251 billion, or trillions in assets. 

Five years after this threshold was fixed in statute, no legislator 

or regulator has properly explained where it came from, why it was 

deemed appropriate at the time, or what analysis supported it. I 

believe that 5 years is long enough to know if an arbitrary threshold is appropriate and whether or not it should be changed. 

Last week, we heard from regulators that there are alternative 

ways to measure systemic risk instead of relying solely upon an arbitrary asset threshold. 

We also heard that the existing statutory requirements limit the 

regulators’ flexibility to tailor prudential standards based on the 

actual systemic risk of an institution. The current framework 

should address systemic risk as current law intends. I believe there 

is a way to do this without preventing regional financial institutions from growing, remaining competitive, and expanding into new 

communities. 

Ironically, the arbitrary $50 billion threshold may create a competitive advantage for Wall Street institutions by imposing costly 

compliance barriers for region-based banks that are a fraction of 

their size. Instead of giving our regulators the flexibility to properly 

direct resources by focusing on the institutions that present the 

most risk, the law creates a clear line of demarcation based purely 

on the institution’s size. Therefore, the regulators are unable to 


BANKI-41578DSA with DISTILLER
2

scale regulation in a manner that reflects a bank’s risk profile and 

activities. 

I am concerned that a regulatory system that is too rigid imposes 

unwarranted costs without enhancing safety and soundness. These 

costs are then passed along to consumers and businesses by restricting credit and other financial services. Restricted lending 

means slower growth and fewer opportunities. 

The ideal regulatory regime should allow for the maximum level 

of economic growth while also ensuring the safety and soundness 

of our financial system. It is becoming more apparent that current 

law has not struck the appropriate balance and that changes are 

in order. Today’s witnesses will discuss some of those changes and 

give us the benefit of their expertise as we consider possible refinements to current law. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. Thanks to all four 

witnesses for joining us. 

This hearing is important to examine the regulation of regional 

banks. It is the second of two hearings on this topic, and a third—

an earlier one actually we had done in the Subcommittee I chaired 

last year. This is the second of these two under Chairman Shelby, 

and I appreciate the work that he is doing. I thought our discussion 

last Thursday was useful. I hope we can learn as much today. 

It is important we advance this conversation to ensure that prudential regulations for regional banks are crafted appropriately. It 

is an important topic to me personally and my State because three 

of our large regional banks—Fifth Third, the largest, followed by 

Key, followed by Huntington in my State, and as I pointed out last 

week, we had a fourth, larger than any of the three, that was unable to survive the 2008 financial crisis, partly for management 

reasons, largely the economy but other things. Congress directed 

agencies through Dodd-Frank to institute standards like capital 

and liquidity and risk management and stress testing to lower the 

likelihood and the costs of large bank holding company failures. It 

called for heightened rules for large bank holding companies, but 

it directed regulators not—and I emphasize ‘‘not’’—to take a onesize-fits-all approach so that a $50 billion bank or a $100 billion 

bank would not be treated the same way, logically, as a $2 trillion 

bank. 

We all agree that regional banks are not systemic in the same 

way that money center banks are, so we need to understand that 

the SIFI designation at 50 does not mean—we sometimes conflate 

this. It does not mean that Congress and the regulators think that 

they are systemic in the same way that money center banks are. 

The failure of one regional bank, assuming it is following a traditional model, will not, in fact, threaten the entire system. But the 

rules were not meant to cover only systemically important or toobig-to-fail banks. 

We heard from Governor Tarullo that systemic importance is 

about the failure of the institution creating a crisis, but it is also 

about the importance of an institution to homeowners and small 

businesses and the economic footprint where that bank operates. 


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3

Go back again to National City Bank in Cleveland and the damage that came to that community and to thousands of employees 

because of what happened with that bank. Chairman Gruenberg 

told us that IndyMac’s failures, of course, had huge consequences 

for its community, its region, and the mortgage market as a whole. 

Again, a smaller bank, but not systemically important in that 

sense, but important in its community and beyond. 

I look forward to hearing more from today’s witnesses about 

these rules and their implementation for banks your size, especially the size of Regions, for example. I continue to believe we will 

not be successful this Congress in providing regulatory relief to institutions of any size if we do not have broad bipartisan consensus—and I underscore ‘‘broad bipartisan consensus’’—to do the 

kind of regulatory relief that most of us or almost all of us on this 

Committee want to do. But it needs to be bipartisan, and it needs 

to be consensus; otherwise, we will fail, I think, our financial system and we fail taxpayers. Our prospects are even less likely if we 

try to undermine or roll back central elements of Wall Street reform. 

Let me give you an example. Legislation that Senator Collins 

and Senator Johanns and I sponsored to tailor insurance capital 

standards provides a useful model on how we should address these 

issues. We started with the agencies—in that case it was the Federal Reserve—to see if they could address the issue without regulation. This was when a large insurance company owns a smaller 

bank and how the capital standards would apply. That was the 

issue. 

When that process faltered, going to the Fed and asking to 

change—asking for change, when that process faltered, we introduced legislation. We held hearings on the legislation. We considered input from supporters and skeptics, and there were a number 

of skeptics, including people who had helped to write the Collins 

provision initially—the skeptics initially of those that helped to 

write the Collins provision. 

After that sort of arduous task but very important to the legislative process, the final product of a 2-year process reflected a pragmatic compromise between industry and consumer groups that 

would receive the support of 100 Members of the U.S. Senate. That 

is the way to do legislation. That is what I hope our Committee 

this year will learn from our Committee last year. We did not allow 

other provisions, even though there were attempts, to be added to 

our legislation. 

I am open to solving real problems affecting actual institutions 

without undermining the safety and the soundness of the financial 

system or of any individual financial entity or without undermining 

consumer protection. 

Last week, we talked with regulators about the enhanced prudential standards are being applied to regional banks above $50 

billion, which Regions and a number of other banks represent. 

Today I hope we can answer other questions, and here is where I 

think the importance of this hearing comes in. 

Are there specific standards that are inappropriate for regional 

banks and why? What standards, if any, are inappropriate for regional banks? And why are they inappropriate? 


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4

Do the concerns being raised stem from implementing regulations which require no legislation to fix or from the law itself? 

Which concerns can be addressed by using the flexibility that the 

law applies to the—that the law provides the Federal Reserve with 

prompting by the FSOC to limit thresholds for some of these standards? In other words, we know that Dodd-Frank gave flexibility to 

FSOC to make determinations working through the Fed or working 

through one of the others sitting on the FSOC on regulation issues, 

and they are empowered to do that. 

Regulation is necessary. It is our job to ensure that regulations 

are appropriate. It is also important we do not make it difficult to 

monitor potential sources of risk or to encourage unsafe practices. 

Lending is inherently risky. We know that. Enhanced prudential 

standards are important not just as a response to the last crisis, 

but to prevent the next one. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Thank you, Senator Brown. 

Without objection, I would like to enter into the record at this 

time statements from the following organizations: the Regional 

Bank Coalition; the Fifth Third Bank; the Silicon Valley Bank; the 

Mid-Size Bank Coalition; the M&T Bank Corporation CEO Robert 

Wilmers’ 2014 Annual Report to Shareholders, pages 8 through 14, 

which discuss a regulatory regime for regional banks; the April 

2014 report from the Bipartisan Policy Center entitled ‘‘DoddFrank’s Missed Opportunity: A Road Map for a More Effective Regulatory Architecture’’; and a 2014 Banking Perspective article from 

Venable LLP entitled ‘‘Section 165 Revisited: Rethinking Enhanced 

Prudential Regulations.’’ Without objection, it is so ordered. 

Chairman SHELBY. Our witnesses today include: Mr. Oliver Ireland. He is a Partner of Morrison & Foerster; Mr. Deron Smithy, 

Executive Vice President and Treasurer, Regions Bank; Mr. Mark 

Olson, former member of the Board of Governors of the Fed, no 

stranger to this Committee, co-chair of the Bipartisan Policy Center Financial Regulatory Reform Initiative’s Regulatory Architecture Task Force; and Mr. Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, MIT Sloan School of Management. 

We welcome all of you. All of your written statements will be 

made part of the record. We will start with you, Mr. Ireland. 

STATEMENT OF OLIVER I. IRELAND, PARTNER, MORRISON & 

FOERSTER 

Mr. IRELAND. Thank you, Chairman Shelby and Ranking Member Brown, Senators on the Committee. I am a Partner in the Financial Services practice at Morrison & Foerster, as Chairman 

Shelby mentioned. I spent 26 years before going into private practice with the Federal Reserve System, 15 of those as an Associate 

General Counsel at the Board in Washington, where one of my focuses was the issue of systemic risk and how to address systemic 

risk. 

I had personal experience with a number of severe market events 

ranging from the Chrysler bailout in 1980 through the thrift crisis 

and other events along the way, including the failure of Continental Illinois Bank while I was at the Federal Reserve Bank of 

Chicago. 


BANKI-41578DSA with DISTILLER
5

In the private sector, working since then, I was working with 

Bear Stearns and the Reserve Funds, both of whom were sort of 

central players in the financial crisis, and so I saw it up close from 

the other side. 

We are here to discuss the issue of an appropriate regulatory regime for regional banks. That issue is tied, I think, inexorably to 

the so-called doctrine of too big to fail that sometimes is viewed as 

flowing out of the Continental Bank failure and was evident in the 

bailouts of banks as well as other institutions in the recent financial crisis. 

Too big to fail is a bad policy. It creates moral hazard that distorts markets, and it is just plain unfair. 

Dodd-Frank, quite correctly I think, attacks too big to fail, but 

I think it does so with too broad a brush. The example that has 

been shown here or referenced here, the 165 rules that trigger off 

a $50 billion asset threshold for certain mandatory requirements 

pick up a large number of regional banks that do not pose the same 

kind of systemic risks that other banking institutions impose. In 

doing so, they impose costs on those banks with traditional models 

of taking deposits, making loans, and they affect regional economies and households that use those banks’ services by increasing 

the costs for those banks. 

A recent OFR report studying the systemic risk of banks over $50 billion showed wide disparities in risk by a factor of over 100. 

I think a better measure, which is basically the measure used by 

the OFR, of systemic risk is a measure that came out of the Basel 

Committee on Bank Supervision in 2013 that looks at size, which 

is, admittedly, an important issue, interconnectedness, substitutability, cross-jurisdictional activity, which may actually have a little bit less effect in domestic economies, and complexity as factors. 

A similar system could be structured for identifying important 

banks that threaten systemic disruptions in the U.S. economy and 

could be applied to U.S. banking institutions. It would require 

some tailoring to do so. 

Adopting such an approach, however, would require changes to 

Dodd-Frank. The lockstep required enhanced prudential standards 

or more stringent prudential standards under Dodd-Frank would 

require amendments to provide the regulators with additional flexibility. 

I would not suggest, however, that we codify any particular 

scheme. The Basel scheme is a good approach. I think it is better 

than the $50 billion. It represents current thinking. Thinking in 

this area is evolving as academics and supervisors alike study the 

issues, and I think we want to develop a system that is flexible 

going forward so that regulators can address risks in whatever size 

banks pose those risks, while at the same time not unnecessarily 

burdening banks that do not present the same level of risk. 

Thank you. 

Chairman SHELBY. Mr. Smithy. 

STATEMENT OF DERON SMITHY, TREASURER, REGIONS BANK, 

ON BEHALF OF THE REGIONAL BANK GROUP 

Mr. SMITHY. Thank you, Chairman Shelby, Ranking Member 

Brown, and Members of the Senate Banking Committee. My name 


BANKI-41578DSA with DISTILLER
6

is Deron Smithy, and I am the Treasurer of Regions Bank, a $120 

billion bank based in Birmingham, Alabama. I appreciate the opportunity today to speak to the Committee about enhanced standards and the systemic risk designation. Dodd-Frank established a $50 billion asset threshold for systemically important financial institutions, or SIFIs, a label that subjects banks to more stringent regulatory oversight and costs regardless of their business model or complexity. 

I am appearing today in my capacity at Regions Bank and as a 

representative of the Regional Bank Group, a coalition of community-based, traditional lending institutions that power Main Street 

economies. 

Regions Bank, which has branches in 16 States, has a simple operating model that focuses on relationship banking, matching highquality customer service with industry expertise. Regions serves a 

diversified customer base with over 450,000 commercial clients, including 400,000 small business owners and 4.5 million households. 

Collectively, the banks in our group operate in all 50 States and 

have credit relationships with more than 60 million American 

households and more than 6 million businesses. Yet, in aggregate, 

our assets are less than 2 percent of GDP, roughly equivalent of 

the single largest U.S. bank. 

Regional banks are funded primarily through core deposits, and 

we loan those deposits back into the communities that we serve, 

competing against banks of all sizes. 

Regional banks are not complex. We do not engage in significant 

trading or international activities, make markets in securities, or 

have meaningful interconnections with other financial firms. It is appropriate for the Committee to consider whether a $50 

billion threshold is the best way to define a SIFI. More stringent 

regulatory oversight should focus on those firms whose individual 

stress or failure trigger or deepen financial crisis or destabilize the 

economy. 

Dealing with the issues of systemic risk is crucial. We do not 

want another financial crisis. Yet an overly broad definition that 

captures traditional lenders has consequences as well. These rules 

have a direct impact on a bank’s strategic direction, including its 

appetite for specific products and its ability to support local economic activity through lending. 

The direct costs as well as management’s time and attention to 

meet these rules create a disproportionate burden on regional 

banks. Collectively, the incremental cost of regulatory compliance 

exceeds $2 billion annually. 

Regional banks seek a regulatory framework that helps the country promote economic growth in tandem with safe and sound banking practices. Thirty-three banks are currently SIFIs, placing the 

same baseline burden on regional banks and money center banks 

alike. While the regulators occasionally tailor rules for the SIFI 

class, it is important to note that with an automatic threshold or 

floor, the tailoring operates as a one-way ratchet only. This floor 

separates regional banks from many of its competitors. 

Now that more data is available regarding the scope of the DoddFrank regulation and the nature of systemic risk, the Committee 

can determine whether there is a benefit to having regional banks 


BANKI-41578DSA with DISTILLER
7

automatically subjected to this oversight regime. The recent Office 

of Financial Research study using systemic indicators gathered by 

the Federal Reserve highlights the gulf between money center and 

regional banks. The top six banks had an average systemic score 

of 319, more than 25 times higher than that average of the regional 

banks of 12. Altering the threshold in a common-sense manner will 

not obstruct regulators’ discretion to stop risky behavior or weaken 

their supervisory powers. Even absent systemic designation, protective regulatory guard rails that have evolved since the financial crisis would remain in place for regional banks, including the capital 

planning and stress testing activities started before Dodd-Frank. 

An activity-based approach would establish a fairer method for 

supervising banks, and it would strengthen regulators’ ability to 

better tailor rules and deploy their own resources where they are 

needed. Regulators have used factors including size, complexity, 

interconnectedness, global activity, and substitutability to determine how firms might impact financial stability. And like the OFR 

study, they reached the conclusion that regional banks are fundamentally different than complex banks. 

In the end, an improved regulatory system better aligned with 

bank complexity and risk would ensure safety and soundness while 

promoting U.S. economic growth and job creation. 

Thank you again for the opportunity to testify before the Committee today, and I look forward to your questions. 

Chairman SHELBY. Mr. Olson. 

STATEMENT OF MARK OLSON, CO-CHAIR, BIPARTISAN POLICY 

CENTER FINANCIAL REGULATORY REFORM INITIATIVE’S 

REGULATORY ARCHITECTURE TASK FORCE 

Mr. OLSON. Thank you very much, Mr. Chairman, Ranking Member Brown, Members of the Committee. Thank you for inviting me 

to be here, and as you indicated, Mr. Chairman, I am enjoying the 

chance to come back to familiar territory. 

I am here today representing the Bipartisan Policy Center with 

my colleague, Richard Neiman, former superintendent of banks for 

the State of New York, who co-chaired this with me. 

As you suggested to Senator Brown, this is a bipartisan effort, 

and I think bipartisanship in looking at this issue is particularly 

important. And thank you, Mr. Chairman, for including our entire 

report for the record. We are appreciative of that. 

My primary focus today will be on the $50 billion threshold for 

the so-called bank SIFIs. Some of the discussion that we have 

heard already this morning focuses on that, but there are a number 

of issues that we think are critical here. I would just highlight that 

there are two that we think are particularly important: number 

one, to provide a greater flexibility, and to use that as a presumption and not as a hard line. And I think the flexibility here is particularly important. 

There are a number of issues that we have with the current $50 

billion. Number one, and as you pointed out very clearly, Mr. 

Chairman, it is arbitrary. We remember the discussion of providing 

some separation between the very largest institutions so that we 

did not have a moral hazard issue, and that I think was significantly what allowed the Congress to decide to put it at $50 billion. 


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8

It clearly includes institutions that are not systemically important, 

and I will come back briefly to that point in a minute. 

Number two, it only considers size, and size alone, and one of the 

things that has happened in the 5 years, I think, since the passage 

of Dodd-Frank is that we have learned a lot about how we can 

measure and evaluate systemic risk exposure. 

Importantly, it is not indexed. Fifty billion 5 years ago will be an 

increasingly small number relative to the banking industry and relative to the overall economy. And yet when it is in the statute, it 

is something the regulators cannot ignore. 

Importantly, it diverts scarce assets. This is true for the financial 

institutions, particularly the regional institutions that are most affected by it. But it is also true—and I feel very strongly about this 

point from the regulatory point of view. The bank examiners with 

the sophistication and the skill sets to be able to evaluate stress 

test, for example, or living wills are not a fungible commodity. 

There are not a lot of them. And it is very important that that 

group be focused on the institutions that are truly systemically important. And for those reasons, we are suggesting, number one, we 

are putting in a soft line, a $250 billion suggestion. We are not 

wedded to that. We just think it should be above the 50. But, very 

importantly, we think it should be a presumption as opposed to an 

absolute so that financial institutions who are at that size but not 

strategically important, as measured by the regulators, would not 

be—could be so recognized. 

Also, one other issue that we did talk about, Mr. Chairman, is 

that we had suggested that there would be—an idea that we think 

is worth pursuing is to have at least a task force looking at a trial 

run on consolidating the examination forces of the Federal regulatory agencies, and I could pursue that question if there is interest. 

Thank you. 

Chairman SHELBY. Explain that. 

Mr. OLSON. We are suggesting—in our report we included a recommendation that through the FFIEC there is a test plan to consolidate for examination purposes the examination forces of the 

Federal regulators, Federal banking industry regulators. 

Chairman SHELBY. Professor Johnson. 

STATEMENT OF SIMON JOHNSON, RONALD A. KURTZ PROFESSOR OF ENTREPRENEURSHIP, MIT SLOAN SCHOOL OF 

MANAGEMENT 

Mr. JOHNSON. Thank you, Senator. 

In the run-up to the crisis of 2007, the Federal Reserve did very 

badly. It had a great deal of discretion over how to watch for risks 

in the financial system, and it failed in those tasks almost completely with regard to not only the largest financial institutions in 

the country but also some of the medium-size firms, including National City Bank in Cleveland. 

As a result—and I think sensibly—Congress in the Dodd-Frank 

Act gave some rather more specific instructions to the Fed to encourage them to focus their attention. This includes the issue 

which we are discussing today, Section 165(a)(1), which reads, ‘‘The 

Board of Governors shall establish prudential standards,’’ and then 


BANKI-41578DSA with DISTILLER
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paragraph (a) says, that ‘‘are more stringent,’’ and that ‘‘increase 

in stringency,’’ based on some considerations that are specified 

later in the statute that include exactly the issues you discussed 

in your hearing last week and that have been foreshadowed here 

today: risk, complexity, derivatives, and so on. Now, I understand there is concern about this threshold of $50 

billion, and I think that is a good discussion, and I think it is very 

good that you are holding the hearing, Senator. But I think if we 

are going to discuss numbers, we should be talking about exposures, risk exposures, total balance sheet size, which includes, of 

course, not just on-balance-sheet assets but also off-balance-sheet 

assets. Now, that includes different things for different banks. For 

some of the global megabanks, it is derivatives. Frankly, the derivative positions that some of these guys are carrying relative to 

their capital bases is very scary. I do not think that regional banks 

are in that kind of business, but they do have a risk exposure, a 

credit exposure, an asset size that is larger than just the stated 

asset number. The statute, I think unfortunately, has been interpreted as meaning only on-balance-sheet assets. 

So if you are going to talk about size, let us talk about exposures, 

and let us be careful in terms of how we define that. Obviously, if 

you are just going off to on-balance-sheet, what you are doing is 

creating an incentive for various kinds of financial firms to shift 

their business off balance sheet and to get around any kind of 

threshold or safeguard that you create in that way. 

Now, I have looked at the banks that would fall in the 50 to 

100—I really do not think you should go to $250 billion in terms 

of a limit. Bear Stearns, when it failed—remember, early 2007?—

had a balance sheet of under $400 billion. If you allow people with 

a balance sheet of 250, that is a risk exposure. I mean, I can take 

you through the banks in the 350 to 400 range. That is basically 

saying to the Fed, ‘‘Eh, do not worry about the Bear Stearns-type 

category.’’ I do not think that is the message you want to be sending to them. 

I have gone through and I put in my testimony in Section B if 

you look at all 10 of the bank holding companies that were between 

$50 and $100 billion in terms of total assets, at the end of 2013—

and I did that because that is the last year for which we have the 

systemic risk reports that the Fed now requires. If you look at 

those 10, 4 of them actually had a total exposure—what I am talking about—over $100 billion. That is a substantial financial institution. Of the remaining six, two are subsidiaries of large non-U.S. 

banks that just failed the stress test administered by the Fed. 

Now, the foreign banks are not here to speak for themselves 

today. I understand that. I do not think they are lacking in resources to be able to handle the stresses. I mean, these are gargantuan organizations. They failed the stress test because they are 

not paying attention and they are not showing respect. So I do not 

think you want to let them out on their own. 

Of the remaining four, two of them had total exposure between 

$95 billion and $100 billion. That is pretty close to $100. So now 

we are talking about Huntington Bancshares in Ohio and Zions 

Bancorporation. Well, you probably saw the coverage in the Wall 

Street Journal on Monday about Zions Bancorporation and the very 


BANKI-41578DSA with DISTILLER
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big gap in their understanding of risk between the view of the Fed. 

Now, that is a fascinating set of problems right there. So perhaps 

we are talking about moving Huntington Bancshares up to a different category, and that is an interesting discussion. 

Please, do not go back to the situation which we had before of 

just letting the Fed decide. Let the Fed have discretion. Let the 

Fed choose the criteria. The Fed did not get it right. On a bipartisan basis they did not get it right pre-2007. Please do not do that 

again. Please do not go to a limit of $250 billion. That will be ignoring the Bear Stearns-type problem. 

I think we should also recognize and hopefully discuss today variation within the regional bank models. I mean, in terms of the regional banks, the standard classification we are all using now, I 

guess, PNC and U.S. Bank are pretty substantial. They are as 

large relative to other banks as Continental Illinois was when it 

failed in the mid-1980s. And on the other end, we have banks like 

Huntington that are genuinely small banks and I think, you know, 

have a case for being regarded as being simpler and in some sense 

safer for themselves and safer for their shareholders. Their shareholders should be appreciative of the additional risk management 

measures that have been put in place as a result of Dodd-Frank. 

Thank you very much. 

Chairman SHELBY. Thank you, Professor Johnson. 

I will direct my first two questions to Mr. Ireland and Mr. Olson. 

As I mentioned in my opening statement, a recent report by the Office of Financial Research, OFR, uses different quantitative criteria 

to determine whether a bank is systemically important. Do you 

agree that the criteria-based analysis cited in the OFR report is a 

more appropriate way to determine systemic risk than the current 

$50 billion asset threshold? Mr. Ireland? 

Mr. IRELAND. Absolutely. The asset threshold, quite frankly, does 

not make any sense. The reason you rescue banks in various times 

is not because of their assets, but because of their liabilities and 

who they might threaten if they go down. It is not the asset size. 

Chairman SHELBY. It is about their risks they take. 

Mr. IRELAND. It is the risks they take and the risks that they are 

going to transmit to the rest of the economy. And the OFR criteria 

that are based on the Basel criteria look at those transmission 

channels and rate banks based on those transmission channels. I 

think that is a much more precise approach to dealing with the 

issue. 

Chairman SHELBY. Governor? 

Mr. OLSON. Mr. Chairman, I would agree, but I would put it in 

a slightly different context. It seems to me what the OFR new 

standards are is an example of some of the thinking and some of 

the tools that are now used to evaluate and measure risk exposures 

in a variety of ways that have happened since Dodd-Frank and 

since the passage of the bill and 165. So what we are seeing now, 

that is a good example, and there are a number of others, both of 

the U.S. regulators and international regulators, of how they have 

measured risk, although there is—to take into consideration the 

complexity, for example, the substitutability, the suitability, and 

other factors like that that really determine what the risk exposure 

is. 


BANKI-41578DSA with DISTILLER
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Chairman SHELBY. I will tailor this question to Mr. Ireland and 

Mr. Smithy. Last week, we heard from the regulators here that 

they are tailoring Section 165 standards based on a bank’s size. In 

your opinion—and start with Mr. Ireland and then Mr. Smithy—

have the regulators ‘‘tailored’’ sufficiently to address differences in 

systemic risk here? 

Mr. IRELAND. No. No. I think there are differences, and you see 

in the number of rules tiers where things become more—requirements become more rigorous as you go up in size. But those differentiations are very crude, and I do not think they really reflect 

the differences in risk, particularly the scope of differences that you 

see outlined in that OFR report. 

Chairman SHELBY. Mr. Smithy, do you have an opinion? 

Mr. SMITHY. I would agree with Mr. Ireland that whereas the 

Fed has used efforts to tailor, it has been in one direction. It has 

been up. Again, they have used asset thresholds rather than always a range of practices. Range of practice would be more beneficial in determining how the risk should be tailored to the regulation. 

I would also say that the issue at its heart is that they cannot 

tailor down, i.e., a $51 billion bank has to be treated——

Chairman SHELBY. It is arbitrary, is it not? 

Mr. SMITHY. It is. It has to be treated with higher prudential standards than a $49 billion bank even though the risks of those 

two institutions may be very similar. 

Chairman SHELBY. Mr. Smithy, we have heard testimony that 

the regional bank model is simpler than that of the Nation’s largest 

banks. The OFR study shows systemic risk scores that vary by a 

factor of over 125 ranging from 0.04 to 5.05. That is a good range 

there. Regions Bank scored 0.11 on the scale, which is about 2 percent of the systemic risk measure assigned to the highest scoring 

bank. Nonetheless, your bank is considered to be systemically important because it has more than $50 billion worth of assets, not 

necessarily because it is risky. 

Mr. SMITHY. Right. 

Chairman SHELBY. Please explain how your bank’s business 

model differs from the Nation’s largest banks and why that matters 

here. 

Mr. SMITHY. Sure, Mr. Chairman. We are a very simple, straightforward business model. We take deposits and we focus on lending 

in our local communities. 

Chairman SHELBY. Most of the regional and smaller banks, is 

that what they basically do? 

Mr. SMITHY. Yes, sir. 

Chairman SHELBY. OK. 

Mr. SMITHY. And so what differs from our balance sheet and the 

risks inherent in our balance sheet versus some of the larger, more 

complex banks, the G–SIBs, is that we do not have complex trading 

activities. The largest single risk we take is credit risk. That is the 

risk we understand. We know how to manage it. We underwrite 

that every day. And we use our deposits, and 80 percent of the deposits—or, actually, almost 90 percent of the deposits that we take 

in are used to fund lending activities; whereas, for some of the G–

SIBs, that number is closer to 60 percent. Less than 1 percent of 


BANKI-41578DSA with DISTILLER
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our balance sheet risk or the risk we take is related to broker-dealer activities or derivatives activities; whereas, that number is closer to 20 percent for the G–SIB banks. 

Chairman SHELBY. Governor Olson, according to your testimony, 

you spent a year and a half researching and assessing the effectiveness of Dodd-Frank, and one of the things that you concluded is 

that the $50 billion threshold is arbitrary. I think most people 

agree with that. Can you comment on how you reached that conclusion? And based on your experience—and you are a former Member 

of the Board of Governors of the Federal Reserve—would the regulators have sufficient information to assess whether a bank is systemically important if the $50 billion threshold were changed? 

Mr. OLSON. Mr. Chairman, regarding the first part of your question, how we arrived at that, together with the sponsors that were 

working with us, Richard Neiman and I interviewed maybe 50 to 

100, somewhere in that range, people representing academia, representing the financial community, many, many, many former regulators, representing of the consumer interests, and others, and focusing—our task force focused on the issue of architecture. And we 

found no advocates for maintaining the $50 billion threshold as a 

measure of when there is systemic risk. And so that was one of the 

first and easiest issues that we put forward. 

In fact, some of us old-timers who have been around a long time 

suggested that, back in the day, that probably would have been 

handled through a technical corrections bill following in the next 

Congress or two Congresses later because it did seem to us pretty 

obvious. 

To the second part of your question, the bank regulators have almost unlimited access to the banks themselves and have a lot of 

ability to look at risk exposures. For example, in relation to the 

previous comments that we heard here, for example, as early as 15 

years ago when I was on the Fed Board, the bank regulators were 

looking at off-balance-sheet on a consolidated basis. So in terms of 

looking at capital adequacy and the measures of the manner in 

which they were looking at it, we had the ability to look at it very 

thoroughly. 

So the ability is there. What we are asking for now is the flexibility. 

Chairman SHELBY. Governor, do you believe that raising the $50 

billion threshold would hinder the Federal Reserve’s ability to tier 

its supervisory regime? 

Mr. OLSON. That raising it would hinder their ability? Raising it 

would not hinder. 

Chairman SHELBY. Would not. You believe that in the $50 billion 

threshold would hinder? 

Mr. OLSON. No, I do not, Mr. Chairman, but I would like to add 

to that that we are also stressing that there ought to be an element 

of flexibility in terms of where that threshold is. 

Chairman SHELBY. Thank you. 

Senator Brown? 

Senator BROWN. Thank you. Interesting discussion. 

A question for you, Mr. Johnson. And, Mr. Smithy, thank you for 

joining us, and I have a couple questions for you. 


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Professor Johnson, most people agree that Senate drafters of Dodd-Frank set the threshold at $50 billion because they wanted 

to avoid creating the moral hazard associated with a market perception that an institution is too big to fail. Is that an appropriate 

line to achieve that goal? 

Mr. JOHNSON. Yeah, I think that was a very good idea, Senator. 

The problem, for example, with the Basel Committee criteria that 

we are discussing that defined these—they currently have 30 G–

SIBs, the global systemically important banks—is that this is the 

too-big-to-fail crowd. If that is the list that people in the market 

know have Government support, that is a very dangerous notion 

around the world. In the United States, we have a more diverse financial system. It was a good idea to have a threshold below, definitely below where the more intense too-big-to-fail issues are so you 

can look carefully—you do not have to spend all your resources on 

these mid-size banks, but you have to pay attention to them because, in particular, the interaction in some of these banks and 

some of the really big too-big-to-fail banks, that is where a lot of 

the damage happened last time and would happen again. 

Senator BROWN. Implicit in that action would no one really—no 

one in the market really believes that Huntington or Regions or 

M&T are systemically such that they are too big to fail, that the 

Government would bail out, correct? 

Mr. JOHNSON. That is exactly my understanding, Senator, that 

if you take Huntington, for example—not to pick on them, but just 

as the name has come up—I do not think they are too big to fail. 

They are, however—they have, it is true, crossed this category 

where Congress asked the Fed to pay more attention, and the Fed 

is paying more attention. And I guess one of the banks in this category appreciate the attention. 

Senator BROWN. Mr. Smithy, you mentioned M&T Bank’s compliance costs. Tell me about Regions’ compliance costs last year, and 

where do other members of your coalition of many banks, a dozen, 

a couple dozen, where do the other members of your coalition fall 

on that spectrum? 

Mr. SMITHY. So, Senator, we mentioned in the testimony that for the group that we represent, there is greater than $2 billion annual 

cost for compliance—or an increase of $2 billion versus the period——

Senator BROWN. Spread over how many banks? 

Mr. SMITHY. Spread over 20 banks. So M&T cites roughly a $400 

million, a little over, cost for compliance. I would say Regions number is closer to $200 million, but, Senator, those are just the direct 

costs. And I think one of the more important elements of this are 

the indirect costs, which are management and the board’s time and 

attention away from serving the needs of our customers and serving our communities as well as the enhanced supervisory standards 

create increases or higher capital levels and liquidity levels at that 

level, at the $50 billion level, that we must adhere to through 

CCAR and LCR, that frankly means there is less of those resources 

available for lending. And for a company like Regions, that standard being lifted would likely liberate as much as 10 percent additional capacity for lending, which could be $8 to $10 billion. 

Senator BROWN. OK. Thank you. That is helpful. 


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We understand that in banking, or perhaps like in all things, 

time is money. I talked with Comptroller Curry last week about the 

fact—and had a number of conversations with him, private and 

public—tend to like—not to like business lines that do not bring in 

revenue, understandably, and compliance costs certainly are that. 

He spoke a lot about, you know, a risk officer and about someone, 

if—I think it is probably safe to say if Nat City in Cleveland had 

had a risk officer of the stature of some other leading bank officers 

and executives sitting at the table with similar compensation and 

similar authority and similar gravitas, Nat City would not have 

gotten in the problems it did, and while Nat City still survives inside PNC, it did great damage to the city I live in and many others 

in Ohio. 

I guess the point is that strong rules and risk management can 

ensure that practices that are profitable in the short term do not 

become harmful in the long term. I know you agree with that, but 

I think it is something important to emphasize. 

Let me more specifically, Mr. Smithy, ask you about some of the 

more onerous rules, what you think are the most onerous rules for 

Regions. Governor Tarullo emphasized stress testing as the biggest 

issue for regional banks. Which rules do you find are the most onerous? Speak specifically of your Alabama bank, if you will, not so 

much the coalition. So speak about the onerous rules for you, and 

then if you would, broaden that. Is that what your coalition banks 

would say, too? Is that true for your coalition members? Give us 

some very specific rules that cost you, that you think are onerous, 

that you think cost you too much. 

Mr. SMITHY. So, Senator, at the $50 billion level, we are subject 

to enhanced standards, which, again, as I mentioned, includes 

stress tests, which frankly we think are a good idea. I will fully 

stipulate that pre-crisis the banking industry was in greater need 

of enhanced risk management practices and stronger internal modeling, stronger capital planning activities. 

I think the stress test that emanated from the original SCAP and 

have evolved into CCAR are a good thing. As a matter of fact, we 

built our whole entire capital planning process and strategic planning process around the stress testing framework. 

Where it becomes——

Senator BROWN. If I could interrupt for a moment, would the 

other 19 banks pretty much say what you said in your coalition 

about stress tests? 

Mr. SMITHY. I think they would largely agree, yes. 

Senator BROWN. OK. Proceed. Sorry. 

Mr. SMITHY. Where it becomes more challenging or restrictive is, 

as part of the CCAR process, there is a stress test that the Fed conducts on banks, and there is an outcome from that stress test in 

terms of losses. And at the end of the day, our capital levels that 

we must manage to, despite what we calculate internally, the binding constraint becomes what the Fed calculates for us. And so one 

of the challenges—there are certain asset classes and products 

where the Fed sees risk just inherently higher than do the banks. 

A specific example would be commercial real estate, for example, 

and that is one that is—there is a much larger loss content for 


BANKI-41578DSA with DISTILLER
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commercial real estate loans in the Fed’s models than they are for 

bank models. 

So what does that mean? Well, that means that as a bank that 

must supply capital and liquidity to that business, A, we have to 

decide whether or not at that level of capital allocation it is worthwhile for us to be in those businesses, if we can make money in 

those businesses. And so the extent that that loss estimation, 

again, becomes our binding constraint, we have to decide whether 

or not—that we can allocate capital. And if we decide that we cannot and make money in that, then that activity gets increasingly 

pushed out of the regulated space and into the shadow bank market. And then one has to question whether or not the same level 

of needed liquidity will always be available. 

Another example that I would give you is around—I was recently 

in western Tennessee in our Memphis office meeting with a group 

of bankers that cover our Ag lenders, and they were citing that internal policies to match the cost of providing those services, liquidity and capital, were increasing the cost on Ag lenders, and that 

made for some very difficult conversation—excuse me, Ag borrowers, and it made for some very difficult conversations with 

those long-time customers. 

But, again, those are just some examples as to us being subjected 

to the internal stress test. Not only the test but the capital levels 

that come from that and the enhanced liquidity standards has a 

real cost to our customers, and it can affect whether or not we 

think we can be in those businesses strategically. 

Senator BROWN. Thank you. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. 

Last September, I asked Federal Reserve Governor Tarullo about 

increasing from $50 billion the current asset threshold for systemically important financial institutions, and he stated at that time 

that the Fed is open to considering a higher threshold ‘‘up to the 

largest bank’’ level. His answer reinforces my opinion that the $50 

billion threshold is arbitrary and that Congress needs to determine 

a new threshold based upon the policy we intend to achieve. 

With the remaining time I have in this question segment, I 

would like to explore the merits of either increasing the threshold 

to the $250 billion level, which Mr. Olson supports, or using an activity test, which I understand you are proposing, Mr. Smithy. And 

so why don’t we start with you, Mrs. Why would an activity test 

be a better metric to use to determine systemically important financial institutions than a numerical threshold? 

Mr. SMITHY. Well, again, it is the arbitrary nature, Senator, of 

the numeric threshold that we oppose. We think the activity-based 

approach uses the data that the Fed has calculated and provides 

transparency as to what are the sources of risk that not only the 

institutions need to consider in managing, but also the regulators. 

It helps provide a road map for them in determining where they 

should divert their resources to make sure that their regulatory efforts are commensurate with where the risk is occurring in the 

economy. 


BANKI-41578DSA with DISTILLER
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We do believe that ultimately there might be a correlation of size 

and those risk factors that above a certain size their size and risk 

seems to be more correlated. I am not sure exactly where to draw 

that line. 

Senator CRAPO. That was going to be my next question. 

Mr. SMITHY. But, again, I think you have the data and the OFR 

has the data. Now, we may argue about the elements of the data, 

and it may evolve over time. But you have the framework within 

which to determine where to draw the line if ultimately we do want 

to have an asset threshold. 

Senator CRAPO. Well, thank you. 

Mr. Olson, could you comment on that and also explain how the Bipartisan Policy Center arrived at the $250 billion threshold as 

the best approach? 

Mr. OLSON. Let me take the latter first. 

Senator CRAPO. Sure. 

Mr. OLSON. We emphasized that the $250 billion is a suggestion, 

and we got to that point because many of us have worked on legislation over the years and have seen legislation come together and 

think it is unlikely that Congress would make a change without 

putting a number in. So we put a number in that we thought 

would be high enough to isolate the very largest and most systemically important institutions while limiting the ones, particularly 

the regional banks, that do not have that same criteria. 

But we were quite clear that if there was a more appropriate 

number in there, we would be willing to go with that number, assuming also that there is some flexibility attached to it, so that it 

is a presumption as opposed to a hard line. And I think that is the 

real key, is making sure that you have that flexibility. 

I think below that number, you have got—and especially if it is 

a hard-line number, you have a phenomenon that we have seen in 

a number of cases where it distorts markets. In other words, financial institutions will fight to keep below that line, and once they 

cannot keep below it, they may make a large addition in order to 

become larger to spread out the additional overhead costs of being 

a so-called bank SIFI. And so the combination of those is what we 

had in mind. 

Senator CRAPO. Well, thank you. And just to clarify, if we adopt- ed any number, whether it be $250 billion or we stayed at the $50 

billion, isn’t it correct that the banks that would be exempt under 

that numeric threshold are still subject to safety and soundness 

regulation on very——

Mr. OLSON. Not only safety and soundness, but they could be 

designated as being covered as a bank SIFI by the—the regulators 

still have the option based on the activity test, as you suggested, 

they could be considered systemically important. 

Senator CRAPO. So the real question we are trying to get at here 

is whether an institution is a risk to the system, not whether they 

should be exempt from regulation. 

Mr. OLSON. That is correct. And just as a reminder, banks over $10 billion are required to have stress tests, and I will support Mr. 

Smithy on that comment. I think the advent of that kind of stress 

testing and any sort of a model that institutions are using has been 

a very important step forward in supervision. 


BANKI-41578DSA with DISTILLER
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Senator CRAPO. Thank you. 

Chairman SHELBY. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. Thank you for holding this hearing. And, you know, I agree with Mr. Olson. If we are 

going to be able to proceed on this, we need to find some bipartisan 

compromise to make sure we get it right, and I particularly appreciate the work of the Bipartisan Policy Center. 

I will start with you, Mr. Olson. And I agree that the $50 billion 

number is a bit arbitrary, but wouldn’t you concur—or what would 

you think if it was a $250 billion institution that had a great deal 

of geographic concentration? If that institution failed, while it 

might not bring down the national economy, it could have systemic 

effects at least on a regional basis, could it not? 

Mr. OLSON. Concentration risk is a very significant risk, and it 

could be concentration geographically or concentration by loans. So, 

yes, very much so. We have seen in the Ag crisis and the oil crisis, 

we have seen times before where that issue was very important. 

Senator WARNER. I agree with you on the notion that you want 

to have a line but not have it a hard-rule line, but oftentimes that 

is always a presumption going up and never a presumption coming 

down. How would we make sure that that presumption kind of ran 

in both directions? 

Mr. OLSON. You would not—I think none of the Members of this 

Committee would be surprised, but it will come as no surprise to, 

I think, the Members of this Committee that the regulators pay a 

lot of attention to what the Congress thinks. And if the Congress 

makes a signal independent of the legislation, that will be heard 

and remembered. 

Senator WARNER. Although I would simply point out that I think 

this Committee and all of us who were involved in carefully tried 

to draw a pretty firm line that said, particularly for smaller institutions, they ought to get a little more regulatory relief, and under 

the guise of best practices those practices have crept down even 

below the $10 billion. 

Mr. Smithy, one of the things I have tried to get at, your concerns—what I hear more often from my regionals is sometimes less 

about actual capital standards or liquidity ratios, but actually just 

the cost of all the compliance, not so much the operating costs but 

just the costs of dealing with all the regulators. When you say that 

$200 million cost for your institution, can you break that out in 

terms of kind of actual personnel dealing with the regulators 

versus business costs, business model changes? 

Mr. SMITHY. Well, a fair amount of that is increased spending on 

systems and technology. There are roughly 100 people that work 

on, let us say, the CCAR process, which is one element of stress 

testing. There is another probably 10 or so that work on liquidity 

stress testing, and those are increasingly becoming more integrated. So there is certainly a direct cost from personnel. 

There is probably another 150 people around the organization 

that have a part in that process, but it is not their full-time job. 

So I would say that there is a lot of technology spend, a lot of 

models that have been built, infrastructure, the control environment. There is, you know, a quality program that we have put 


BANKI-41578DSA with DISTILLER
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around the whole process to ensure that it is a properly controlled 

environment. And so there are many layers to that cost. 

Senator WARNER. I guess what I am more—I am sympathetic to 

trying to cut down some of these layers, trying to cut down some 

of the compliance costs, but without sacrificing the standards. So 

let me go to you, Professor Johnson. Would you not see that there 

could be things we could do? For example, I think Mr. Olson’s suggestion of a consolidated exam schedule is a great notion. But what 

I hear constantly from institutions is that they have got one set 

after another of regulators coming in, and that drives up the cost 

tremendously. 

You know, I really question in a plain-vanilla institution whether 

we ought to have—the living will process makes sense, but the idea 

that the living will process ought to be done repeatedly if you are 

not changing your business model? Are there other places where 

we might be able to give, even with your, I think, appropriate 

focus, daily liquidity capital ratio requirements that take a lot of 

time? I do not even think the regulators can look at it on a daily 

basis. But would you even as an advocate of tight reform be willing 

to look at areas where we might be able to drive down compliance 

costs but still keep appropriate prudential standards? 

Mr. JOHNSON. I think these are all good questions, Senator. I 

think the regulator has considerable discretion to tailor, and that 

is what they told you last Thursday. I read the transcript of that 

hearing fairly carefully, and I think consolidated examinations to 

some degree would be a good idea. Please do not forget that the 

FDIC’s back-up examination authority has turned out in the past 

to be very useful as a safeguard, both for with regard to the system 

and also with regard to shareholders and creditors, and, of course, 

the Deposit Insurance Fund, which is on the hook when a lot of 

these smaller banks fail. 

So I think reducing compliance costs where it makes sense is 

sensible. I am very encouraged, though, by what Mr. Smithy said, 

and I think also what the Chairman said, which is Congress mandated some better risk management practices, and they have been 

adopted by many banks willingly, and they make very good use of 

them. And I do not think their shareholders would want to go back. 

So when we talk about the cost of compliance, I think we should 

also break out that part which is now best practice, as you called 

it, Mr. Chairman, and that part which you might regard as being 

a bit too much if you are $50 billion. Do you need to do a living 

will every year? That is a good question. 

If you get up to $200, $250, $300 billion, I think you should be 

paying very close attention. We have had some rather bad experiences with banks, both of that size in terms of nominal dollars and 

that size relative to the scale of the economy. You look at percent 

of GDP, what was Long Term Capital Management, what was Continental Illinois? It is exactly when you are getting up into that 

level, 150, 200, 300, that is when the Fed should be paying attention. 

Senator WARNER. Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman, and I want to thank 

all of our witnesses for being here. 


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Mr. Johnson, welcome back. I know you are gladly playing the 

skunk-at-the-party role here. It is good to have you here again. 

There has been a too-big-to-fail discussion here today that has 

been odd to me, and I would like to ask for a brief comment of all 

of the witnesses. I realize that people’s memories fade, and over 

time things change, but over the next decade or so, let us say, if 

one of our larger institutions failed, is there any question that they 

would be—their equity would be wiped out, their boards would be 

wiped out, and their executives would be wiped out, their junior 

debt would be wiped out? Is there any question in your minds 

about that? 

Mr. IRELAND. No. What happens in—

Senator CORKER. Well, that is good enough. 

[Laughter.] 

Mr. SMITHY. No, Senator, not in my mind. 

Senator CORKER. Well, why do we keep using that word? I find 

it misleading to the public and misleading in a debate when, in essence, they would be wiped out. So, Mr. Johnson, go ahead. 

Mr. JOHNSON. So, Senator, I am on the FDIC Systemic Resolution Advisory——

Senator CORKER. Is it yes or no, first? 

Mr. JOHNSON. The answer is no. 

Senator CORKER. You do not think they would be wiped out? 

Mr. JOHNSON. Not necessarily. No, that is the problem, Senator. 

This problem is not over. Their probability they would be wiped out 

is higher. I will grant you that. Dodd-Frank has made some 

progress, yes. 

Is the answer to your question an unequivocal yes? Unfortunately not. That is a very, very big problem. I think it is a problem 

for the regional banks also because of spillover dangers from these, 

too big to fail could have on the regional banks that we should not 

want. 

Senator CORKER. Yeah, well, what I find fascinating is all the regional banks use these words, ‘‘too big to fail.’’ I was with a group 

of them the other day, the 10 to 50s, and really was disappointed 

by their presentation. So they do not—they use these words, ‘‘too 

big to fail.’’ I disagree. I think if a large bank failed today, they 

would be in essence wiped out. Would their drive-in window still 

exist? Yes. Would their building still exist? Would their management be there? No. Would their equity be gone? Yes. 

So it is interesting. None of the regional banks want to be systemically important, and yet they keep using this pejorative term, 

‘‘too big to fail.’’ So I would just like to understand—not from you—

where that is coming from. 

Mr. Smithy, can you share—I find that to be an odd place for 

people to be. 

Mr. SMITHY. Well, Senator, as I stated, I do not think that too 

big to fail is indeed true in the context of whether or not management would be wiped out, equity of investors would be wiped out. 

I spend——

Senator CORKER. That is fairly painful, is it not? 

Mr. SMITHY. That is the most painful thing that could happen, 

and as a Treasurer whose job is to ensure, you know, proper liquidVerDate 0ct 09 2002 11:04 Aug 01, 2016 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 S:\DOCS\94375.TXT SHERYL

BANKI-41578DSA with DISTILLER
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ity and capital for the institution, which is the lifeblood of the business, it is death of the business. 

Senator CORKER. Let me just make a statement, and I know my 

time is going to run out. The way this debate all started, the ICBA 

came in and wrote a letter before we even had a bill, and they supported Dodd-Frank before Dodd-Frank existed, because basically 

what they thought was going to happen is they were going to get 

them, not us. They were going to get them, not us. 

And, obviously, what happens is over time the smaller institutions do get engulfed in all this, and that is what has happened, 

and certainly there are some things that need to be resolved, and 

I agree with that. I do think the $50 billion threshold that—look, one of the things 

that is most strange about serving in the Senate is you realize we 

just make this stuff up, right? I mean, somebody decided 1 day it 

was 50, and that is what it was. 

On the other hand, Mr. Ireland, I do have a degree of trepidation 

in punting again to the regulators. We did so much of that during 

Dodd-Frank, and so the qualitative piece is interesting to me. But 

I am not sure I want to punt again, I am sorry, especially not to 

FSOC, which I do not even really believe is functioning. I believe 

it is stovepipes of nothingness. It is not functioning the way that 

it should. 

So I have got concerns about that. Everybody obviously wants the level to be $10 billion above wherever they are, right? I mean, 

if you are at 50, you want it at 60. If you are thinking mergers and 

you are at 90, you want it at 120. 

So, I mean, everybody wants the number to be just above where 

they are and yet people keep using this too-big-to-fail piece, which, 

again, I find fascinating. 

I will remind people that TARP was spent on banks of varying 

sizes. That is a United States citizen risk when that occurs. 

So I would just close with this. I have got 16 seconds over. I am 

very open to making changes. I think we should make changes. 

What I am not interested in making changes is groups of people 

coming in saying, ‘‘Get them, not us. We are not them.’’ And this 

lobbying effort that is taking place, to me, is not healthy. To me, 

what we need is a healthy financial system, and I do not think we 

are focused on that right now. We are focused on groups of people 

who want relief, some of which is well deserved. And I think the 

50 is too low. But I am more interested in making sure we have 

a stable financial system which creates—which means we have 

banks at all levels that are regulated properly. And I do not see 

that as being what is taking place here now. 

So, Mr. Chairman, I appreciate you helping illuminate that with 

this hearing, and I look forward to working with you. 

Chairman SHELBY. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. Thank you all for 

being here today. 

After the financial crisis, Congress decided that the bigger banks 

should be subject to more oversight than the smaller banks. Congress drew the dividing line at $50 billion in assets, a threshold 

that left out all but about 40 of the 6,500 banks in the country. 

And then after drawing that line, Congress explicitly gave the Fed 


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the discretion to tailor how those standards applied among that 

small group so that the biggest and the smallest could be treated 

differently. 

Now, I know some people in the banking industry want to completely exclude even more banks from Dodd-Frank’s stricter scrutiny, but the alternatives to the current $50 billion threshold raise 

a whole new set of problems. 

Professor Johnson, we have heard today one suggestion is to re- place the $50 billion threshold with a multi-factor test so that the 

Fed would have to do an intensive study of every bank to determine whether they should be subject to higher standards or not. So 

I want to ask: Do you think that is a workable solution? 

Mr. JOHNSON. No, Senator. I think the Fed has a very bad track 

record in applying exactly that confused, multiple-criteria set of 

issues. They could have done that before the crisis. They had a responsibility, clear legal responsibility to do it before the crisis, and 

they did not. So I do not think it is a good idea to ask them to do 

again what they previously failed to do spectacularly. 

Senator WARREN. All right. Thank you. It seems like we have 

some evidence. We have tested that approach. And it seems like 

this particular proposal would require the Fed to spend a lot more 

time on an administrative task, leaving it a lot less time to spend 

on actually regulating and supervising the riskiest banks, which 

was exactly the point of Dodd-Frank. 

Now, the other proposal that has been talked about today is simply to raise the threshold to some higher number, like $100 billion 

or $250 billion. And the main argument I hear in support of that 

is banks with about $50 billion in assets would not pose any systemic risk if they failed. I think that is what we have heard repeatedly today. 

You pointed out, Professor Johnson, that a $50 billion on-book 

bank can actually be a $100 billion off-book bank, posing much 

higher risk, but I want to focus on another aspect. 

We learned or should have learned in the 2008 crisis that several 

banks can find themselves on the verge of failure at the same time. 

So, Professor Johnson, do you think it would pose a systemic threat 

if two or three banks with about $50 billion on-book in assets were 

on the verge of failure? 

Mr. JOHNSON. Absolutely, Senator. In fact, the typical pattern of 

financial crises around the world—I used to be the chief economist 

at the International Monetary Fund. The typical pattern around 

the world is exactly what you talked about, which is you have some 

smaller financial institutions that are failing together, have very 

highly correlated portfolios, and then the thing starts to snowball 

and you bring down a really big financial player, one of the biggest 

banks in that market. Then you have got a full-blow financial crisis. 

So I think the scenario you are talking about is exactly typical 

experience of financial crisis always and everywhere. 

Senator WARREN. So when we are talking about the risks that the $50 billion banks pose to the economy, we need to consider that 

not just one bank could go south at a time, but that two or three 

or four could be following similar business practices, get caught 

short at the same time, which would pose a much bigger risk to 


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the economy. So it looks like to me we can use one of two approaches: We can draw the line somewhere, like $50 billion, and then rely 

on the Fed to use its discretion to tailor its supervision appropriately and to consider the risks that these banks may pose not 

only individually but also may pose together. 

Or we can raise the threshold number; we can cut loose all the 

banks that are smaller than $100 billion or $250 billion on-book, 

and who knows how much additional risk they have got off book, 

and hope that two or three of them do not make the same mistakes 

the way the banks did in 2008, when they nearly brought down the 

whole economy and had to be bailed out. 

You know, me? I would rather err on the side of being careful 

and covering a few banks that may not pose as much risk rather 

than running the risk of another crisis that plunges our economy 

back into recession. And since the American taxpayers are on the 

hook when the economy starts to implode, I suspect that most of 

them would prefer that Congress be careful as well. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. 

Mr. Olson, I have to share with you, I had 2 years in which we 

participated in activities at the Bipartisan Policy Center and the 

Governors Council, and I found the approach to be enlightening 

and I found it to be encouraging when we could come together and 

find ways in which on a bipartisan basis we could impact policy 

change at the national level. And listening to the testimony here 

among all of you, it has been enlightening to me today. 

I just want to just come up an analysis to begin with in terms 

of where I want to go with this, and then I would like your 

thoughts on this. 

The designation of a bank as systemically risky has a wider ripple effect across the economy as a whole, and I know that we are 

talking right now simply about the safety of the bank and about 

whether or not we could have a catastrophe on our hands if the 

banks were to fail. But last week, when we talked to the regulators, they were basically telling us that we did not have to worry 

and that they knew what they were doing when it came to regulating the banking industry. 

I think they were well intentioned. I think they really do believe 

that they have things under control. But what I want to know is 

when we talk about their decisions and the impact they have not 

just on the banks but on the economy as a whole and how it affects 

the borrowers and access to credit, to me their answers were troubling, because it seemed as though we were looking at this in a 

vacuum. 

I think the regulatory decisions they make do not just occur in 

that vacuum and that they have a real effect on real people that 

need access to capital and credit. 

For example, when a bank is forced to hire more compliance officers or retain more capital, it makes fewer loans. And I think that 

is what Mr. Smithy is suggesting. This means that there is less 

money available for small business owners to start and expand 

businesses. 


BANKI-41578DSA with DISTILLER
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If we take a look at what is happening to our economy since the 

beginning of a recovery and what appears to be not a robust recovery, I wonder whether or not a lot of that has to do with literally 

a regulatory hand on the top of the ball which is sitting in the 

water, holding it down from where it would otherwise be. 

So, with that, I am just curious, because, Mr. Smithy, you have 

talked about the impact that it has had on your bank, but from 

2009 to 2013, your risk management expenses, I believe under your 

testimony, you indicated that it had doubled. Now you have indicated that your costs are somewhere around $200 million. 

But what did it do to your ability to make loans? I mean, I think 

there is an impact there. Would you care to share a little bit about 

what the impact has been on your bank’s ability to make loans? 

Mr. SMITHY. Sure. I would add one other stat that is very interesting. We now have more people in our organization devoted to 

compliance-related matters than we do for commercial lending. 

Senator ROUNDS. As a matter of fact, I think across the financial 

institution world, right now we are talking about since 2009, I 

think the number I heard was 300,000 more people employed in financial services, and it is in compliance is where they are at rather 

than in the production side of things. 

Mr. SMITHY. And, again, Senator, I would stipulate that we have 

learned a lot through the process. We are better at understanding 

the risks we take. It is better controlled. We have better concentration risk management practices in place. There has been, you 

know, modeling enhancements that have come out of the crisis and 

the stress testing framework that I would submit helps us make 

better decisions. But at the end of the day, it is the fact that we 

have to keep capital and liquidity in surplus to guard against risks 

that we think are remote, and that is capital and liquidity that 

cannot be used to make those loans, you are suggesting. 

Senator ROUNDS. I think there seems to be a sense that $50 billion was arbitrary and that it is a matter of trying to find the right 

number. But also we have heard testimony today that it should be 

based upon the activity that is being involved, and that would be 

perhaps a better model. 

But, Mr. Olson, I am curious. Under the proposal that have 

looked at, how do we know that if we allow more of an opportunity 

for the regulator to make those decisions that we do not end up 

with a regulatory process which is even more challenging with regard to trying to figure out what the regulator is going to want this 

year versus next year versus the following year? And just how 

much tether should we have on a regulator to make those demands 

upon the banking industry or the individual banks that they are 

looking at? 

Mr. OLSON. A very important fundamental question, Senator. 

And having been on both sides, having been a banker and having 

been a bank regulator, being a banker, among other places, in Fergus Falls, Minnesota, and being a bank regulator with the Fed, one 

thing that becomes very clear when you become a regulator is that 

Congress has given a very specific mandate to the regulators. Your 

responsibility is the financial institutions’ safety and soundness 

and compliance with laws and regulations. That is the rule. 


BANKI-41578DSA with DISTILLER
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So the balance between what is the appropriate regulatory regime and legal regime is the responsibility of the policymakers, 

which is the Congress. That to me is why we are having—why it 

is important to have hearings like this, especially in light of a 

major piece of legislation, much of which is supported by the Bipartisan Policy group in terms of its overall effect. But looking at that 

balance is really key. 

Senator ROUNDS. Thank you. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman. Thank you for those 

serving on the panel this morning giving us an opportunity to have 

insight into your perspective. I certainly appreciate the academic 

perspective of Professor Johnson on the impact of this new regulatory environment. 

I, on the other hand, am a small business owner, and so for me, 

I look at the perspective of how all this comes down to the end 

user, the person, Mr. Smithy, who comes into your bank looking for 

a loan. In South Carolina, I think you guys have about $1.2 billion 

of outstanding loans. What that means to me is that the ability for 

small business owners to invest, to innovate, and, more importantly, to create jobs is visible through the number of dollars in 

outstanding loans to small business owners in my State who are 

better prepared to make sure that our economy continues to grow. 

And I am a believer that we need to have responsible regulations. 

My thought is that we do not need to have irresponsible levels of 

regulations. I am on the Finance Committee as well, so I have 

headaches many days of the week. 

But I will suggest to you, as I did to Governor Tarullo, that the 

Basel and Dodd-Frank standards that come with the SIFI designation is like a tax on labor and capital, and that tax has a dynamic 

negative growth effect on our economy. And you have said it a 

number of ways, Senator Rounds, I think Senator Warner asked a 

similar question. And my question really goes to the impact on 

small business owners like myself in this climate. You said that 

there were approximately—your compliance costs were a little over 

$200 million. You have 150 compliance officers. And then your last 

comment was not shocking, but it should be shocking, I think, to 

those who are not familiar with the impact of the Dodd-Frank regulatory environment. You now have as many folks working on the 

regulatory side as you do on the lending side. That suggests to me 

that perhaps the climate that you are working in is not conducive 

for actually having an impact on the economy through lending 

money. You are almost a company that now exists to a large extent 

for providing a conversation with the compliance officers. That does 

not make a lot of sense to me. 

Mr. SMITHY. Well, obviously we would agree. I think we, too, are 

supportive of banking practices that promote stability in the communities that we serve and give us an opportunity to serve those 

customers and the communities’ needs. 

I think, again, we would fully stipulate that there has been a lot 

of improvement in internal practices, what might be deemed as 

compliance but are risk management practices that help us better 

serve the customer. 


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What I would say, though, is being deemed systemically important adds another layer of cost and oversight to that process that 

we think is not commensurate with the risk that we pose to the 

system, and so, therefore, it inhibits our ability to, as you say, focus 

on innovation, focus on technology, and focus on serving the needs 

of those customers. I would agree with you. 

Senator SCOTT. Mr. Smithy, I do appreciate the fact that one of 

your opening comments was the fact that it was important for the 

stress test and the opportunity to make sure that you are safe and 

sound, those were important characteristics moving into the regulatory conversation. So I really appreciate the fact that you are not 

suggesting that there should be no regulations or that even enhanced regulation has not been beneficial to the industry. But the 

fact of the matter is that there has to be some threshold where it 

makes sense. Is that an accurate statement? 

Mr. SMITHY. That is a fair assessment. 

Senator SCOTT. Mr. Ireland, I see you shaking your head over 

there a little bit, and I will tell you that, to me, right now the SIFI 

threshold is too low, it appears, and we are making regional banks 

act like and think like and hire like it is a G–SIB. It is a large 

bank with operations that are so complex and so interconnected 

that the oversight, the enhanced oversight is absolutely necessary 

and that there is really no impact on the economy or on consumers. 

That just seems to fly in the face of reality. I assume that is a part 

of the——

Mr. IRELAND. I think that is right. I think, you know, as attractive as thresholds may be as a legislative solution, they are not 

consistent with practices, and the banking models are very, very 

different The risks they pose to the economy are very, very different, and they need to be treated accordingly to avoid creating 

what economists will often call ‘‘dead costs,’’ which are compliance 

costs that do not reduce risk, that are merely there for compliance 

purposes and do not foster better banking. 

Senator SCOTT. Let me use my last 13 seconds for Mr. Olson, because you just hit the nail on the head, which is the dead costs. 

We have finite resources available without any question. And so 

from my perspective, I would love to hear—as a former official at 

a bank, a regulatory agency, can you comment on why it is important for regulatory efficiency that we have a more meaningful way 

of figuring out where not to waste these very limited resources? 

Mr. OLSON. Senator, that is a good question. It is the inverse of 

the squeaky wheel gets the oil. What we should be doing is concentrating these finite resources where the real risk exposures are. 

Right now all the wheels are getting the same amount of oil in a 

significant way, and there is a limitation, and I will defer to my 

former colleague Ollie Ireland in terms of in his testimony where 

he said that tailoring alone cannot address this issue. It will take 

a change in legislation. And he is better qualified to address that 

than I am, as I am not a lawyer. And so putting the resources in 

the right place is important. 

I would also like to add that I have, as a former banker and a 

regulator, tremendous respect for the people who are now the examiners in the field. If I can have 20 seconds, Mr. Chair, I would 

just say that one of my burning memories is an examiner coming 


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to me and pointing out one of the most highly respected people in 

our community, and he brought in the file, and he said, ‘‘This person is going to fail.’’ And I said, ‘‘No way. I know him too well, and 

I am too good a banker. He is not going to fail.’’

Well, I do not have to tell you what happened. He failed. And I 

have never—that has been a lesson to me on the importance of getting the input from the regulator examiners that can spot anomalies. 

Senator SCOTT. Yes. 

Mr. OLSON. Which is what the regulators do best. Thank you. 

Senator SCOTT. Thank you, Mr. Olson. 

Thank you, Mr. Chairman, for the extra time. 

Chairman SHELBY. Thank you, Senator Scott. 

Mr. Ireland, in your testimony you stated that the Fed ‘‘can establish asset thresholds above $50 billion for the application of 

some, but not all, of these enhanced prudential standards.’’ Could 

you clarify where the Fed is limited by statute to tailor Section 165 

regulations? Just for the record. 

Mr. IRELAND. 165(a)(2)(B), asset threshold for application of certain standards, ‘‘The Board of Governors may, pursuant to recommendation by the Council’’—this is the FSOC Council—‘‘in accordance with section 115, establish an asset threshold above $50 

billion for the application of any standard established under subsections (c) through (g).’’, which omits subsection (b), which specifies a number of standards. And so the $50 billion threshold for the 

(b) standards, which include risk-based capital, liquidity, overall 

risk management, resolution plan, concentration limits, and so on, 

are tied expressly to the $50 billion threshold. 

Chairman SHELBY. Thank you. 

Mr. Olson, in your written testimony, you recommend indexing 

the $50 billion threshold in Dodd-Frank to economic growth or a 

similar metric. Last week, Fed Governor Tarullo right here indicated that he would support indexing the thresholds set in DoddFrank. Why do you think it is important to index with DoddFrank? 

Mr. OLSON. Senator, as the economy grows and as times change, and particularly with the impact of inflation, what is a $50 billion 

threshold in 2010 will be a fraction of that in 2030. And yet the 

threshold should move in concert with some other metric. 

We are suggesting the metric being the size of the economy. It 

could be GDP. It could be the size of the banking industry or the 

financial services sector, but it is important that it be indexed. 

Chairman SHELBY. Mr. Smithy, it is my understanding—and correct me if I am wrong on this—that when assessing systemic risk, 

the OFR-described methodology looks at the banks’ interconnectedness as one of the factors which ought to address the concerns of 

several smaller banks bringing the system down. Are you familiar 

with that? Is that right? 

Mr. SMITHY. Yes, I am, Mr. Chairman. 

Chairman SHELBY. Is this correct? 

Mr. SMITHY. That is correct. 

Chairman SHELBY. Thank you. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 


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Dr. Johnson, I have long believed, as I know you have, and I 

have heard the Chairman speak about it often, that banks need 

more and better quality capital, that much of what happened to the 

bank in my city, National City, and banks all over the country, if 

they had been better capitalized, the problems would have been 

less severe. 

Mr. Smithy said—and I appreciated your comments in response 

to my question earlier—that Dodd-Frank is not flexible enough because it does not relieve banks from capital and liquidity rules, and 

that capital and liquidity, therefore, insufficient capital and liquidity, if you will, inhibit lending. 

Respond to that, if you would, Professor Johnson, on his comments about capital and liquidity and what it means for his bank. 

And if you would also tell us—answer a couple more questions. Are 

regional banks subject to any capital rules other than Basel III? 

And are these rules appropriate for these banks? If you would take 

all three of those. 

Mr. JOHNSON. I think Mr. Smithy should speak about his bank, 

but in terms of the general pattern of the rules and the tiering of 

the system and also, I think, very much this is about the flexibility 

of the Federal Reserve, Basel III is an international agreement 

that sets some floors, and then the Fed has chosen how to build 

on top of that. And they absolutely have focused their attention on 

the largest, most complex, most interconnected financial institutions, which makes a lot of sense. 

Now, the capital requirements are higher than they used to be 

across the board above some minimum size, and that also seems 

appropriate, Senator. In fact, I rather like the Brown-Vitter legislation that would set an even higher and more demanding capital requirement with a step up at $50 billion, I believe, and another step 

up at $500 billion in terms of total assets. 

So I think that the capital requirements and the way they are 

being applied are appropriate. I think they are appropriate for the 

regional banks. The Fed has—and other regulators, but the Fed is 

in the lead here—a lot of flexibility in terms of how it applies them, 

and I do not think that they are too high. If anything, they are too 

low. 

Senator BROWN. Thank you. A question about stress tests for Mr. 

Olson and Mr. Ireland and Professor Johnson. Yesterday’s Wall 

Street Journal had a story that was cited earlier about Zions disagreement with the Fed about how much value their CDOs would 

lose in a financial crisis. Zions says the number is zero; the Fed 

says the number is 400. Mr. Olson, starting with you, and then—

I am sorry, Mr. Ireland, then Mr. Olson, then Professor Johnson. 

If the Fed and the bank disagree on risk, who should win that argument? 

Mr. IRELAND. Ultimately, the Fed has to win that argument. 

Senator BROWN. Governor Olson? 

Mr. OLSON. The Fed will win that argument without——

Senator BROWN. The question was: Who should win that argument? 

Mr. OLSON. And I am not at all familiar with the individual circumstance of the individual bank other than what I read. But at 

the end of the day, the regulator will prevail in a stress test. 


BANKI-41578DSA with DISTILLER
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Senator BROWN. OK. I asked who should win the argument, not 

who will win the argument. 

Mr. OLSON. It should be a balance, actually, because there are—

the stress tests are—all of the stress tests have a certain amount 

of assumptions in them. So you have to go back, and you have to 

look at each of the assumptions, and it is the responsibility of the 

bank to defend all of the assumptions that they have made in that 

test procedure. 

And so it needs to be an ongoing dialogue. It cannot just be an 

up-or-down. 

Senator BROWN. Professor Johnson? 

Mr. JOHNSON. Well, my colleagues have been very positive about 

the Fed and the Fed judgment when talking about setting criteria 

and so on. I am a bit more skeptical of the Fed’s judgment. But 

my skepticism is a little one-sided. I think what we have seen 

based on that track record over the past, let us say, 20 years is 

they have tended to defer too much to industry assessments, and 

they have tended to understate losses. There are not that many instances we have seen where the Fed has got it wrong exaggerating 

how bad things are going to be. If anything, they tend to downplay 

the potential losses. 

So I thought that article was really very interesting, and I think 

that is a big flag for anyone involved with Zions. The Fed is saying 

this on the basis of information and data and experience, and the 

Fed does not tend to over exaggerate the losses in these kinds of 

situations. Their bias has rather, unfortunately, historically been to 

defer to the industry. 

Senator BROWN. Governor, do you want to speak to that? 

Mr. OLSON. Yeah. Senator, I respectfully disagree. Having been 

on the other side of that table and having been on the side of the 

regulator listening for the 5 years that I was on the Fed Board, the 

banks telling us that we are too strict and too hard on them, his 

statement is clearly an overstatement. 

Mr. JOHNSON. Senator, then how do we explain what happened 

in the run-up to 2007, the massive losses across the board in the 

financial system and the collapse of National City Bank, among 

other things? 

Senator BROWN. Governor Olson was there right before that happened, my understanding, 2006. 

Two more questions. Mr. Ireland, I thought I heard you say the 

Fed cannot lift the threshold of living wills. Is that correct? Is that 

what you said? 

Mr. IRELAND. I think the—I read to you from the statutory language. I find the statutory language a little bit confusing myself, 

but one of the listed criteria or requirements in subsection (B) 

which is not accepted is resolution plans. And so it appears that 

they cannot lift the resolution plans if they are adhering to that 

statutory language. 

Senator BROWN. Professor Johnson, I have one other, but go 

ahead. 

Mr. JOHNSON. The regulators have said quite clearly, including 

last week, that they can tailor resolution planning to a very, very 

large degree. The one statutory constraint that they feel binding is 

on the stress test, and participation in the stress testing starts at 


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$10 billion, as we have discussed, on an annual basis run by the 

firms. But the semiannual stress testing at the firm level and the 

annual CCAR, that is a $50 billion requirement right now. 

Senator BROWN. Last question, Mr. Chairman, and thank you for 

your indulgence. 

Both Governor Olson and Mr. Ireland said that raising the 

threshold or eliminating it entirely would conserve regulators’ 

scarce resources. I hear that argument a lot with community 

banks. I generally believe it. Simplifying the larger banks so that 

they are no longer too big to regulate would also, I think it goes 

without saying, help agencies better allocate their resources. So my 

last question, Professor Johnson: Do you think that regulators, regional banks, and taxpayers would benefit from the proposal that 

I offered sometime ago, the Brown-Kaufman bill—Senator Shelby 

supported it as an amendment on the Senate floor; Governor 

Tarullo has spoken out about it—to cap banks’ nondeposit liabilities at 3 percent of GDP? Would that make the situation better? 

Mr. JOHNSON. Senator, that would help on a number of dimensions, including enabling regulators to do a better job, but also reducing systemic risk as being measured by—you are all talking 

about the OFR report. Well, the OFR report, I think you should 

look at those levels of systemic risk that got around the biggest financial institutions. Those are very scary, Senator, and your Safe 

Banking Act would exactly address that issue in an indexed fashion, indexing the size of the largest banks to 3 percent of GDP. 

Senator BROWN. Thank you. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Mr. Olson, I noticed recently that some of our 

largest banks had some trouble meeting their capital standards in 

the stress test. Did the regional banks overall—maybe I should ask 

Mr. Smithy this question. Did they have trouble like our biggest 

banks barely getting over the line on some of the capital and stress 

test? Mr. Olson, you first. 

Mr. OLSON. Mr. Chairman, I apologize. I do not have that information in front of me, so I am not able to answer. 

Chairman SHELBY. OK. Mr. Smithy? 

Mr. SMITHY. The regional banks did not face as many obstacles, 

if you will, in meeting their objectives. 

Chairman SHELBY. OK. Do you know of any regional banks 

that—well, ‘‘any’’ is a big word—that failed their test? 

Mr. SMITHY. Not to my knowledge this year. 

Mr. JOHNSON. Excuse me? 

Chairman SHELBY. Do you know, Professor? 

Mr. JOHNSON. Yes, Senator. I am just looking at—using the definition of ‘‘regional banks’’ from Mr. Smithy’s testimony, and 

Santander did fail their test. Santander is on the list; they did fail 

their stress test this year. And we have, of course, also been discussing the situation with Zions, which is also on the list, that 

barely passed the stress test. 

Chairman SHELBY. You know, you have heard it said—and it was 

said here I believe by Dr. Volcker, and I will paraphrase him—that 

if you are too big to fail and you are too big to regulate, maybe you 

are too big to exist. A lot of people have that feeling, I believe, in 

America. 


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I thank all of you for your testimony today. 

Mr. JOHNSON. Thank you. 

Mr. SMITHY. Thank you. 

Mr. OLSON. Thank you. 

Chairman SHELBY. The Committee is adjourned. 

[Whereupon, at 11:37 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follows:]


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PREPARED STATEMENT OF OLIVER I. IRELAND

PARTNER, MORRISON & FOERSTER

MARCH 24, 2015

Chairman Shelby, Ranking Member Brown and Members of the Committee, it is 

an honor to be here today. My name is Oliver Ireland, and I am a partner in the 

Financial Services practice at Morrison & Foerster here in Washington, DC. I have 

worked for over 40 years as a financial services lawyer. I spent 26 of those years 

in the Federal Reserve System, including over 10 years in the Federal Reserve 

Banks and fifteen years as an Associate General Counsel at the Board of Governors 

of the Federal Reserve System (‘‘Board’’) in Washington. As an Associate General 

Counsel, I helped establish policies and write rules designed to reduce systemic risk 

in the financial system and rules to foster consumer protection. During my tenure 

at the Federal Reserve, I was involved in a number of significant economic events, 

including the Chrysler ‘‘bailout’’ in 1980 and 1981, the Continental Illinois National 

Bank and Trust Company (‘‘Continental Illinois’’) ‘‘bailout’’ in 1984, the Ohio and 

Maryland thrift crises in 1985, the recapitalization of the Farm Credit System in 

1986 and the savings and loan crisis of the late 1980s and the early 1990s. As a 

private-sector attorney for the past 14 years, I have had the opportunity to work 

directly with financial institutions as they struggled to cope with the most recent 

financial crisis and adapt to the new standards and rules that have flowed from the 

Dodd-Frank Act. 

The Dodd-Frank Act contains significant reforms that are designed to stabilize 

and improve the functioning of our financial institutions, financial markets and the 

markets for financial products and services. These reforms have been supplemented 

by changes in capital requirements under Basel III. A key focus of these efforts has 

been to eliminate the phenomenon of financial institutions that are too big to fail. 

These institutions must be ‘‘bailed out’’ in times of trouble by the Federal Government in order to prevent ‘‘systemic’’ problems in the financial system. Historically, 

Federal Government intervention in support of private-sector financial institutions 

has been limited. In the recent financial crisis, the Federal Government’s actions 

may be more properly characterized as attempts to stabilize markets as opposed to 

bailouts of individual institutions. However, individuals often have a negative, visceral reaction to bailouts because they perceive them to be unfair, and policymakers 

understand that bailouts can create a moral hazard that erodes private market discipline. 

The origin of the term ‘‘too big to fail’’ is sometimes traced to the rescue of Continental Illinois in 1984 by the Federal Deposit Insurance Corporation (‘‘FDIC’’). At 

the time, Continental Illinois was the 8th largest bank in the United States. In congressional testimony later that year, the Comptroller of the Currency, Todd 

Conover, suggested that there were 11 banks in the United States that could not 

be allowed to fail. 

The potential for market events, including bank failures, to have a destabilizing 

effect has been recognized since at least 1873 when Walter Bagehot discussed the 

characteristics of money markets in Lombard Street. Although it is an over-simplification, there are generally two flavors of ‘‘systemic’’ risk-knock-on, or domino, 

risk and panic risk. Domino risk arises when the failure of one institution triggers 

the failures of other institutions due to their credit exposure to the failing institution. Panic risk occurs when the failure of a financial institution or other event 

causes a loss of confidence in financial institutions or assets. As a result, liquidity 

dries up and asset prices decline due to a lack of buyers. This, in turn, triggers 

widespread failures that further depress confidence, creating the potential for a 

downward spiral of increasing scope and severity. 

The Continental Illinois bailout has been cited as an example of domino risk. The 

FDIC in a study described the risks posed by the failure of Continental Illinois as 

follows:

With regard to Continental Illinois, the regulators’ greatest concern was 

systemic risk, and therefore handling Continental through a payoff and liquidation was simply not considered a viable option. Continental had an extensive network of correspondent banks, almost 2,300 of which had funds 

invested in Continental; more than 42 percent of those banks had invested 

funds in excess of $100,000, with a total investment of almost $6 billion. 

The FDIC determined that 66 of these banks, with total assets of almost 

$5 billion, had more than 100 percent of their equity capital invested in 

Continental and that an additional 113 banks with total assets of more 


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1FDIC, An Examination of the Banking Crises of the 1980s and Early 1990s, 250 (1997). 2Walter Bagehot, Lombard Street, 44 and 46 (1873) (emphasis added).

than $12 billion had between 50 and 100 percent of their equity capital invested.1

In Lombard Street, Walter Bagehot discussed panics as follows:

When reduced to abstract principle, the subject comes to this. An ‘alarm’ 

is an opinion that the money of certain persons will not pay their creditors 

when those creditors want to be paid. If possible, that alarm is best met 

by enabling those persons to pay their creditors to the very moment. For 

this purpose only a little money is wanted. If that alarm is not so met, it 

aggravates into a panic, which is an opinion that most people, or very many 

people, will not pay their creditors; and this too can only be met by enabling all those persons to pay what they owe, which takes a great deal of 

money. No one has enough money, or anything like enough, but the holders 

of the bank reserve.

...

If all those creditors demand all that money at once, they cannot have it, 

for that which their debtors have used, is for the time employed, and not 

to be obtained. With the advantages of credit we must take the disadvantages too; but to lessen them as much as we can . . . 2

Domino risk and panic risk are not necessarily independent of each other. For example, domino risk can itself create or feed a panic. While the failure of other types 

of institutions can create systemic problems and past bailouts have not been limited 

to banking institutions, banking institutions are particularly susceptible to both 

forms of systemic risk. This is true because of the very nature and core business 

of banks. Banking institutions borrow short-term from depositors and other creditors to fund long-term assets. This creates a maturity mismatch that can lead to 

liquidity shortfalls and deposit runs. In turn, these liquidity crunches lead to fire 

sales of assets at distressed prices, which erode bank capital and confidence in 

banks. Depositors and other creditors who lend to banks bear the credit risk that 

can lead to a domino effect and banks’ hard to value loan assets and maturity transformation activities create the potential for a loss of confidence and panic risk. 

For these reasons, banking institutions have been the focus of prudential regulation at the Federal level in the United States for over 150 years. Over time, this 

regulation has been refined to account for the size and complexity of banking organizations; however, the recent financial crisis revealed serious shortcomings in the 

existing regime. The Federal Government had to intervene to recapitalize large and 

some small banking institutions, as well as a number of nonbanking institutions. 

The Dodd-Frank Act represents, in part, an effort to avoid similar bailouts in the 

future, but there is no simple solution for the too big to fail quandary. 

Macroeconomic stability is a key goal of prudential regulation. The economic and 

human consequences of the recent financial crisis and prior financial crises have 

been enormous, resulting in devastation that can last for years or even generations. 

Simply refusing to intervene to stabilize the financial system during a financial crisis may not be an acceptable policy choice. At the same time, short-term fixes to 

prevent or contain an economic meltdown, such as a bailout, can diminish market 

discipline and increase risk taking by individual institutions and their 

counterparties. This erosion of market discipline, or moral hazard, can itself lead 

to future crises. Ideally, we should foster robust financial institutions and encourage 

prudent risk taking that reduces the likelihood of future stress and, at the same 

time, increases financial institutions’ ability to withstand the stresses that do arise. 

At the same time, financial intermediation, and particularly the extension of credit, is inherently risky. These risks can be mitigated but they cannot be eliminated. 

To a certain extent, risk taking behavior is beneficial, because it fosters the innovation and economic growth that maximize employment and increase standards of living. There are serious consequences to unnecessarily increasing the costs of financial intermediation or constricting the availability of credit and other financial services that would otherwise be available in a fair and efficiently functioning market. 

Legislators and regulators have attempted to balance these considerations for 

some time, but a proper equilibrium has proved elusive so far. Dodd-Frank, which 

was shaped by the experiences of the recent financial crisis, is an effort to recalibrate with a distinct focus on reducing the potential for individual institutions to 

create systemic problems. One of the main tools in Dodd-Frank that will be used 

to address systemic risk is the prudential standards for bank holding companies 

with total consolidated assets of greater than $50 billion established under Section 


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165. These standards are meant to increase in stringency based on a list of specified 

factors and other risk-related factors that the Board will consider. In establishing 

these standards, the Board can differentiate among companies based on their size, 

complexity and other factors, and, pursuant to recommendations of the Financial 

Stability Oversight Council, the Board can establish assets thresholds above $50 billion for the application of some, but not all, of these enhanced prudential standards. 

Section 165 is clearly designed to apply to large, interconnected banking organizations whose failure could threaten the financial stability of the United States. While 

Section 165 allows for some flexibility, the $50 billion assets threshold is its most 

specific differentiator. Other provisions of Dodd-Frank, and other aspects of existing 

and new regulatory requirements, including, for example, the Volcker Rule and the 

requirement to use the advanced approaches method in capital calculations, also 

provide for varying standards based on thresholds tied to the size of the institution 

or the size of the activity. 

Without a doubt, the overall size of a banking institution is a factor in the likelihood that such an institution could pose a risk to the financial stability of the 

United States. But supervisors globally have increasingly focused on a broader, 

more nuanced array of systemic risk measurements. They have begun to weight 

these measures in order to tailor supervisory policies to the activities most likely 

to affect financial stability. For example, in July 2013, the Basel Committee on 

Banking Supervision (‘‘BCBS’’), which consists of representatives from over two 

dozen of the world’s most economically significant countries, presented five principal 

factors for identifying global systemically important banking organizations. These 

factors include size, which for purposes of the BCBS calculations is a measure of 

total exposures as opposed to total consolidated assets, interconnectedness, substitutability, cross-jurisdictional activity and complexity. The factors other than size 

are subdivided into component factors and the factors and component factors are 

weighted. Scores are calculated for each factor by dividing the individual bank score 

for that factor by the aggregate score, which is the sum of the scores of the 75 largest global banks plus selected additional banks. 

Since the factor on cross-jurisdictional activity was included by the BCBS to 

measure global risks, it is likely that it is less significant for purposes of measuring 

systemic risks to the U.S. economy. The other BCBS systemic risk factors, coupled 

with a similar measurement process that is tailored to the U.S. economy, could be 

used to identify banking organizations that pose systemic risks to the United States. 

The U.S.-focused scores could then be used by the Board to refine regulatory requirements for and supervisory scrutiny of those institutions. The Board already collects the necessary data on the BCBS factors from bank holding companies with 

total consolidated assets of $50 billion or more. 

Such a tailored approach in the implementation of the Section 165 requirements, 

capital requirements and potentially other regulatory requirements could prevent 

the imposition of dead costs—costs that do not reduce an institution’s riskiness or 

the risk to U.S. financial stability or contribute to compliance with other applicable 

laws and Federal policies—on banking organizations with consolidated assets in excess of $50 billion. In addition, more customized regulation and supervision should 

result in more effective oversight of banking organizations in the United States, 

some of which have very different business models. For example, regional banks 

often fund themselves with core deposits and focus on traditional lending, while 

other institutions choose to focus more on financial market, or custody and payment 

activities. Regulatory requirements designed to mitigate the risks related to financial market services are often inappropriate to address the risks related to more traditional banking organizations. 

Nevertheless, a more bespoke approach to the application of Section 165 and other 

regulatory requirements does not solve the issue of what the appropriate thresholds 

are for such requirements to kick in. Bank supervision should always be, and has 

historically been, tailored to the risk profiles of specific institutions. As such, special 

requirements aimed at financial stability and the elimination of too big to fail 

should have limited application for several reasons. First, the identification of an 

institution as systemically important carries with it the moral hazard that the identified institutions will enjoy a halo effect—that market participants will be more 

willing to transact with such an institution because of the belief that it will not be 

allowed to fail. Counterparty confidence based on an institution’s reputation for prudential standards is healthy, but confidence based on the perception that an institution will be bailed out by the Government is not desirable. 

Second, empirical data based on the BCBS risk factor information collected by the 

Board suggest that the systemic risk scores of banking organizations with over $50 

billion in consolidated assets in the United States vary greatly. A study by the Office of Financial Research, which was created by the Dodd-Frank Act, shows scores 


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3OFR Brief 15–01 (Feb. 12, 2015), available at http://financialresearch.gov/briefs/files/

OFRbr-2015-01-systemic-importance-indicators-for-us-bank-holding-companies-fig-1.pdf.

that vary by a factor of over 125, ranging from 0.04 to 5.05.3 Moreover, there is a 

sharp inflection point at around a score of 1.5. The ninth highest scoring banking 

organization scored 1.48, but the tenth highest scoring bank only scored 0.49. The 

next highest scoring banking organization scored 0.38. These scores include crossjurisdictional activity, which may not be as significant in measuring potential effects 

on U.S. financial stability. The dramatic differences in systemic risk scores suggest 

that the number of systemically important institutions is limited. 

Third, we should continue to provide bank supervisors with the discretion to apply 

more stringent safety and soundness requirements on particular banking organizations with distinct risk profiles. It is not necessary to adopt requirements with broad 

applicability to capture a handful of unique organizations. 

Moving to such a tailored, risk-based approach to the supervision and regulation 

of banking organizations under Section 165 would require statutory changes. For example, the Board would need to be granted the ability to set different thresholds, 

including thresholds based on factors other than total consolidated assets, for all of 

the prudential requirements in Section 165. I believe that legislative changes should 

stop short of attempting to codify any particular risk evaluation system, such as the 

BCBS systemic risk scoring system. The understanding, identification and management of risk in banking organizations, and in the economy more broadly, are dynamic and changing. Codification of even current thinking runs the risk of leaving 

the financial system unprepared for new risks as they develop in the years to come. 

Finally, I recognize that granting regulators greater discretion to limit the application of Section 165, and potentially other regulatory requirements, does not guarantee that regulators will exercise that discretion in a way that will reduce the costs 

and burdens of traditional banking organizations. These institutions have more than 

$50 billion in assets, but they do not present the same risks to the U.S. economy 

as other larger, more complex banking organizations. I am not sure that there is 

a neat way to put a statutory floor on supervision and regulatory requirements that 

does not run the risk of creating loopholes; however, congressional oversight can 

help ensure that these requirements remain tailored to the actual risk presented. 


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PREPARED STATEMENT OF MARK OLSON

CO-CHAIR, BIPARTISAN POLICY CENTER FINANCIAL REGULATORY REFORM INITIATIVE’S

REGULATORY ARCHITECTURE TASK FORCE

MARCH 24, 2015

Chairman Shelby, Ranking Member Brown, Members of the Committee, thank 

you for the opportunity to testify. I am honored to appear not only because of the 

important impact that the Committee’s work has on U.S. economic growth, financial 

stability and consumer protection, but also because of my own time working on the 

Committee staff, having served as staff director of the Securities Subcommittee. 

I appear before you today in my capacity as co-chair of the Bipartisan Policy Center (BPC) Financial Regulatory Reform Initiative’s Regulatory Architecture Task 

Force. I co-chaired this task force with former New York State Superintendent of 

Banks Richard Neiman and am proud of the work that we accomplished, finding 

common ground and practical solutions to many complex issues. 

Today, I would like to focus on one of our task force’s recommendations raising 

the so-called ‘‘bank SIFI’’ asset threshold from $50 billion to $250 billion, while giving regulators more flexibility to determine whether or not an institution should be 

subject to more rigorous oversight. We believe this recommendation strikes the right 

balance between assuring that financial institutions, whose collapse could pose a 

significant risk to the financial system, receive an appropriate level of supervision 

and regulation, while not subjecting those that do not meet this standard with needless rules and oversight which may impede economic growth. 

BPC was founded in 2007 by former Senate Majority Leaders Howard Baker, Tom 

Daschle, Bob Dole, and George Mitchell with the idea of finding bipartisan solutions 

to the complex policy issues facing our country. In 2012, BPC launched the Financial Regulatory Reform Initiative to assess the Dodd-Frank Act: what is working, 

what is not working, and how financial reform can be improved. Richard and I were 

asked to analyze and find ways to improve the U.S. regulatory structure. We spent 

a year-and-a-half researching and assessing this issue. We met with a wide variety 

of stakeholders, including current and former regulators, financial reform and industry advocates, and academics. We had five guiding principles in our work:

• Clarifying the U.S. regulatory architecture to close gaps that could contribute 

to a future crisis or financial stress event;

• Improving the quality of regulation and regulatory outcomes;

• Better allocating, coordinating, and efficiently using scarce regulatory resources;

• Ensuring the independence and authority of financial regulators to allow them 

to anticipate and appropriately act on threats to financial stability; and

• Increasing the transparency and accountability of the regulatory structure.

In April 2014, we released our report: Dodd-Frank’s Missed Opportunity: A Road 

Map for a More Effective Regulatory Architecture that included more than 20 recommendations that we believe will help achieve these goals. The full report is included as an addendum to this testimony. 

We found a number of areas where we believe Dodd-Frank moved the U.S. financial regulatory structure in the right direction, including eliminating the Office of 

Thrift Supervision, creating the Consumer Financial Protection Bureau, and paying 

greater attention to oversight of the financial system as a whole. We also found 

many ways that the current system could be improved. 

A good example was our recommendation to change the asset threshold over 

which bank holding companies become subject to enhanced supervisory and regulatory requirements. These companies are sometimes called bank SIFIs (systemically important financial institutions) because they face enhanced prudential requirements, similar to those applied to the nonbank SIFIs, which are designated by 

the Financial Stability Oversight Council (FSOC). In the course or our research, we 

found little support for the idea that the current asset threshold, set at $50 billion 

and not indexed for any future growth, was an ideal solution to the real issues it 

was meant to address. 

The Current Threshold is Problematic 

There are several problems with the current $50 billion threshold, which I will 

briefly summarize.

1. It is arbitrary. In general, a bank holding company with $49 billion in assets 

does not suddenly become systemically important, and therefore subject to enhanced prudential standards, when it grows to $51 billion in assets. Different 

banks have different balance sheet structures and risk profiles and should be 


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1 Application of Enhanced Prudential Standards to Bank Holding Companies Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, DC, 114th Cong. 

(March 19, 2015) (testimony of Daniel K. Tarullo, Governor, Board of Governors of the Federal 

Reserve System). http://www.federalreserve.gov/newsevents/testimony/tarullo20150319a.htm. 2 Examining the Regulatory Regime for Regional Banks before the Committee on Banking, 

Housing, and Urban Affairs, Washington, DC, 114th Cong. (March 19, 2015) (testimony of Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation). https://www.fdic.gov/

news/news/speeches/spmarch1915.html. 3 CIT Grp. Inc., Quarterly Report (Form 10–Q), at 2 (November 10, 2008). http://

www.sec.gov/Archives/edgar/data/1171825/000089109208005502/e33450l10q.htm. 4Mosser, Patricia. ‘‘OFR Brief Examines Data on Systemically Important Bank Holding Companies.’’ Office of Financial Research, February 12, 2015. http://financialresearch.gov/from-themanagement-team/2015/02/12/ofr-brief-examines-data-on-systemicallyimportant-bank-holdingcompanies/.

judged accordingly, making the presence of a ‘‘solid-line’’ or binary threshold 

problematic.

2. It includes institutions that are not systemically important. In addition to being arbitrary, the $50 billion threshold captures a number of bank holding companies that few would argue are, individually, systemically important. This is by 

design. During the crafting of what later became Dodd-Frank, there was real 

concern that setting a threshold that clearly separated systemic from nonsystemic institutions would reinforce the moral hazard concerns associated with 

too big to fail. At the time, policymakers worried that banks above the asset 

threshold might be conferred with unfair benefits relative to those institutions 

that fell below the line. It has become apparent, however, that the extra oversight that applies to nonsystemic institutions just above today’s $50 billion 

asset threshold is costly—both for regulators to administer and the institutions 

subject to the regime to comply. The requirements of the new regime include 

developing living wills and participating in regular comprehensive stress tests, 

all of which entail substantial compliance costs. Furthermore, the benefits of 

including these firms, which are now subject to far more robust supervisory regime in the post-crisis world, are smaller than many expected. In his testimony 

before this Committee last week, Federal Reserve Board Governor Daniel 

Tarullo said that stress testing requirements, for example, ‘‘can be a considerable challenge for a $60 billion or $70 billion bank,’’ but that the benefits 

gained by including such institutions, ‘‘are relatively modest’’ and that regulators ‘‘could probably realize them through other supervisory means.’’1

3. It focuses only on size. The size of a bank holding company’s balance sheet affects how systemically important it is, but it is far from the only relevant variable. An institution’s potential to create systemic risk is also determined by its 

mix of activities and practices, interconnectedness, term structure of funding, 

leverage and a number of other factors. One can imagine an institution with 

well over $50 billion in assets that is well-capitalized, diversified, not overly 

interconnected and engaged predominantly in low-risk, plain-vanilla activities 

the failure of which would not pose a significant risk to financial stability. A 

number of regional banks arguably fall into this category. In his testimony to 

this Committee last week, FDIC Chairman Martin Gruenberg said that of the 

37 institutions above the $50 billion threshold, 20 of them ‘‘are diversified commercial banks that essentially take deposits and make loans.’’2

On the other hand, at certain points during the financial crisis the CIT Group 

was considered potentially systemically important given its unique position in 

providing credit to small businesses. During that period, CIT had approximately $90 billion in assets, which would be below even the $100 billion threshold some have proposed.3 Given that size is not the only factor in determining 

whether a bank is systemically important, size should not be the only factor 

used by the law or regulators in determining whether a bank holding company 

should be subject to enhanced oversight.4

4. It produces undesirable incentives. A binary threshold based simply on size 

gives bank holding companies an incentive to either stay below the threshold 

to avoid extra regulatory requirements or, once they are above the threshold, 

to become ever larger to spread out the fixed costs of those requirements. If 

the purpose of these extra requirements is to improve financial stability, then 

the law should focus on promoting incentives for institutions to engage in less 

risky activities and practices while still meeting the needs of their customers 

and forming a foundation for sustainable economic growth.

5. It is not indexed. Dodd-Frank as written retains a static, hard-wired $50 billion 

threshold. Each year, the real value of $50 billion in assets will decline as a 


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5Examining the Regulatory Regime for Regional Banks: Hearing Before the Committee on 

Banking, Housing, and Urban Affairs, U.S. Senate, Washington, DC, 114th Cong., 2 (March 19, 

2015) (testimony of Thomas J. Curry, Comptroller of the Currency). http://www.occ.gov/newsissuances/congressional-testimony/2015/pub-test-2015-39-written.pdf.

share of the economy. Because of this, the current static threshold will capture 

more and smaller bank holding companies over time since the threshold is not 

indexed for economic growth, inflation, or any other metric. If a threshold is 

maintained in statute, it should be automatically adjusted to avoid this effect. 

If the threshold is indexed, I would suggest indexing it to economic growth 

rather than inflation since the systemic significance of a bank holding company 

is tied to an institution’s size relative to the economy rather than in relation 

to consumer prices.

6. It diverts scarce regulatory resources. Whether they are funded independently 

or through Congressional appropriations, financial regulatory agencies face 

constraints on their budgetary resources. They must prioritize these resources 

to achieve the greatest benefit they can for the least cost. This is particularly 

true in a post Dodd-Frank world where regulators have far greater responsibilities and authorities. The current static threshold limits their ability to do so. 

As an example, a number of critics have argued that the process for creating 

a living will has been intensive and time consuming for bank holding companies. That is true, but what is much less noted is that they are intensive and 

time consuming for regulators as well. I do not argue that living wills have not 

generated benefits, but those benefits are not the same for all institutions regardless of their complexity and size. I think that it makes little sense to tie 

up a significant share of scare regulatory resources in systemic oversight of institutions that few believe are systemically important. 

Rethinking the Bank SIFI Threshold 

As is often the case, agreeing on the problems with a system is more difficult than 

agreeing on a path forward. So it is with the bank SIFI threshold. No regulatory 

regime will be perfect, but we believe that our BPC task force’s recommendation 

would be a major improvement over the status quo. 

Our solution contains two integrated elements. First, we recommended raising the 

bank SIFI threshold to focus on bank holding companies that are more likely to be 

systemically important. Specifically, we suggested raising the threshold from $50 

billion to $250 billion. We were pleased that, following the release of our report, the 

idea of raising the threshold was publicly supported by Governor Tarullo, and also 

from elected officials from both parties. 

No matter what level at which one establishes an asset-size threshold, it will be 

arbitrary and will not by itself take into account the complexity and risk profiles 

of different bank holding companies. As Comptroller of the Currency Thomas Curry 

stated in his testimony before this Committee last week, ‘‘it is essential for the OCC 

to retain the ability to tailor and apply our supervisory and regulatory requirements 

to reflect the complexity and risk of individual banks.’’5 Therefore, we also recommended complementing raising the threshold with moving from a binary, ‘‘solidline’’ threshold to a presumptive, ‘‘dashed-line’’ threshold that allows regulators to 

have more discretion in applying requirements based on other appropriate risk factors. In effect, bank holding companies with more than $250 billion in assets would 

be presumed subject to enhanced prudential standards, but would be able to make 

a case to regulators to leave them out of the enhanced regime if they are well-capitalized and diversified and engaged predominantly in relatively low-risk activities 

and practices. On the flip side, bank holding companies below the $250 billion asset 

threshold would be presumed not subject to enhanced prudential requirements, but 

regulators could include them in the enhanced regime if they determined any such 

institution to present significant systemic risk factors. 

We believe that, taken together, these changes would realize a number of benefits:

1. They would make the threshold level less arbitrary by making it presumptive.

If regulators have the ability to use some discretion in taking other risk factors 

into account, the threshold becomes a starting point rather than an absolute.

2. The threshold would be less likely to capture institutions that pose little systemic risk. Where the current ‘‘solid-line’’ threshold captures a number of bank 

holding companies that are not systemically important on their own, the higher 

threshold removes smaller institutions from the enhanced regime while giving 

regulators the ability to ‘‘capture’’ any that have high-risk profiles. This can 

be achieved while reducing unnecessary costs to institutions and regulators 

with minimal loss of benefits.


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3. The threshold would not be based simply on size. Making the threshold presumptive allows for other risk factors to be taken into account when determining whether an institution should be subject to enhanced prudential standards.

4. They would better align incentives with goals. A higher and presumptive 

threshold allows for incentives to be geared toward reducing overall systemic 

risk rather than encouraging institutions to stay below the threshold or grow 

well beyond it. An institution that is not considered systemically risky just 

below the asset threshold could presumably grow organically to just above the 

threshold and not trigger a systemic designation.

5. The threshold can be indexed. An indexed threshold will help to ensure that 

it does not grow increasingly outdated over time. Whatever threshold is set, 

we recommend indexing it to economic growth or a similar metric.

6. They focus scarce regulatory resources where they are most needed. A higher 

threshold allows regulators to prioritize the use of their resources on the largest and most complex financial institutions, where they can do the most to benefit financial stability.

As the entity most responsible in statute for questions of systemic risk and financial stability, we envision the FSOC as the entity that would make determinations 

about whether to include institutions below the $250 billion threshold in the enhanced oversight regime or whether to exclude institutions above the threshold from 

the regime. The FSOC could overturn presumption in either direction via a supermajority vote of the Council. We understand, however, that a case could be made 

for one or more different ways to overturn presumption, and we are open to other 

approaches. The specific mechanisms used are secondary to our core recommendations: to raise the threshold and make it presumptive. 

Avoiding One-Size-Fits-All Regulation 

The bank SIFI threshold issue is an important example of how one-size-fits-all 

regulation can pose an unnecessary regulatory burden on midsize banks. However, 

it is not the only one. There are several other actions Congress could take to alleviate unnecessary regulatory burden and improve the quality of supervision for regional banks. 

In addition to the prospect of facing enhanced supervisory and regulatory requirements as bank SIFIs, regional banks are already subject to reviews by multiple Federal and State financial regulators as part of the routine examination process. Indeed, the current system is often fragmented, with different agencies often having 

overlapping and duplicative responsibilities. We believe more coordination and cooperation among the regulators would lead to more efficient and comprehensive examination process. 

That is why our BPC task force recommended the creation of a pilot program for 

a consolidated examination force for banks subject to supervision by the Fed, FDIC, 

and OCC. Where appropriate, State regulators could also choose to join. This approach would enable examiner teams to take advantage of interchangeable elements 

offered by each agency, while at the same time, permit the development of specialized examination teams. For example, examiners could specialize in banks of certain 

sizes or complexity levels, geographic regions, or business lines. To test the feasibility of this idea, our task force recommended that the pilot program be overseen 

by the Federal Financial Institutions Examination Council (FFIEC). 

We believe the pilot could work for banks of any size, but it may be especially 

appropriate for regional banks given the growth in regulatory scrutiny they have 

received from regulators. Congress could require the regulators to implement this 

pilot program and consider expanding it depending on results. 

Another issue facing midsize banks has been the propensity to get ensnared by 

rules designed for larger, more complex financial institutions. Congress was wise to 

give the Federal Reserve and the FDIC a substantial degree of latitude to engage 

in such tailoring. We encourage regulators to take advantage of this authority. 

The text of Dodd-Frank includes several provisions that allow for and in some 

cases require agencies to tailor their approach. For example, Section 165 of DoddFrank, which deals with developing enhanced supervisory and prudential standards 

for nonbank SIFIs and bank SIFIs, says that:

In prescribing more stringent prudential standards under this section, the 

Board of Governors may, on its own or pursuant to a recommendation by 

the Council . . . differentiate among companies on an individual basis or 

by category taking into consideration their capital structure, riskiness, complexity, financial activities (including the financial activities of their subVerDate 0ct 09 2002 11:04 Aug 01, 2016 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6621 S:\DOCS\94375.TXT SHERYL

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6Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111–203, 111th 

Cong., Section 165 (a) (2) (A). http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW111publ203.htm. 7 Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations; Final Rule. 79 no. 59 12 CFR 252 (March 27, 2014): 17240. http://www.gpo.gov/fdsys/

pkg/FR-2014-03-27/pdf/2014-05699.pdf. 8 Examining the Regulatory Regime for Regional Banks before the Committee on Banking, 

Housing, and Urban Affairs, Washington, DC, 114th Cong. (March 19, 2015) (testimony of Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation). https://www.fdic.gov/

news/news/speeches/spmarch1915.html. 9 Application of Enhanced Prudential Standards to Bank Holding Companies Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, DC, 114th Cong. 

(March 19, 2015) (testimony of Daniel K. Tarullo, Governor, Board of Governors of the Federal 

Reserve System). http://www.federalreserve.gov/newsevents/testimony/tarullo20150319a.htm. 1 Also Senior Fellow, Peterson Institute For International Economics; and Co-Founder of 

http://baselinescenario.com, a member of the Congressional Budget Office’s Panel of Economic 

Advisors, the Federal Deposit Insurance Corporation’s Systemic Resolution Advisory Committee, 

the Office of Financial Research’s Research Advisory Committee, and the Systemic Risk Council 

(created and chaired by Sheila Bair). All the views expressed here are mine alone. Italicized text 

indicates links to supplementary material; to see this, please access an electronic version of this 

document, e.g., at http://baselinescenario.com. For important disclosures, see http://

baselinescenario.com/about/.

sidiaries), size, and any other risk-related factors the Board of Governors 

deems appropriate.6

The Federal Reserve included 40 instances of the word ‘‘tailor’’ or one of its permutations in its final rule implementing Section 165.7 The Federal Reserve and 

FDIC also jointly worked to tailor their requirements for both living wills and stress 

tests (along with the OCC), scaling them to some degree to account for the size and 

complexity of the institutions subject to them. And in fact, our recommendation to 

make the new threshold for banks to be subject to enhanced prudential standards 

presumptive is very much in keeping with Congress’ desire for regulators to tailor. 

Regulators can and should use their tailoring authority to adjust their enhanced 

requirements based on the size, complexity and other risk factors of individual bank 

holding companies. They has worked to do so, for example by the Federal Reserve 

creating three effective categories of enhanced graduated requirements for bank 

holding companies between $50 billion and $250 billion in assets, between $250 billion and $750 billion, and a third category for the 8 largest bank holding companies 

with more than $750 billion in assets. The agency can accomplish significant benefits through approaches like this. However, tailoring alone will not solve the problems I outlined earlier. 

Chairman Gruenberg testified that Dodd-Frank’s stress testing requirements are 

‘‘more detailed and prescriptive than the language covering other prudential standards, leaving the regulators with less discretion to tailor.’’8 And Governor Tarullo 

testified last week that there are certain kinds of prudential regulation that Congress required the Federal Reserve to implement for all bank SIFIs, and that some, 

such as the application of the Volcker Rule and $50 billion threshold, ‘‘bear reexamination.’’9 If regulators have determined areas where they believe Dodd-Frank restricts their ability to tailor regulations designed for the largest most complex institutions appropriately for smaller institutions, we as a general principal would support legislative change to enhance regulatory authority to implement tailoring. 

From having run a family owned community bank in Minnesota, I know firsthand 

the value of America’s diverse banking system. This diversity, however, makes onesize-fits-all regulation challenging and often unwise. We believe that the reforms we 

propose—raising the bank SIFI threshold and making it presumptive, encouraging 

a more coordinated approach to bank examinations, and appropriately tailoring 

rules—are both prudent and pragmatic. They would result in a more effective and 

efficient oversight, a safer financial system, and ultimately, a regulatory structure 

that encourages economic growth. 

PREPARED STATEMENT OF SIMON JOHNSON 1

RONALD KURTZ PROFESSOR OF ENTREPRENEURSHIP

MIT SLOAN SCHOOL OF MANAGEMENT

MARCH 24, 2015

A. Main Points 

1) Section 165 of the 2010 Dodd-Frank Act authorizes the Board of Governors of 

the Federal Reserve System to establish ‘‘more stringent’’ standards and reVerDate 0ct 09 2002 11:04 Aug 01, 2016 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6621 S:\DOCS\94375.TXT SHERYL

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2On this and broader Fed history, see Peter Conti-Brown, ‘‘The Twelve Federal Reserve Banks: 

Governance and Accountability in the 21st Century,’’ Working Paper #10, Hutchins Center on 

Fiscal & Monetary Policy at Brookings, March 2, 2015. For the Fed’s extensive supervisory mandate in the 2000s, see Heidi Mandanis Schooner, ‘‘Central Banks’ Role in Bank Supervision in 

the United States and United Kingdom,’’ Brooklyn International Law Journal, 2003, available 

at ssrn.com.

3The Federal Reserve System’s own mission statement has four bullet points. The Fed disappointed along almost every dimension of these stated goals in 2007–08, with the exception 

that it kept the payments system functioning. 4For the history of deregulation and the role of the Fed, see Simon Johnson and James Kwak, 

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, Pantheon 2010, particularly chapter 4. Fed chairman Alan Greenspan was a leader in this push for deregulation 

in the 1980s, 1990s, and into the 2000s but, to be fair, there was a considerable degree of bipartisan consensus on this policy direction. 5Dodd-Frank did create a new authority for the Fed vis-a-vis nonbank financial companies 

that are designated as systemic by the Financial Stability Oversight Council (FSOC).

quirements for bank holding companies with assets over $50 billion compared 

with smaller bank holding companies. At the same time, the Fed is granted 

considerable discretion to determine exactly how to apply these standards, including what requirements are imposed on different size banks (Section 

165(a)(2)(A)). (The precise wording of the Act is discussed further in Section 

C below.)

2) As a matter of practice since 2010, the Fed has not applied one set of standards to all banks with assets over $50 billion. There is substantial differentiation, depending in part on size, but also varying according to factors such business model, complexity, and opaqueness.

3) This differentiation, to date, seems sensible and reasonably robust—subject to 

the points below. It also appears completely consistent with Congressional intent, expressed through Dodd-Frank and earlier legislation that is still in effect.

4) The Federal Reserve has long had responsibility for the safety and soundness 

of the American financial system. This role can be traced back to the panic of 

1907, which led to the founding of the Fed in 1913. The bank runs and broader 

economic problems of the 1930s led to a re-founding of the Federal Reserve 

System, with a clear mandate to prevent the financial system from getting out 

of control.2

5) In the run-up to 2007–08, the Federal Reserve failed: to protect consumers, to 

understand the buildup of risk around derivatives, to supervise appropriately 

some large financial institutions then under its jurisdiction, and to keep the 

system from imploding.3 These failures were not due to lack of resources or an 

unawareness of the changes happening within the financial system. Rather 

there was a deliberate strategy of noninterference, along with many instances 

of actually encouraging various forms of deregulation that, in retrospect, are 

clearly understood—including by Fed staff and Governors—as having increased 

levels of systemic risk.4

6) At the time of the discussions and debates that led to Dodd-Frank, Congress 

had to face the facts: almost all the banking and financial sector regulators 

had failed in their tasks—some even more spectacularly than had the Fed. 

(The exception was the Federal Deposit Insurance Corporation, but a decision 

was taken not to promote the FDIC to the role of system regulator.)

7) With regard to bank holding companies, Congress did not create a new authority for the Fed in Dodd-Frank. Rather Congress re-affirmed the existing broad 

authority and set some minimum bars—specifying bright lines to define for the 

Fed which kinds of bank holding companies require more attention, while allowing the Fed to retain a considerable degree of discretion regarding what exactly that attention will involve.5

8) At the threshold of $50 billion in total assets, bank holding companies are now 

required to prepare resolution plans. They must also file an integrated Systemic Risk Report (FR Y–15).

9) Bank holding companies with more than $10 billion in total assets must conduct annual company-run stress tests. Bank holding companies with more than 


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6Section 165(i)(2) of Dodd-Frank is quite specific on these requirements. However, as applied 

by the regulators, there is a ‘‘substantially abbreviated data reporting template’’ for the smaller 

banks; see Thomas J. Curry, written testimony submitted to this Committee, March 19, 2015. 7 Better Markets, a pro-financial reform group, has produced a very useful fact sheet that shows 

the main thresholds and how the Fed has chosen to apply them. 8See for example, the Fed’s 2008 Policy statement on equity investment in banks and bank 

holding companies. On the ‘‘many activity restrictions and regulatory intrusions’’ involved with 

becoming a bank holding company—owning or controlling a bank—see Saule T. Omarova and 

Margaret E. Tahyar, ‘‘That Which We Call a Bank: Revisiting the History of Bank Holding Company Regulation in the United States,’’ Review of Banking and Financial Law, Vol. 31, 2011–

2012, available at ssrn.com.

$50 billion in total assets must conduct semiannual company run stress tests 

and also participate in stress tests run by the Federal Reserve.6

10) The Fed already had authority to establish regulatory capital requirements, 

liquidity standards, risk-management standards, and concentration limits (including single counterparty credit limits). All of these can be and have been 

tailored as the Fed deems appropriate.7

11) There are, of course, costs with running any sensible risk management program. Many of these so-called ‘‘compliance costs’’ are very much in the interests of shareholders—it was deficiencies in or the complete lack of such programs that resulted in heavy losses and significant financial firm failures in 

the financial crisis. For example, the Dodd-Frank requirement (Section 

165(h)) of risk committees for bank holding companies with more than $10 

billion in assets seems entirely consistent with the interest of shareholders.

12) Shareholders could, in principle, speak for themselves regarding how much 

risk management they want and how they would like this to be organized. 

But we must recognize the limits imposed on shareholder influence over bank 

holding company management, including through the extensive rules on ownership of banks. These restrictions are, ironically, administered by the Federal Reserve itself.8

13) Some recent legislative proposals could increase our deference to the Financial Stability Board (FSB), with regard to either criteria or actual designation 

of banks as systemically important. This would be unwise. The FSB plays an 

important role in facilitating communication between regulators, but not all 

major countries share our concern for or general approach to limiting systemic risk. Relying too much on the FSB would excessively cede U.S. sovereignty to a body with limited accountability. It would also create the possibility of a ‘‘race to the bottom’’, as happened with capital requirements before 

2007.

14) Other proposals suggest that the Financial Stability Oversight Council 

(FSOC) should have to designate banks as systemic in order for them to receive heightened scrutiny from the Fed. This would be a strange arrangement, as FSOC by design includes nonbank regulators, such as the chairs of 

the Securities and Exchange Commission and the Commodity Futures Trading Commission. Allowing or requiring nonbank regulators to tell a bank regulator which banks to regulate (and potentially how to regulate them) does 

not seem wise.

15) It would be helpful to require bank holding companies with at least $10 billion in total assets to file a Systemic Risk Report (FR Y–15). This report is 

concise and provides data on the systemic footprint of a financial institution. 

Hopefully, bank holding companies put together such data for their own management and investors in any case. Publishing such reports provides a clearer 

perspective, for regulators and for market participants, on differences in activities and risks across bank holding companies just below and just above 

$50 billion in assets.

16) Should some bank holding companies with less than $50 billion in total assets 

be subject to heightened scrutiny, for example due to various off-balance sheet 

activities? Without seeing Systemic Risk Reports for those firms, it is hard 

to know.

17) The available Systemic Risk Reports also suggest, at all size levels, it would 

be sensible to think of bank holding company size more in terms of total exposure (on-balance sheet plus off-balance sheet) as defined in that report, rather 

than the more narrow measure of total consolidated assets. (More on this in 

Section B below.) 


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9This section uses information from the Systemic Risk Reports required by the Fed of all bank holding companies with over $50 billion in total assets; end of 2013 is the latest available. The 

form is here: http://www.federalreserve.gov/reportforms/formsreview/FRY15l20120822 lfldraft.pdf. The publicly available data can be accessed, by bank, from this Web page: http:/

/www.ffiec.gov/nicpubweb/nicweb/HCSGreaterThan10B.aspx. 10The instructions are here: http://www.federalreserve.gov/reportforms/forms/FRlY1520131231li.pdf. 11KeyCorp had over $130 billion in total exposure, while BBVA, M&T Bank, and Bancwest had just over $100 billion in total exposure. 12Long-Term Capital Management (LTCM), when it was on the brink of failure in 1998, had on-balance sheet assets of around $125 billion, with capital of $4 billion. ‘‘But that leverage was 

increased tenfold by LTCM’s off balance sheet business whose notional principal ran to around 

$1 trillion’’; David Shirreff, Lessons from the Collapse of Hedge Fund, Long-Term Capital Management. 13Santander USA has total exposure of $98 billion and Deutsche Bank (in the United States) has total exposure of over $60 billion. Strikingly, the assets of Santander USA increased from 

around $77 billion at the end of 2013 to over $113 billion at the end of the third quarter of 

2014—an example of how quickly a large global bank can shift business into its U.S. subsidiary. 

Too Big to Fail: The Hazards of Bank Bailouts, by Gary H. Stern and Ron J. Feldman (Brookings, 2004) highlights, among other points, the potential dangers posed by foreign banks operating in the United States. 14Zions has had repeated problems with the Fed-run stress tests, barely passing in 2015. Part 

of the issue appears to be its large portfolio of Collateralized Debt Obligations. See Julie Steinberg, ‘‘Zions, Regulators Still at Loggerheads,’’ Wall Street Journal, March 22, 2015. 15This CFTC list is current as of March 16, 2015: http://www.cftc.gov/LawRegulation/

DoddFrankAct/registerswapdealer. The OCC latest derivative report shows activities by bank in 

the third quarter of 2014, http://www.occ.gov/topics/capital-markets/financialmarkets/trading/derivatives/dq314.pdf. 16 It is hard to know what will or will not be regarded as systemic as the next crisis develops. 

IndyMac Bancorp, which failed in 2008, had assets of just over $30 billion; in retrospect, its 

Continued

B. The Critical Threshold Issue 

What if the threshold for enhanced prudential standards were lifted, for example, to $100 billion? 

At the end of 2013, there were 10 bank holding companies that had assets be- tween $50 billion and $100 billion.9 However, a better measure of potential importance to the financial system as a whole is ‘‘total exposure’’ of a bank holding company, as defined in the Systemic Risk Report form. This requires a bank to report 

both its on-balance sheet and off-balance sheet activities, including derivatives exposures and credit card commitments, in a comparable way.10 As we learned in 2007 

and 2008, off-balance sheet activities are important and can—particularly at a time 

of stress—have major impact on solvency of financial institutions and on the spillover effects from potential failures. 

In the latest available Systemic Risk Reports, from the end of 2013, 4 of these 

10 bank holding companies actually had ‘‘total exposure’’ (on- and off-balance sheet) 

over $100 billion.11 It is hard to argue that the fate of a bank holding company with a total exposure threshold of over $100 billion is definitely inconsequential to the 

system as a whole.12

Of the six bank holding companies that had under $100 billion in total exposure, 

two are subsidiaries of large non-U.S. banks that recently failed the stress tests conducted by the Fed.13 It would seem unwise to suddenly regard those firms as no 

longer needing more stringent standards than required for smaller and much simpler banks. 

Of the remaining four bank holding companies, two had total exposures between $95 billion and $100 billion. This leaves Huntington Bancshares Incorporated with 

$64 billion and Zions Bancorporation with $75 billion in total exposure.14

While some regional banks have relatively simple business models, others are at 

least partially more complex. For example, 5 of the 10 bank holding companies with 

under $100 billion in total assets are (i.e., own) registered swaps dealers or have 

a significant exposure to derivatives.15

Regional banks, including those in the $50 billion to $100 billion total asset range, 

were reportedly involved in lobbying for the repeal of Section 716 of Dodd-Frank, 

which would have ‘‘pushed out’’ some swaps from their insured bank subsidiaries. 

The repeal of Section 716 at the end of 2014 is a further reason for the Fed and 

other regulators to pay close attention to regional banks. 

If the discussion turns to considering lifting the scrutiny and reporting require- ments for banks having over $100 billion in total assets, then looking at total exposures remains important. In the Systemic Risk Reports for the end of 2013, all of 

the bank holding companies with over $100 billion in assets actually had total exposure of at least $140 billion.16


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problems should have been seen at least as an early warning for the rest of the system. Continental Illinois, which failed in 1984, was one of the top 10 banks in the United States, but its 

assets were only around $40 billion. U.S. Gross Domestic Product in 1984, in current prices, was around $4 trillion, so Continental Illinois’s balance sheet assets had a book value of about 1 

percent of the size of the U.S. economy. In modern terms, this further confirms the notion that 

we should pay close attention as a bank’s size (i.e., total exposures) reaches $150 billion. 17Governor Daniel K. Tarullo discussed the Fed’s ‘‘tiered approach to prudential oversight’’ 

most recently in his testimony before this Committee on March 19, 2015: http://

www.federalreserve.gov/newsevents/testimony/tarullo20150319a.pdf. 18These quotes are from his recent testimony to this Committee, March 19, 2015.

C. Regulatory Interpretation of Dodd-Frank 

Some recent prominent discussion of the Dodd-Frank Act suggests that bank holding companies with over $50 billion are ‘‘designated’’ as ‘‘systemic’’. But this is not 

what the legislation actually says and this is not how the law has been interpreted 

by regulators. 

Section 165(a)(1) of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act reads:

‘‘In order to prevent or mitigate 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 financial institutions, the Board of 

Governors shall, on its own or pursuant to recommendations by the Council 

under section 115, establish prudential standards for nonbank financial 

companies supervised by the Board of Governors and bank holding companies with total consolidated assets equal to or greater than $50,000,000,000 

that——

(A) are more stringent than the standards and requirements applicable to 

nonbank financial companies and bank holding companies that do not 

present similar risks to the financial stability of the United States; and

(B) increase in stringency, based on the considerations identified in subsection (b)(3).’’

Section 165(a)(2) stipulates that the Board of Governors may ‘‘differentiate among 

companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities (including the financial activities of their subsidiaries), size, and any other risk-related factors that the Board 

of Governors deems appropriate.’’ And the threshold for applying some standards 

may be set above $50 billion. 

The Federal Reserve appears to have interpreted this and related sections of 

Dodd-Frank exactly as intended, i.e., as requiring additional scrutiny for bank holding companies over $50 billion, compared with smaller bank holding companies, but 

not as requiring that all bank holding companies over $50 billion be treated the 

same way.17

Martin J. Gruenberg, chairman of the FDIC, confirms that this is how regulators 

have interpreted the law.18

‘‘In implementing the requirement for resolution plans, the FDIC and the 

Federal Reserve instituted a staggered schedule for plan submissions to reflect differing risk profiles.’’

And,

‘‘The FDIC’s stress testing rules, like those of other agencies, are tailored 

to the size of the institutions consistent with the expectations under section 

165 for progressive application of the requirements.’’

Overall, the Dodd-Frank financial reforms told the Fed to be more careful in its 

regulation of bank holding companies with more than $50 billion in total assets, but 

there was definitely no one-size-fits-all requirement. The Fed and other regulators 

seem to have followed both the letter and spirit of this instruction.


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RESPONSE TO WRITTEN QUESTION OF CHAIRMAN SHELBY 

FROM OLIVER I. IRELAND 

Q.1. Mr. Ireland, during the hearing there was disagreement as to 

whether the Federal Reserve has the authority to establish an 

asset threshold above $50 billion for certain prudential standards, 

specifically, resolution plans. Please explain why you believe the 

Federal Reserve does not have the authority to establish a higher 

threshold for resolution plans.

A.1. As I noted in my testimony, the language of Section 165 of the 

Dodd-Frank Act on the Federal Reserve’s authority to establish an 

asset threshold above $50 billion for certain prudential standards, 

such as resolution plans, is confusing. Section 165(a)(2)(B) states:

(B) ADJUSTMENT OF THRESHOLD FOR APPLICATION 

OF CERTAIN STANDARDS.—The Board of Governors 

may, pursuant to a recommendation by the Council in accordance with section 115, establish an asset threshold 

above $50,000,000,000 for the application of any standard 

established under subsections (c) through (g).

While this language authorizes the Federal Reserve Board to set 

higher thresholds for standards established under subsections (c) 

through (g), it does not authorize the Board to set higher thresholds for standards established under subsection (b). 

Subsection (b) states:

(b) DEVELOPMENT OF PRUDENTIAL STANDARDS.——

(1) IN GENERAL.——

(A) REQUIRED STANDARDS.—The Board of Governors 

shall establish prudential standards for nonbank financial companies supervised by the Board of Governors and bank holding companies described in subsection (a), that shall include——

(i) risk-based capital requirements and leverage limits, 

unless the Board of Governors, in consultation with 

the Council, determines that such requirements are 

not appropriate for a company subject to more stringent prudential standards because of the activities 

of such company (such as investment company activities or assets under management) or structure, 

in which case, the Board of Governors shall apply 

other standards that result in similarly stringent 

risk controls;

(ii) liquidity requirements;

(iii) overall risk management requirements;

(iv) resolution plan and credit exposure report requirements; and

(v) concentration limits.


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1 76 Fed. Reg. 67,323, 67,334, n.16 (Nov. 1, 2011). 

To the extent that the Board is following the mandate in Section 

165(b)(1)(A)(iv) in establishing standards for resolution plans, it is 

not authorized to establish a higher threshold under Section 

165(a)(2)(B) above. 

Confusion arises however, when Sections 165(a) and 165(b) are 

read in conjunction with Section 165(d) which provides:

(d) RESOLUTION PLAN AND CREDIT EXPOSURE REPORTS.——

(1) RESOLUTION PLAN.—The Board of Governors shall 

require each nonbank financial company supervised by 

the Board of Governors and bank holding companies 

described in subsection (a) to report periodically to the 

Board of Governors, the Council, and the Corporation 

the plan of such company for rapid and orderly resolution in the event of material financial distress or failure, which shall include——

(A) information regarding the manner and extent to 

which any insured depository institution affiliated 

with the company is adequately protected from 

risks arising from the activities of any nonbank 

subsidiaries of the company;

(B) full descriptions of the ownership structure, assets, liabilities, and contractual obligations of the 

company;

(C) identification of the cross-guarantees tied to different securities, identification of major 

counterparties, and a process for determining to 

whom the collateral of the company is pledged; 

and

(D) any other information that the Board of Governors 

and the Corporation jointly require by rule or 

order.

Simply put, Section 165(a)(2)(B) allows the Board to establish 

higher thresholds for resolution plans created under Section 165(d) 

but not for resolution plans created under Section 165(b) even 

though both of these provisions require the creation of resolution 

plans. The inconsistency in the language of these sections is clear. 

We note that in adopting resolution plan requirements the Board 

used the $50 billion threshold. While it asserted the right to set a 

higher limit under section 165(d),1 it did not choose to do so, nor 

did it explain why it did not. 

While canons of statutory construction and Chevron deference 

could lead to a conclusion that a higher threshold set for resolution 

plans under Section 165(d) by Board regulation would be valid, the 

conflicting statutory language with respect to this requirement and 

other requirements of Section 165 should be revised to remove the 

uncertainty created by the inconsistency. 


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RESPONSE TO WRITTEN QUESTION OF SENATOR REED FROM 

MARK OLSON 

Q.1. The Bipartisan Policy Center has recommend the creation of 

a pilot program, which calls for a consolidated examination effort 

that would put together examiners from each of the OCC, Federal 

Reserve, and FDIC into one unit that could issue single examination reports for banks. Could you explain why the Bipartisan Policy 

Center is in support of this proposal?

A.1. Thank you for that question, Senator. I and Richard Neiman, 

my colleague as co-chair of BPC’s Regulatory Architecture Task 

Force, made and support this proposal because it would improve 

the quality of bank supervision on numerous levels, and would do 

so in a way that would benefit all stakeholders. Specifically, a program of consolidated examination task forces would improve communication among prudential regulators, better coordinate and 

more efficiently use scarce regulatory resources, reduce the supervisory burden on both banks and agencies, allow State regulators 

to leverage Federal resources while preserving the dual banking 

system, and put better and more actionable data more quickly into 

the hands of regulators. 

As you know, banks and thrifts, and their holding companies, are 

subject to examination by multiple Federal and State financial regulators. Prudential supervision ensures that financial institutions 

are sufficiently capitalized, are not engaging in activities that are 

too risky, are liquid enough to meet their obligations, and are otherwise safe and sound. The current examination system, however, 

is fragmented, with overlapping and duplicative responsibilities. A 

banking entity that consists of only a parent holding company and 

a subsidiary national bank, would be subject to examinations by 

the Federal Reserve Board (for the holding company), the OCC (for 

the national bank), and the FDIC (as the insurer of the national 

bank), just for solvency regulation. If the holding company also 

owned a State-chartered bank, then that bank would be subject to 

examination by the State and either the FDIC or a Federal Reserve 

Regional Bank, depending on whether the State bank is a member 

of the Federal Reserve System or not. Each of these agencies has 

a specific mission and focus, leading examiners for the agencies to 

pursue different objectives. There is a significant opportunity for 

greater coordination and cooperation among the Federal prudential 

banking agencies since they share a common safety-and-soundness 

goal and have limited resources. 

Proposed solution 

Our proposed solution is to create a pilot program for a consolidated examination force with participation from the three Federal 

prudential banking agencies (the Federal Reserve, FDIC, and 

OCC). The pilot program would be directed by a new supervisory 

committee within the Federal Financial Institutions Examination 

Council (FFIEC), an agency designed to foster cooperation among 

its member agencies, including the three prudential bank regulators. The voting Members of the Committee would be the heads 

of supervision of the three prudential banking agencies and the 

FFIEC’s State banking regulator. 


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The supervisory committee would select a group of banks of varying characteristics (e.g., size, complexity, type of charter, and State 

of domicile) to participate in the pilot program. For each institution, the committee would create a consolidated examination task 

force made up of examiners from each agency with jurisdiction for 

that institution. The task force would be led by the institution’s 

primary regulator, but examiners from each participating agency 

would work together to:

• Develop a single set of supervisory questions to ask an institution;

• Jointly examine each institution; and

• Ensure that each examination produces a single, combined report that is available to all agencies that participate in a particular exam.

A task force could be assigned to conduct a full examination of 

an institution, or could be assigned to conduct a more targeted examination, such as for risk management or Volcker Rule compliance. Further, State banking regulatory agencies would be invited 

to participate in task forces that are assigned to institutions within 

their respective States, allowing them leverage Federal resources to 

an extent they would not otherwise be able. 

The committee would be responsible both for building and executing the pilot program in a way that tests its effectiveness under 

a variety of conditions, including coordinating consistent supervisory priorities, protocols and procedures for examination task 

forces and otherwise ensuring coordination among participating 

agencies. The committee would also be responsible for assessing 

the pilot program’s effectiveness and making recommendations to 

improve the operation of consolidated examination task forces. 

A well-designed and pilot program would realize a number of advantages:

• Consolidation would improve communication among supervisory teams since examiners would be trained under a common framework and be overseen by a unified committee of supervisors drawn from the three agencies. Since financial stability can be threatened by a lack of communication among 

agencies, the advantages of this structure should be substantial.

• Regulators could better leverage their specialist personnel, 

whose expertise would be usable across a wider set of institutions. This would improve the overall quality of examination 

teams, because those teams would be able to draw on a wider 

variety of experiences and best practices.

• The quality of State regulation would be significantly boosted 

by allowing individual States to leverage Federal examination 

teams to assist in State examinations. State agencies often 

cannot afford to employ multiple specialists or do not have the 

overall level of resources available to the Federal agencies. To 

the extent that the Federal examiner training and procedures 

incorporate individual State supervision objectives, State bank 

supervisors may elect to put greater reliance on accepting a 

Federal examination in lieu of a separate State examination. 


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Federal regulators would also benefit from better informationsharing with States through this process.

• Consolidated budgeting for examiners and examinations would 

enable the agencies to better coordinate and apply examiner 

teams to particular lines of business or institutions.

• Uniform standards for training and management of examiners 

and supervisors should lead to more consistent and translatable examination results and expectations, as well as streamlining the process for both regulators and financial institutions.

• Human capital among examination teams would be developed 

by providing greater opportunities for career advancement, 

consistent and higher compensation standards, and a betterdefined and supported career path.

• Integrating key support operations—such as hiring, training, 

compensation, and promotions—for examiners should make the 

management of the examination force more efficient and less 

costly compared with sustaining the same functions at multiple 

agencies.

• It would enable examiner teams to take advantage of interchangeable elements offered by each agency. At the same time, 

it would permit the development of specialized teams. For example, examiners could specialize in banks of certain sizes and 

complexities, geographic regions, or predominant lines of business (e.g., agricultural loans, small-business lending, commercial real estate, and derivatives).

These proposals exist in harmony with the dual banking system. 

The task force believes that the existence of both federally chartered and State-chartered banks provides great benefits, offering 

more choices for consumers and allowing for greater policy innovation by individual States. The consolidated examination force envisioned here will provide more and better resources to both State 

and Federal jurisdictions, thereby improving the quality of supervision across the board. 

A pilot program would improve and enhance the efficiency and 

quality of the examination and supervision of insured depository 

institutions and their holding companies through better coordination and training with improved efficiencies. 

RESPONSE TO WRITTEN QUESTION OF SENATOR VITTER 

FROM MARK OLSON 

Q.1. Mr. Olson in your written statement you described the com- plications with the arbitrary SIFI threshold of $50 billion and presented different ideas to overcome this arbitrarily threshold. 

What threshold amount or formula would you propose for small or community banks where the current threshold is at $10 billion?

A.1. Thank you for that question, Senator. Although I and Richard 

Neiman, my colleague as co-chair of BPC’s Regulatory Architecture 

Task Force, did not make a specific recommendation regarding a 

threshold for community banks, I believe that the principles we articulate in reference to the so-called ‘‘bank SIFI’’ threshold apply 

here as well. 


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In short, financial regulatory agencies should focus a greater 

share of their scarce resources on the institutions and activities 

most likely to produce systemic risk that might threaten financial 

stability. While any threshold will inherently be arbitrary, it is 

clear that the risk presented by smaller banks that are well-managed, well-capitalized and engaged predominantly in plain-vanilla 

activities is significantly lower than that presented by larger banks 

with high-risk profiles. Regulators can and should tailor their regulation to account for these differences. 

We also believe that there is a need to index any threshold of 

this type. Currently, these thresholds in Dodd-Frank are static, 

meaning that over time, their real value will decline relative to a 

number of economic measures. In effect, a static $10 billion threshold will capture more small banks over time much the same way 

that a dollar buys less than it did 20, 50, or 100 years ago. We believe these thresholds should be indexed to GDP or perhaps the 

overall size of the banking industry, rather than to a metric like 

inflation. This is because the most relevant criterion in determining a bank’s impact on the financial system is how significant 

that bank is relative to the economy or the financial system rather 

than the purchasing power of a dollar. 

RESPONSE TO WRITTEN QUESTION OF SENATOR REED FROM 

SIMON JOHNSON 

Q.1. I think it may surprise most of my colleagues to learn that 

the employees at the regional Federal Reserve banks are not currently subject to the same ethics laws that other Government employees are subject to. Do you think that the employees at the regional Federal Reserve banks should be subject to the same ethics 

laws that Government employees are subject to, such as the ban 

on accepting gifts from regulated entities?

A.1. Yes, employees at the regional Federal Reserve banks should 

be subject to the same ethics laws as all other Government employees, including the ban on accepting gifts from regulated entities. 

The Federal Reserve System is an important part of the American Government. Within the Fed System, the Federal Reserve 

banks operate as important components of policymaking and implementation. People working in these banks are essentially Government employees, with all the responsibilities that this entails. 

Through some quirks of legal and political history, some Federal 

Reserve employees are not treated the same as other Government 

employees, for example with regards to ethics law. This is a problem that should be addressed. The current situation only undermines the legitimacy and the effectiveness of the Fed.


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