U.S. Senator Richard Shelby (R-AL) questions U.S. Treasury Secretary Timothy Geithner (not pictured) during the Senate Banking Committee on the Financial Stability Oversight's Council annual report to Congress and recent developments pertaining to the London Interbank offered rate (LIBOR) in Washington July 26, 2012. Financial regulators are examining survey-based measures of financial prices and interest rates other than Libor for potential manipulation, Geithner told Congress on Thursday. Senator Tim Johnson (D-SD) is at left. REUTERS/Gary Cameron (UNITED STATES - Tags: POLITICS BUSINESS) - RTR35CJP
US Senator Richard Shelby

America’s struggle to decide which banks pose grave threats to the financial system was laid bare on Thursday as Republicans challenged regulators over where they apply the most stringent supervision.

Six years on from the financial crisis, a push by Republicans to modify post-crisis reforms is reigniting conflict over how to identify “systemically important” banks that would threaten the economy if they fell into trouble.

The Dodd-Frank act, the main post-crisis legislation, says that banks with more than $50bn in assets — there are 38 — should face tighter regulation, including requirements to hold more capital, undergo stress tests and prepare “living wills” to wind themselves up in a crisis.

But the $50bn threshold is deeply unpopular with many medium-sized banks and their Republican allies.

They say it is arbitrary and imposes costly and stifling rules on institutions that do not pose any risks comparable to giants such as JPMorgan and Citigroup.

Senator Richard Shelby, the Republican chairman of the Senate banking committee, said he had concerns about the $50bn threshold serving as an “automatic cut-off for systemic risk”.

“It has been said that regulators should not apply [stringent] macroprudential rules to those institutions that do not pose macroprudential risks. I could not agree more,” he told a hearing, the third of four he has organised to pave the way for legislation to modify Dodd-Frank.

Top bank regulators, however, offered only faint glimmers of support for potential changes to the way risky banks are designated.

Jack Lew, the US Treasury secretary, said earlier this week that he was opposed to changing the threshold. The Obama administration has been alarmed by emerging challenges to Dodd-Frank, fearing that small tweaks could open the way to bigger revisions that would allow a return to the kind of bank risk-taking that led to the financial crisis.

Some banks and Republicans want to reduce the number of institutions classed as systemically important by raising the threshold to a figure such as $100bn or indexing it to gross domestic product or another economic indicator.

Others — including the American Bankers Association, a lobby group — want to eliminate the threshold and instead have regulators determine systemic importance based on banks’ complexity, interconnections with other institutions, range of activities and global presence.

Daniel Tarullo, the Federal Reserve governor in charge of bank regulation, was asked at the hearing if any banks that did not pose systemic risks were currently regulated as if they did and said: “To a degree, yes.”

He said it was “worth thinking about some adjustment” to the $50bn threshold, but indicated that his concerns were confined to bank stress testing.

Examining how banks with $50bn-$100bn of assets would fare in simulated crises imposed significant costs on both banks and regulators and had only “marginal benefits for [the] safety and soundness” of the lenders, he said.

Institutions in the $50bn-$100bn category include groups with limited national profiles such as Zions Bank of Utah, KeyCorp of Ohio, and M & T Bank from upstate New York.

Another regulator, Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, was less willing to acknowledge problems with the threshold and said that all banks that were regulated as if they posed systemic risks did merit that treatment.

He did, however, say he was ready to work with lawmakers on modifying Dodd-Frank to give regulators more flexibility to tailor their demands according to the size and nature of banks above $50bn. The biggest bank, JPMorgan, has assets of $2.5tn.

The Obama administration has also sought to shift debate away from the threshold itself and on to ways of ensuring that not all banks above it are treated as global giants.

Elizabeth Warren, a Democratic senator and anti-Wall Street crusader, warned against anything that would rob regulators of the discretion to intervene with medium-sized banks where necessary.

“That is a recipe for missing the build-up of excessive risk in the financial system and it reflects the kind of ‘let the banks run free’ mindset that created the last financial crisis,” she said.

Away from the hearing, James Ballentine, chief lobbyist at the American Bankers Association, suggested that a more holistic analysis of systemic importance could lead to just three, four or five institutions being classified as risky.

Mayra Rodriguez Valladares, a regulatory consultant, supports a broader analysis of risks, but said regulators needed to keep a close eye on institutions that were not global but could pose systemic risks on a regional basis due to their concentration in certain parts of the US.

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