Magazine article American Banker

There's a Better Way to Identify SIFIs Than Size: Office of Financial Research

Magazine article American Banker

There's a Better Way to Identify SIFIs Than Size: Office of Financial Research

Article excerpt

Byline: Ian McKendry

WASHINGTON -- The Dodd-Frank Act's $50 billion threshold for determining which banks are systemically important should be scrapped and replaced with an indicator test, according to a report issued Thursday by the Office of Financial Research.

Though the message was not new -- the industry has been pressing for just such a move in regulatory relief legislation being developed in the Senate -- the messenger was surprising. Though an arm of the Treasury Department, the independent Office of Financial Research has generally not weighed in pending political issues, favoring a more academic approach.

But the report was unequivocal that the current standard was insufficient for determining what institutions pose a risk to the broader economy.

"Our analysis indicates that a multifactor approach could replace the $50 billion asset-size threshold that some U.S. regulations use to identify U.S. banks that are not" considered globally systemic "but warrant enhanced regulation," wrote Richard Berner, director of the research agency, in a blogpost.

Regulators have divided firms over the $50 billion category into three tiers. Those with between $50 billion and $250 billion of assets are subject to additional requirements, including additional stress testing, the creation of resolutions plans and enhanced liquidity rules. Banks with more than $250 billion in assets are subject to even tougher standards requiring them to hold greater capital. Finally, the eight banks considered globally-systemic face more onerous regulatory requirements.

The OFR report, titled "Size Alone is Not Sufficient to Identify Systemically Important Banks," the research agency says that the test for which banks are considered globally systemic could be applied to U.S. institutions with more than $50 billion in assets in helping to determine which institutions are truly systemically important.

In addition to a bank's size, international regulators look at a bank's interconnectedness, substitutability or reliance on short-term funding, complexity of business model and cross-jurisdictional activity to determine which banks are globally systemic.

Berner said adapting that test for U.S. firms would be a better gauge of which banks above $50 billion warrant higher standards.

"Such an approach could identify a much smaller group of non-G-SIB banks for enhanced prudential standards," he wrote. "Relatively large but less-systemic U.S. institutions might no longer face regulatory costs disproportionate to their importance. Smaller banks that play unique roles in U.S. markets, are more complex, or rely on short-term wholesale funding could continue to face higher standards."

The research agency recommends some changes to the G-SIB test. First, it wants to better account for so-called "substitutability" risks "from banks that offer unique services that are central to the functioning of financial markets. …

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