On October 26, 2017, the Office of Financial Research (“OFR”), an arm of the Treasury Department, issued a Report of its Director that challenges the standard set forth in the Dodd-Frank Act for determining which entities are systemically important and should be subject to the supervision of the Federal Reserve because their failure would pose the greatest risk to financial stability.
A new OFR viewpoint, “Size Alone is Not Sufficient to Identify Systemically Important Banks,” argues that a multifactor approach is superior to considering asset size alone to assess a bank’s systemic importance.
The Report observes that regulators already use such an approach to identify global systemically important banks (“G-SIBs”). They consider size and four other factors to measure a bank’s systemic importance: (1) interconnectedness, (2) substitutability, (3) complexity, and (4) cross-jurisdictional activity. The eight G-SIBs based in the United States face the most stringent standards.
The Report further notes that the OFR’s 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 G-SIBs, but warrant enhanced regulation.
The Report asserts that such an approach could identify a much smaller group of non-G-SIB banks for enhanced prudential standards. 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.