Small and mid-sized institutions that did not take part in the types of activities that helped precipitate the financial crisis have nonetheless seen their compliance burdens increase astronomically since the passage of Dodd-Frank.
Sen. Chuck Schumer, D-N.Y., told regulators during a Feb. 6 Senate Banking Committee hearing that the phenomenon — known in some circles as regulatory trickle down — has been particularly troubling for larger, “plain vanilla” institutions that trip certain asset size thresholds.
Schumer said such institutions “don’t do all of the investment banking activities, the trading activities that the largest banks do, and yet they seem regulatory often to be lumped in with them.”
“Some of these institutions are in upstate New York, and they’re really good for the economy,” Schumer said.
Federal Reserve Governor Daniel Tarullo acknowledged the issue and said regulators must develop supervision regimes that are tailored to institutions’ size and complexity. He argued that the case against regulatory trickle down is rooted in Dodd-Frank.
“Section 165 of Dodd-Frank put into law the proposition that with increasing size and complexity of banks, there should be increasingly stringent regulation,” Tarullo noted. “It sounds simple, but that has not always been a precept of financial regulation, and I think it’s central to what we should be trying to do.”
Tarullo said the Fed has been working on regulatory and supervisory regimes tailored specifically to the largest, most complex financial institutions. However, he acknowledged that banking supervisors sometimes tend to view big bank requirements as the height of financial regulation. He also indicated that stress testing is an area where regulatory trickle down can occur.
“We’re supposed to have different expectations for the different size institutions, and I realize that the senior people in our banking supervision and regulation division need to keep making clear: they are different expectations,” Tarullo said. “It’s almost a natural instinct of people to say we want the best and the toughest.”
He said regulators should develop state-of-the-art supervision regimes for community banks, regionals and super-regionals, each of which “is not a paler or stronger version of the other but is instead customized to those institutions.”
When it comes to banks that are engaged in traditional lending activities, Tarullo said regulators should focus on “strong capital, good examination and some of the traditional activities restrictions.”
“Some of the other things just cost more than they’re worth in terms of increased safety,” Tarullo said.