How "Too Big to Fail" Banks Will Get Even Bigger (JPM, BAC, GS)

June 03, 2017

In a rare show of bipartisan consensus, Republicans and Democrats in Washington seem ready to raise the current $50 billion asset benchmark for banks facing the tightest regulatory scrutiny under the Dodd-Frank Financial Regulatory Reform Act of 2010, the Wall Street Journal reports. The question is how high. Democrats suggest $100 billion to $150 billion, while Republicans favor $250 billion to $500 billion, per the Journal.

Fewer But Bigger Banks

This means the average size of U.S. banks presumed to be "too big to fail" would rise sharply as the number of smaller banks in the group plunges. Based on the asset sizes under discussion, the number of banks subject to the most stringent regulations, currently 37, would be reduced to as many as 30 or as few as six institutions, the Journal says.

Meanwhile, President Trump has promised to dismantle Dodd-Frank entirely, but the odds of that happening seem to be diminishing. So piecemeal adjustments to the landmark law, such as to the $50 billion asset benchmark, are much more likely. Treasury Secretary Steven Mnuchin has told the Senate Banking Committee that a $50 billion bank is not as systemically risky as one with $750 billion or $2 trillion in assets, the Journal says. Even Barney Frank, the former Democratic representative from Massachusetts whose name is on the law, admits that $50 billion in assets was an arbitrary number that should be raised, the Journal adds. (For more, see also: Trump's Bank Deregulation May Send Investors $120B and Trump's Vow to End Dodd-Frank Faces Big Hurdles.)

The Big 12

The one sure bet is that the six biggest national banking institutions will continue to face the stiffest regulation. These include JPMorgan Chase & Co. (JPM

), Morgan Stanley (MS), Wells Fargo & Co. (WFC), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Bank of America Corp. (BAC).

In addition to commercial banking, all six also are involved in investment banking, asset management and broker-dealer activities. Goldman Sachs and Morgan Stanley are primarily securities firms, but were given TARP funds and made subject to banking regulations during the 2008 financial crisis. BofA acquired Merrill Lynch, which was facing possible insolvency, during that period. (For more, see also: Banks Say "Too Big" Is Best Amid Calls for Breakup (BAC, JPM).)

If Congress settles on a new $250 billion asset cutoff for the highest level of regulation, the other six banks qualifying would be, according to bank asset data from the Federal Reserve: U.S. Bancorp (USB

), PNC Financial Services Group Inc. (PNC), Bank of New York Mellon Corp. (BK), Capital One Financial Corp. (COF), The Toronto-Dominion Bank (TD) and State Street Corp. (STT).

The Stakes

Banks that fall below a new, higher asset threshold could become more profitable, as the result of relaxed capital requirements and more freedom to engage in mergers. They also would have more flexibility to raise dividends or repurchase stock, as MarketWatch notes, and would be spared costly annual stress tests. However, these newly-liberated banks also might take bigger risks, with the potential for bigger losses. The Journal observes that banking crises sometimes are set off by problems at smaller institutions. Finally, removing a bank from the list of those subject to the most stringent regulation does not guarantee that it would never be bailed out at taxpayer expense.

Risk vs. Assets

Republicans in Congress also are considering basing the strictest regulation on measures of a bank's risk, rather than its assets, per the Journal. Based on that risk criteria, Bob Wilmers, CEO of M&T Bank Corp. (MTB

), told the Journal that regulators would be in a position to effectively liquidate many smaller banks. M&T has $123 billion in assets and Wilmers favors raising the regulatory bar to $250 billion or more, the Journal says.

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