Garnet Capital Advisors Blog

Regional banks have been putting significant effort into either raising the threshold for being deemed systemically important - which currently stands at $50 billion - or scrapping the level completely. These mid-sized banks have been asserting that they are different from Wall Street megabanks and therefore should not have to meet the same requirements, such as higher capital requirements and having living wills, according to American Banker. 

Regional banks speak out
Some regional banks have been speaking out, detailing the challenges they are encountering as a result of being classified as systemically important financial institutions, American Banker reported. The compliance costs of the 20 regional banks that surpass the $50 billion threshold have risen by $2 billion, stated Deron Smithy, executive vice president and treasurer Regions Financial Corporation.

Speaking before the Senate Banking Committee last month, Smithy elaborated on the costs incurred by Regions Financial, which is based in Birmingham, Alabama, American Banker reported. At the time, his company had roughly 100 employees devoted to compliance and another 150 spending at least some of their time in new compliance activities.

Evaluation methods
While regional banks are struggling to overcome such difficulties, those who support changing existing regulations have asserted that these mid-size financial institutions should not be forced to meet requirements created for SIFIs because the regional organizations don't score on international evaluations of systemic significance, according to American Banker.

When determining which banks should be deemed systemically important, some have suggested using a more qualitative approach that considers interconnectedness, complexity and other variables, American Banker reported.

"Right now, you have a threshold as a blunt instrument, so the idea is to give regulators a toolbox full of tools they can use as they see fit," Edward Mills, a policy analyst at FBR Capital Markets, told American Banker. "That's where the sell for this is not a rollback of Wall Street reforms, but a removal of an arbitrary threshold that's allowing an unfair advantage to the large-cap institutions."

Impact on lending
To give an example of how the system is working currently, Smithy emphasized during the Senate hearing that regional banks' ability to lend has suffered because these organizations must meet higher standards for capital and liquidity, according to American Banker.

Because these financial resources are going toward meeting the requirements, they are not available for lending, he stated, American Banker reported. Smithy spoke to how scrapping the $50 billion threshold could affect loan origination at Regions, stating that if the organization didn't have to meet the new requirements, its capacity for lending could rise by as much as 10 percent.