WASHINGTON — Senate Banking Committee Chairman Mike Crapo sounded optimistic Thursday about reaching a bipartisan deal for regulatory relief, but a hearing with regional and large-bank representatives once again emphasized the gulf between what lawmakers are likely to pass and what the industry is seeking.

The Idaho Republican commended a Treasury Department report released this week that provided a list of recommendations to streamline financial regulations, citing several as ideas for possible legislation.

“I am particularly encouraged by a number of specific recommendations for midsize and regional banks, including: changing the $50 billion SIFI threshold; exempting midsize banks from company-run stress tests; exempting banks without significant trading activity from the proprietary trading prohibition of the Volcker Rule; and improving the transparency and process of CCAR and living wills," Crapo said.

Yet his Democratic counterpart, Sen. Sherrod Brown of Ohio, slammed the report as a Wall Street giveaway.

“Let me be clear: Proposals to weaken oversight of the biggest banks have no place in this committee’s process,” Brown said.

But Brown did not shut the door on any changes to Dodd-Frank.

“I am optimistic that there is room for agreement on a modified regime for overseeing regional banks,” he said.

Conversations on Capitol Hill continue to gravitate toward some sort of deal favoring relief for all but the largest institutions.

Sen. Mike Crapo, R-Idaho
“I am particularly encouraged by a number of specific recommendations for midsize and regional banks, including: changing the $50 billion SIFI threshold; exempting midsize banks from company-run stress tests; exempting banks without significant trading activity from the proprietary trading prohibition of the Volcker Rule; and improving the transparency and process of CCAR and living wills," Sen. Mike Crapo said. Bloomberg News

But Greg Baer, president of The Clearing House, an association owned by the largest banks, said that any twisting of the regulatory dials must include those institutions as well.

“Community bank relief is warranted," Baer said, "but as the Treasury Department noted in its report this week, community banks hold only 13% of U.S. banking assets. The 25 banks that own The Clearing House fund more than 40% of business loans held by banks and more than 75% of loans to households. If the goal is economic growth, it cannot be achieved while excluding large and regional banks from that effort.”

Other industry witnesses, however, said a more fundamental change is needed, in which big and small banks are subject to completely different regulatory standards.

“The risk comes from the 'too big to fail' banks, so to me, we need to regulate them as one industry and then outside of that … community banks or large community banks … I think those are a very different type” of bank that should regulated differently, said Robert Hill, chief executive of the $11 billion-asset South State in Columbia, S.C.

Sen. Tom Cotton, R-Ark., immediately latched on to that idea, noting that there are only 79 banks with assets of $10 billion to $50 billion and concluding that it would be easy to tailor regulation appropriately. Currently, all banks with more than $50 billion of assets are subject to enhanced standards for systemically important financial institutions. While there is widespread agreement to raise that figure, there is no consensus on what should replace it.

“It seems” regulation “can be done in a more discriminating basis than an arbitrary threshold,” said Cotton, who pointed to a 2015 proposal to raise the SIFI threshold to $500 billion, which was opposed by Democrats. “In principle you could have a $50 billion bank or a $500 billion bank, for that matter, that is relatively plain vanilla, conservative and therefore not all that risky” and could be regulated without the complex requirements that come with being a SIFI.

The regional banks have advocated for a House proposal put forward last year by Rep. Blaine Leutkemeyer, R-Mo., that would make a SIFI determination by testing five different characteristics of a bank. Cotton endorsed the concept, saying size should be one of the measures but not the only one.

However, Sen. Elizabeth Warren, D-Mass., attacked regional banks with more than $50 billion in assets for pushing to get rid of the threshold and zeroed in on Harris Simmons, CEO and chairman of the $65 billion-asset Zions Bancorp. in Salt Lake City, who testified against tighter requirements for commercial real estate loans while chairman of the American Bankers Association in 2006.

“Whenever things are going OK, the banks come in here and say, ‘Hey, let's reduce the rules,’ " and then when they get in trouble, “they say to the taxpayers, ‘Bail me out,' ” Warren said. Banks with heavy loan concentrations in commercial real estate generally fared worse during the financial crisis, she noted.

“Our job is to make sure we do not permit the next failure to happen because it helps short-term bank profits,” Warren said.

The issue will be taken up again next week, when bank regulators are scheduled to testify before the panel.

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