Janet Yellen Supports Changes to Systemically Important Distinction

By Victoria McGrane 

Federal Reserve Chairwoman Janet Yellen on Thursday said she would support a "modest increase" to the minimum size at which banks are drawn in for tougher scrutiny by the central bank.

At issue is the $50 billion threshold set by the 2010 Dodd-Frank law at which a bank automatically qualifies for Fed supervision and regulation under a set of tougher capital, liquidity and other requirements such as participating in the Fed's annual "stress test" exam. Regional banks above the threshold like Zions Bancorp, Huntington Bancshares Inc. and Regions Financial Corp. are fighting for that bar to be raised and Ms. Yellen's remarks are the latest sign that they may eventually be successful in that pursuit.

These banks say they shouldn't face the enhanced regulatory scrutiny because their businesses are more traditional than Wall-Street banks and aren't systemically important to the U.S. economy.

"I would be open to a modest increase in the threshold," Ms. Yellen said Thursday in remarks before the Senate Banking Committee, marking the first time she has publicly endorsed the idea.

The comments come after Senate Banking Chairman Richard Shelby (R., Ala.) included a proposal to alter the limit in a wide-ranging regulatory package approved by his committee in May. Ms. Yellen's comments strike a different tone on the issue than the Obama administration, which has been reluctant to embrace any changes to Dodd-Frank.

Just last week, Treasury Secretary Jacob Lew sounded far less enthusiastic, saying Mr. Shelby's proposal "would take some of the very largest financial institutions in our country out of heightened scrutiny."

Mr. Shelby's bill, which was approved by the banking panel on a party-line vote, would raise the automatic threshold to $500 billion, but allow regulators--guided by criteria such as size, international risk and complexity--to decide whether banks between $50 billion and $500 billion should face tougher rules.

"We are encouraged by the continued discussion of the benefits of increasing the threshold," James Abbott, director of investor relations at Zions Bancorp, which has $58 billion in assets, said of Ms. Yellen's remarks.

Columbus, Oh.-based Huntington and Birmingham, Ala.-based Regions didn't immediately return requests for comment.

While Dodd-Frank gave the Fed limited power to tailor many of the tougher rules prescribed for those banks above the $50 billion threshold, Ms. Yellen said, it is harder to scale the stress tests or the requirement that the banks each year write and revise so-called "living wills" to show they can go through bankruptcy without damaging the broader financial system.

"It does look from our experience that the costs exceed the benefits" in these areas for some of the smaller banks, Ms. Yellen said.

Her support for any change, however, would depend on the Fed retaining the discretion to impose stress testing and other requirements on banks below the new threshold if the Fed deems them a big enough risk to the financial system, she said.

The fate of the $50 billion threshold remains uncertain despite the existence of bipartisan support for some sort of change.

Some Democrats including Sen. Sherrod Brown of Ohio say they're open to raising the threshold, though they're wary of cutting a deal on Mr. Shelby's broader bill for fear it will gut other provisions of Dodd-Frank they support. Earlier this week, Mr. Brown mentioned $150 billion or $200 billion as a possible higher level. Mr. Shelby, who says he is open to negotiating aspects of his bill, needs the support of at least a handful of Democrats to get a bill through the full Senate.

Other Democrats such as Massachusetts Sen. Elizabeth Warren are adamantly opposed to raising the threshold above $50 billion. Ms. Warren says that the threat posed by the possible failure of more than one midsize bank at a single time justifies keeping the level where it is. She also says Dodd-Frank gives the Fed enough power to tailor the rules for less risky banks.

Rachel Louise Ensign contributed to this article.

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