WASHINGTON The banking industry is often cast in Washington as a story of David and Goliath the struggling mom-and-pop community bank versus the hulking, careless megabank.
But the old narrative is being revisited in the fight over the Dodd-Frank Act's $50 billion asset threshold for enhanced prudential standards. A loose coalition of more than a dozen regional banks is lobbying hard to do away with the cutoff or at least get it raised.
The battle has become a key test for how successful those institutions ranging from just over $50 billion of assets up to nearly $400 billion prove to be in defining themselves differently than megabanks on Capitol Hill.
"What we're seeing here is the regional banks playing offense for the first time with their advocacy strategy, rather than defense," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading.
The regional banks have dramatically stepped up their presence in Washington in recent years, but this will be their first major legislative test since Dodd-Frank was enacted in 2010.
U.S. Bancorp, Regions Financial, SunTrust Banks, BB&T Corp. and Toronto-Dominion Bank all spent more than $1 million each on lobbying in 2014, according to the Center for Responsive Politics.
While that's far less than the over $6 million spent by Wells Fargo and JPMorgan Chase, respectively, it's significantly more than the regional banks were shelling out just a few years ago. In fact, SunTrust and BB&T spent no recorded money on lobbying in the lead-up to the financial crisis or during the drafting of Dodd-Frank.
Meanwhile, Fifth Third Bancorp, PNC, KeyCorp and Huntington Bancshares each spent hundreds of thousands of dollars over the past year on lobbying all up from pre-crisis levels.
"They're in much better shape than they were before and during Dodd-Frank," said one former senior Senate staffer, who spoke on the condition of anonymity. "Now they're a known quantity. Their profile is certainly much higher than it was."
Lobbyists for the banks are clear to emphasize that the regionals are operating as a loose coalition, not a formal trade group, which allows them to diverge on policy issues when needed.
Still, analysts noted that they've been successful in their conversations with regulators so far, which could help add momentum to legislative efforts to remove or raise Dodd-Frank's $50 billion threshold for systemically important institutions.
"The coalition has done an amazing job presenting its case to regulators as to why regulation should be applied differently to them," said Edward Mills, an analyst at FBR Capital Markets. He pointed, for example, to the fact that regulators have applied the toughest rules for liquidity and leverage to the
very largest banks, those with over $250 billion in assets.
The cornerstone of the regionals' strategy in the fight over the $50 billion threshold rests on differentiating their business from that of their largest competitors. They argue that new Dodd-Frank standards, even when tailored, are unnecessarily onerous for the kinds of risks that the banks pose and that the asset cutoff was chosen arbitrarily in the first place.
A fact sheet circulated by the coalition emphasizes the banks' bread-and-butter lending to individuals and small businesses, aligning the banks more closely with their smaller counterparts, the community banks.
"Regional banks focus on traditional banking services, accepting deposits and making loans to consumers and small to medium-sized businesses," according to the fact sheet, which includes logos for 18 of the regional banks. "Yet, the federal law treats regional banks as if they hold the same risk profiles as complex, interconnected banks, imposing costly regulatory restrictions that will limit their ability to support economic growth and job creation."
They've gained considerable traction so far. Rep. Blaine Luetkemeyer, R-Mo., introduced a bill last session that would have replaced the $50 billion threshold with an assessment based on business activity. The bill attracted 81 co-sponsors, including 20 Democrats.
Federal Reserve Board Gov. Daniel Tarullo has also called for raising the threshold, while former Rep. Barney Frank, D-Mass., said he's open to having Congress revisit the issue.
Looking forward, Luetkemeyer has indicated he plans to reintroduce his bill soon, perhaps with some tweaks, and the Senate Banking Committee is expected to take up the issue in coming months as part of a broader look at reforms to Dodd-Frank.
"We're going to get into that as we go," said Chairman Richard Shelby, R-Ala., in a recent interview with American Banker. "So many things are arbitrary and they shouldn't be."
But consumer groups and some progressive lawmakers are beginning to push back against the effort, arguing that the regionals are still core to the financial system, even if they aren't strictly creatures of Wall Street.
Sen. Elizabeth Warren, D-Mass., suggested at a Banking Committee hearing earlier this month that she thinks regulatory relief efforts should be focused on the smallest institutions, those with less than $10 billion in assets.
She also warned fellow lawmakers to be wary of legislation framed as being helpful for community banks that would actually benefit larger institutions a legislative Trojan horse, of sorts.
While Warren hasn't spoken out directly on whether or not to raise the $50 billion threshold, the remarks are not a good omen for regional banks on where the progressive wing of the Democratic Party might land on the issue.
Americans for Financial Reform, a consumer group, also circulated its own fact sheet earlier this month, addressing what it argues are false claims about the large regional banks. The fact sheet notes that Dodd-Frank gave regulators the ability to modify their regulations based on factors like risk and complexity for banks over $50 billion, and that the regional banks present a risk to the financial system, particularly when taken as a group.
"In combination, the 26 large regional banks hold $3.9 trillion in assets, over one-fifth of all banking assets in the country," the fact sheet says. "If multiple failures occurred among these banks, substantial financial stress could result and bank failures could become extremely difficult to manage."
Marcus Stanley, AFR's policy director, said that efforts to do away with a single threshold are particularly dangerous, calling the Luetkemeyer proposal "radical and a real weakening of the law."
He emphasized that the law permits regulators to adapt the standards for different banks and that the process for designating all banks individually would be too time-consuming, pointing to the Financial Stability Oversight Council's procedures for designating non-bank SIFIs.
"It's been four and a half years since Dodd-Frank was passed, and the FSOC has designated four different [non-bank] entities. If you say that all 38 banks over $50 billion have to be individually designated, that's going to take a lot of time," Stanley said.
Regional bank supporters, of course, reject reform advocates' concerns, arguing that regulators haven't effectively tailored the rules so far, and that being subjected to the enhanced standards at all is burdensome and unnecessary given their business models.
They also argue that international regulators on the Basel Committee have adopted a more holistic approach to identifying globally systemic financial institutions, providing a more detailed framework for how to think about risk. The Fed also uses a related framework when analyzing domestic bank mergers. The Luetkemeyer bill would require U.S. regulators to adopt a similar approach, which is based on complexity, interconnectedness and other factors, including size.
Still, it's possible pressure from the left could force the banks to distance themselves even further from the megabanks, their sometimes-allies, in an effort to make legislation as politically desirable as possible.
"What's going to be important to this political fight is to truly make the SIFI threshold something that is anti-'too big to fail,'" Mills said. "You have to fight this fight almost as retribution for the globally systemic guys."
Like many alliances in Washington, the relationship between the big banks and the regionals is a complicated one. Observers noted that behind closed doors, the megabanks have made clear they don't want the $50 billion threshold raised, because it would remove hurdles for their smaller competitors.
And the biggest banks arguably have more to lose than gain if any financial services bill were to move in Congress this year, creating an opening for lawmakers to include measures hostile to Wall Street.
But the banks have been known to work together on other issues. Indeed, several regional banks joined the largest institutions in the heated yearend push to roll back a Dodd-Frank derivatives provision as part of a must-past spending bill. That push, designed to help big and regional banks involved in certain kinds of hedging activities, could hurt regionals in their effort to raise the threshold.
Dennis Kelleher, president and chief executive at Better Markets, another advocacy group with concerns about raising the threshold, added that the regionals would actually benefit in more ways than one from turning the heat back on the biggest banks.
"Frankly the regionals should be the biggest supporters of ending 'too big to fail' by the globally significant banks, because if those banks were not 'too big to fail' then the regionals would be able to compete on a level playing field," he said.
Victoria Finkle is American Banker's Capitol Hill reporter.
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