House Resolution 3072 is Poorly Conceived and Written

US House Resolution 3072 would increase the minimum size of banks that are subject to direct examination by and reporting to the Consumer Financial Protection Bureau (CFPB) from $10 billion in assets to $50 billion in assets. As of June, 2017, this would exempt about 80 banks from the examination and reporting rules and leave about 40. I am opposed to this legislation for three reasons:

• A $10 billion bank is not a small bank without the compliance resources to handle examinations and this exempts banks that are big enough that when they do something problematic, the scale is large enough to cause regional problems. The $10 billion threshold represents 2.8% of all banks, while the proposed threshold represents 0.6% of US banks.
• Arbitrary asset limits of either $10 billion or $50 billion do not adjust for inflation, and moving the threshold from $10 billion to $50 billion does nothing to fix this problem. Neither inflation nor the deposit flood that occurs during a panic should push a bank into a different regulatory realm. For the businesses serving banks, regulatory instability is a bigger problem than regulatory burden, and this type of threshold legislation leads to legislative churn and regulatory instability.
• It does not address the different business models employed by banks over $50 billion. There are banks over $50 billion with business models that do not require much CFPB oversight and banks between $10 and $50 billion that should probably receive significant oversight.

Although I am opposed to this legislation, I am not strongly opposed for the simple reason that most of the mischief during the financial crisis occurred at the “too big to fail” banks, and this does not exempt those banks from CFPB examination.

These are Not Small Banks

The current $10 billion threshold is about the 98th percentile in assets ($10.7 billion), while the proposed $50 billion threshold is above the 99th percentile ($30 billion). These are not small banks with a small staff. Figure 1 shows employment by bank as a function of asset value. There are few banks of $10 billion with fewer than 1,000 employees, so these banks already have full-time compliance staff; this does not present the disproportional regulatory burden that it would for banks with less than 1,000 employees. Although this legislation would remove some oversight for some arguably large banks, it leaves in place oversight for the largest banks in a system that is badly skewed to very large banks. To understand the relative size of of banks in the US, Figure 2 shows the asset size distribution–even though it represents more than 5,800 banks the chart looks like an error due to the vast empty space in the right 90% of the histogram. Figure 3 shows only banks larger than $10 billion (about 120 of 5,800) and points out the dramatic skew in bank size.

Arbitrary Dollar Thresholds are Bad Legislation in the First Place

When legislation is written with arbitrary dollar limits as this bill uses, it means that normal inflation will push banks (or taxpayers in the case of the Alternative Minimum Tax) over the threshold when nothing has changed in terms of bank operations. Inevitably, the legislature is slow to reset the threshold, and institutions and consumers struggle to deal with a regulation that was never intended to apply to them. This legislation perpetuates that problem. It guarantees business for lobbyists, but is not a good way to write laws.

For businesses serving the banking industry, regulatory instability is probably a bigger problem than regulatory burden. If regulation is stable, you can automate the solutions, and banks can buy an inexpensive solution. If regulation is unstable, it cannot be automated and the management burden at a bank prevents the bank from innovating any way; the focus is on how to stay in compliance in a changing compliance world. This type of regulatory threshold is ultimately unstable for a larger number of institutions than other approaches.

There are at least two better threshold-based approaches:

• A percent of the total number of banks, such a bank being in the largest 2.5% for three consecutive years. This would present uncertainty for a small number of banks as the industry consolidates, but would not create inflation creep problems due to legislative inaction at some point in the future.
• An asset threshold set as a percentile of asset values. The 98th percentile of assets would currently be approximately $10 billion, while the 99th percentile in assets would be approximately $30 billion. Under normal inflation and consolidation conditions, this would minimize the effects of inflation creep.

A Business-model Approach Would be Best

Some banks just do not touch consumers, and examinations by the CFPB just do not make sense. Table 1 shows the banks that were above $10 billion at the end of June, 2017. There are clearly some banks in this list that have wholesale models where the word “consumer” just does not apply. Figuring out legislation that would take this approach is probably beyond the capability of any legislative body in the United States, so this is probably not a realistic approach, though it would be the best.