The Obama administration's regulatory reform plan would for the first time officially define a "big" bank as those with more than $10 billion in assets — and force them to pay more for their supervision as a result.

Observers and industry representatives are not enamored of that number, however. They question whether it is too low and argue that judging a bank just on its size is simplistic.

"The discussion over time has been too much over the basis of size, as if we can find this magical number, and I don't know that we can find a magical number," said Kevin Jacques, Boynton D. Murch chair in fnance at Baldwin-Wallace College.

The Obama plan uses the $10 billion figure in several different places. Under the proposal, banks with more in assets would pay proportionally more for their supervision by their banking regulator and by a new consumer protection agency. Similarly, all those above that level would be required to submit information to the Federal Reserve Board to determine if they were systemically important institutions, a process that could result in higher capital requirements.
The definition caught many by surprise. Previously the administration had used a $100 billion level when attempting to define a large institution by forcing them to undergo a stress test — a universe of just 19 institutions.

By using a $10 billion level, the number of institutions captured would increase dramatically, to 114, though it is still a small fraction of the approximately 8,000 financial institutions nationwide.
A Treasury spokesman said the figure was designed to exclude community banks, ensuring they face lower supervisory and compliance costs.

Community bank representatives hail the move, saying they have long sought to have the largest banks pay proportionately more. "In many different studies between what are called community banks and what are called larger banks, many academic studies use $10 billion as a cutoff," said Camden Fine, the president of the Independent Community Bankers of America. "You're getting 98% or more of banks under the $10 billion threshold."

But other industry representatives say that level is lower than it should be, that some traditional banks are over that figure.

"There are institutions at the $10 billion level or slightly above and they are community banks, they are just bigger," said Diane Casey-Landry, chief operating officer and senior executive vice president of the American Bankers Association (ABA). "When you draw this bright line and say just because you are this size, I can name five that are traditional banks, and they are no more different than a smaller institution."

But if it is not $10 billion, there is no consensus on what the right level is. Robert Clarke, a senior partner at Bracewell & Guiliani and a former comptroller of the currency, said $25 billion is a proper cutoff. "You probably have some banks that operate pretty much as community banks that are bigger than $10 billion," Clarke said. "And if you are talking about systemically important, I'm not sure that $10 billion is systemically important."

Others said it is like throwing a dart at a board.

"Whatever number you choose is going to be arbitrary," said Ron Glancz, a partner at Venable. "No matter how you do it, you are going to be criticized."

But many contend that the administration should use a more nuanced measurement, and instead create a risk-based calculation that looks at an institution's activities. Such an approach is already used by regulators that regulate institutions in part based on their size.

The Office of the Comptroller of the Currency (OCC), for example, divides institutions into three categories. Community banks are those below $10 billion in assets, while midsize banks are designated as midsize institutions, and those over $100 billion are large banks. Still, the OCC does not strictly adhere to the asset figure. Some institutions that are below the $10 billion mark may be treated as a midsize institution, while those above it could still be examined as a community bank, depending on lines of business and overall lending activity. "I don't see $10 billion as a relevant threshold," said Doug Faucette, a partner at Locke Lord Bissell & Liddell. "There's got to be a multiplicity of factors. … It's not the asset size that triggers the higher demands in exam talent but the complexity and diversification of a bank."

The ABA is also arguing standards should be based on risk, not size. "We believe you have to look at complexity, and a size cutoff may not reflect that," Casey-Landry said.

There are also questions about whether an asset cutoff could backfire. Institutions close to $10 billion could manipulate their balance sheet to ensure they did not hit that mark.

"What you may see is if there is a fixed number of size of institutions to avoid these fees depending on when it's calculated, they will change their balance sheet to get the lower number," Glancz said.

How much difference the designation will make remains to be seen. Though the Obama administration has made it clear it wants to create a two-tiered system for fees, it has yet to flesh out that plan. Similarly, the process by which the Fed would identify a systemically important institution is not detailed, but would involve several regulators examining data from institutions above the $10 billion level.

Many industry observers agreed that, in concept, the administration should charge small banks less for supervision.

"It definitely is appropriate to assess them differently, because of the work the examiners would have to do is much less," Faucette said.

Others see political motivations in the administration's definition, arguing it is an attempt to defuse community bank opposition to the plan by promising that larger banks will pay more.
"What they are trying to do is carve out the community banks, so their political opposition will be silenced — and I don't think that will fly," said Richard Hunt, president of the Consumer Bankers Association, who argued some community banks are bigger than $10 billion in assets. "They are trying to sell it that a bank in Tupelo, Miss., or Flint, Mich., is the same as a Wall Street bank and it's not. These are Main Street banks and are going to be affected by the fee increase."

Though most of the banking industry opposes parts of the reform plan, including a provision that would create a new consumer protection agency, the community bank lobby has been particularly effective because of its grassroots base. Even some House Democrats that normally would support the creation of a consumer protection agency have expressed reservations after hearing from local bankers in their area.

"They are trying to take away some of the small-bank opposition," said Alex Pollock, a resident fellow at the American Enterprise Institute.

But Fine said that is not likely.

"I doubt whether the Treasury had a motive like that," he said. "I could be just as cynical and say those saying the $10 billion cutoff was made to win over community banks... are probably supporting the megabanks and very large banks and saying to ward off fees on them."
Ultimately, Fine said, community banks are "not going to get hung up over artificial lines. I figure if there is a proposal that takes in all but 114 banks, that pretty much covers most of the industry. Could that line be moved a little higher? Sure it could, but you have to start somewhere."

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