If lawmakers replace the $50 billion asset threshold for systemically important financial institutions with a five-point risk-based assessment, Credit Suisse Holdings (USA) Inc. and HSBC North America Holdings Inc. could be the top regulatory targets among banks subject to the change.
Both the House and the Senate are working through identical bills that would apply enhanced prudential oversight based on a firm's size, interconnectedness, substitutability, global cross-jurisdictional activity and complexity. The proposed bills do not change regulatory standards for global systemically important banks, or G-SIBs.
Currently, the Federal Reserve applies stronger supervisory and regulatory standards to firms that cross the $50 billion threshold for total consolidated assets, which some politicians have criticized as "arbitrary." One of the architects of Dodd-Frank, former Massachusetts Sen. Barney Frank, has previously acknowledged that he thought the threshold was a "mistake."
The concept of a risk-based assessment is not new; the Basel Committee uses a weighted average of indicators across the same five categories when assessing a G-SIB. In the U.S., regulators have used these weighted scores to apply capital surcharges.
S&P Global Market Intelligence used one of the existing methodologies for calculating risk to reassess the banks that currently have over $50 billion in total assets and face enhanced prudential oversight. Under "method 2" of the current G-SIB risk assessment, a firm is evaluated on nine systemic indicator scores and short-term wholesale funding scores. This method does not account for substitutability, which includes payments activities, assets under custody, and underwritten transactions in debt and equity markets.
Based on data from FR Y-15 regulatory filings, a number of foreign banking organizations could catch more regulatory attention. Among the top 10 U.S. non-G-SIBs with the highest scores under method 2, five are U.S. operations of foreign banking organizations. Credit Suisse's and HSBC's U.S. offices claimed the top scores, despite having fewer total assets and less total exposure than U.S. Bancorp, which ranks third, and PNC Financial Services Group Inc., which ranks fourth.
U.S. Bancorp would top the list based on either total assets or total exposure.
Using a risk-based assessment also roughly shuffles those at the bottom of the list, which could have implications on which firms would and would not face enhanced prudential oversight depending on where the Fed would theoretically draw the line. CIT Group Inc. is the smallest firm in the group based on total assets, but CIT would have a risk score higher than Regions Financial Corp., which is more than double its size.
Specialty lenders Discover Financial Services and Synchrony Financial, both under $100 billion in total assets, would have a risk score that is greater than four bank holding companies with more total assets on their balance sheets: KeyCorp, Citizens Financial Group Inc., Regions Financial Corp. and M&T Bank Corp.
The industry is watching movement on the legislation closely. Speaking at a conference Oct. 12, Brian Sterling, co-head of investment banking at Sandler O'Neill & Partners, said he could see the SIFI threshold being an easier Dodd-Frank fix than other proposed changes.
"There may actually be more movement on the $50 billion than on the $10 billion," Sterling said.
Ed Groshans, an analyst at Height Securities, said in an interview that he thinks Congress has a "decent chance" to get enough Democratic support in the House and the Senate to give President Donald Trump a bill to sign. The House could pass a bill on party lines but Republicans in the Senate would need at least eight Democrats to vote in favor of the bill to break a 60-vote filibuster for standard passage.
But Groshans warned that a risk-based assessment could encourage banks to stay away from banking activities that would lead to a higher risk score and, consequently, enhanced prudential oversight.
"You're not going to see a regional bank touch those activities," Groshans said.
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To look at all the schedules filed under FR Y-15 by all large U.S. banks for the period ended Dec. 31, 2016, click here.