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Fair Game

Regulatory Relief for Banks That Rarely Fail

Thomas Hoenig, vice chairman of the F.D.I.C., has proposed regulatory relief based on the complexity and activities of an institution, not just its size.Credit...Andrew Harrer/Bloomberg News

Rolling back regulations created after the 2008 crisis has been Job 1 for leaders of many of the nation’s large and powerful banking institutions. So it’s no surprise that recent proposals for regulatory reform in the financial industry have overwhelmingly been the work of big banks or their supporters. The bankers want to return to the days when they could roll the dice, pocket their winnings and rely on the taxpayer if something went wrong.

That’s what makes a reform proposal put forward last week so unusual. It actually outlines smart ways to give regulatory relief only to low-risk, traditional banks that did not cause the financial crisis. Those institutions that did contribute to the 2008 mess get no relief under the plan.

The proposal comes from Thomas M. Hoenig, vice chairman of the Federal Deposit Insurance Corporation. In an interview last week, Mr. Hoenig told me he had been hearing more and more calls to reform the Dodd-Frank Act of 2010 and he wanted a surgical and effective response to those requests.

“There has been a lot of discussion about the need for reform,” Mr. Hoenig said. “But you can’t just say there’s too much of a burden. You have to think through what are the conditions where you might consider providing relief.”

Mr. Hoenig decided to base any possible regulatory relief on the complexity and activities of an institution, not simply on its size.

So he and Karl Reitz, deputy to the vice chairman at the F.D.I.C., examined bank failure rates and looked at the characteristics of institutions that were able to withstand downturns.

From this exercise, Mr. Hoenig devised a list of three criteria for banks that could be exempted from some regulations without posing risks to the financial system and taxpayers.

The winners: banks that hold no trading assets or liabilities, those that have no derivatives positions other than plain-vanilla interest-rate swaps and foreign exchange derivatives and, finally, banks whose notional value of all derivatives exposures totals less than $3 billion.

So how many domestic banks have these characteristics and would therefore be eligible for regulatory relief?

Many, it turns out. But few are huge.

Roughly 6,100 of the more than 6,500 commercial banks would pass this test, according to the F.D.I.C. Of the remaining 400 that would not, many are behemoths: 310 of them have more than $250 million in assets.

Clearly, this is a regulatory relief proposal that benefits bankers on Main Street, not Wall Street.

A fourth criterion that would make a bank eligible for regulatory relief, Mr. Hoenig said, is a capital level of at least 10 percent. That means a bank’s shareholder equity or net worth must be at least 10 percent of its assets, he said. This clean and simple capital ratio cannot be gamed as more complex, risk-weighted ratios can.

Once again, most smaller community banks already have capital ratios at or above this level, according to the F.D.I.C. For those that don’t, it would not be a stretch to get there.

Banks that have at least 10 percent of total assets in shareholder equity, an F.D.I.C. analysis shows, have a lower rate of failure than their brethren and are less likely to require government assistance.

Still, it’s not only small banks that could catch a break on regulations under the Hoenig plan. His office said it had identified 18 banks with total assets greater than $10 billion that would qualify. They include Charles Schwab Bank, with $104 billion in assets, and the United States unit of UBS and New York Community Bank, each with $45 billion in assets. Hudson City Savings Bank, with $38 billion in assets, would be another beneficiary under the proposal, as would First-Citizens Bank and Trust Company, with $22 billion in assets.

What kinds of regulations could banks avoid if they met these qualifications? In a speech in Washington on Wednesday outlining the idea, Mr. Hoenig said they might include longer periods between examinations by the F.D.I.C. and other regulators — every 18 months instead of every 12 — and exempting a bank from having to fill out some sections of the quarterly Consolidated Report of Condition and Income, known as a call report.

The banks could also avoid having to adhere to capital standards and calculations required under the rules of the Basel Committee on Banking Supervision, the international standard-setter.

“From our point of view, a bank that meets the 10 percent threshold of equity to assets and that doesn’t have trading or off-balance-sheet items, that’s a well-capitalized bank,” Mr. Hoenig said. “And yet they have to go through this burden doing these Basel calculations to prove they’re not undercapitalized.”

In addition, qualifying banks could also escape having to conduct stress tests under the Dodd-Frank Act. “If you meet the 10 percent capital requirement and you’re traditional, we would do the stress test ourselves,” Mr. Hoenig said.

Banks meeting the criteria set out by Mr. Hoenig would not be exempt from the Volcker Rule, which was intended to separate banks’ risk-taking trading desks from their federally insured units. That’s because these banks aren’t engaging in these kinds of practices. “The reality is that the vast majority of community banks have virtually no compliance burden associated with implementing the Volcker Rule,” Mr. Hoenig said in the speech.

Mr. Hoenig knows he needs congressional support to make some of these changes. “We’ve suggested this to individuals in Congress who are willing to listen to us and they are taking it in,” Mr. Hoenig said in the interview.

The clamor for regulatory relief from large and politically connected financial institutions has been a constant ever since Dodd-Frank was enacted five years ago. First, these institutions worked to water down the rules as the regulators were writing them. Now they are pushing for repeal.

It is refreshing, therefore, to see a bank regulator differentiate between institutions that truly deserve a lighter burden and those that do not.

“For the vast majority of commercial banks that stick to traditional banking activities and conduct their activities in a safe and sound manner with sufficient capital reserves, the regulatory burden should be eased,” Mr. Hoenig said in his speech. “For the small handful of firms that have elected to expand their activities beyond commercial banking, supported with the subsidies that arise from the bank’s access to the safety net, the additional regulatory burden is theirs to bear.”

A correction was made on 
April 26, 2015

The Fair Game column last Sunday, about a proposal that would provide regulatory relief to banks whose operations do not involve excessive risks, misstated the size of 310 banks that would not qualify for relief under the proposal. Those banks each have more than $250 million in assets, not “more than $100 billion.”

How we handle corrections

A version of this article appears in print on  , Section BU, Page 1 of the New York edition with the headline: Rule Relief for Banks at Low Risk. Order Reprints | Today’s Paper | Subscribe

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