{
  "id": "R45036",
  "type": "CRS Report",
  "typeId": "REPORTS",
  "number": "R45036",
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  "source": "EveryCRSReport.com",
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      "source": "EveryCRSReport.com",
      "id": 576197,
      "date": "2017-12-06",
      "retrieved": "2017-12-07T14:04:27.304277",
      "title": "Bank Systemic Risk Regulation: The $50 Billion Threshold in the Dodd-Frank Act",
      "summary": "The 2007-2009 financial crisis highlighted the problem of \u201ctoo big to fail\u201d financial institutions\u2014the concept that the failure of a large financial firm could trigger financial instability, which in several cases prompted extraordinary federal assistance to prevent their failure. This report focuses on one pillar of the Dodd-Frank Act\u2019s (P.L. 111-203) response to addressing financial stability and ending too big to fail: a new enhanced prudential regulatory regime that applies to all banks with more than $50 billion in assets and to certain other financial institutions. Under this regime, the Federal Reserve is required to apply a number of safety and soundness requirements to large banks that are more stringent than those applied to smaller banks. These requirements are intended to mitigate systemic risk posed by large banks:\nStress tests and capital planning ensure banks hold enough capital to survive a crisis.\nLiving wills provide a plan to safely wind down a failing bank.\nLiquidity requirements ensure that banks are sufficiently liquid if they lose access to funding markets.\nCounterparty limits restrict the bank\u2019s exposure to counterparty default.\nRisk management requires publicly traded companies to have risk committees on their boards and banks to have chief risk officers.\nFinancial stability, regulatory interventions that can be taken only if a bank poses a threat to the financial stability.\nMost of these requirements apply to about 30 U.S. bank holding companies or the U.S. operations of foreign banks. The requirements do not apply to other types of financial institutions with more than $50 billion in assets (unless individually designated by the Financial Stability Oversight Council), including a few large securities and insurance firms that are chartered as thrift holding companies. \nIn addition, a number of provisions, such as higher capital requirements, that stem from the international \u201cBasel III\u201d agreement apply only to a handful of the largest banks. This is an example of how the current system is tailored, with the largest banks facing more stringent regulatory requirements than medium-sized and smaller banks.\nCongress is debating whether to modify the $50 billion threshold because some Members believe that it applies to too many banks that do not pose systemic risk. Bills to amend which banks are subject to enhanced regulation include H.R. 3312/S. 1893, H.R. 10, and S. 2155. \nMany economists believe that the economic problem of too big to fail is really a problem of firms that are too complex or too interdependent to fail. Size correlates with complexity and interdependence, but not perfectly. Size is a much simpler and more transparent metric than complexity or interdependence, however. As a practical matter, if size is well correlated with systemic importance, a dollar threshold could serve as a good proxy that is inexpensive and easy to administer. Designating banks on a case-by-case basis could raise similar issues that have occurred in the designation of nonbanks, such as legal challenges to overturn their designation.\nThis report also examines the question of which banks are systemically important. However, examining the banks above and slightly below the threshold does not reveal any natural cut off points that divide bank organizations into two groups that clearly present substantively different risks to systemic stability. This is because the size differences between each bank and those nearest to it are incremental and because banks vary across numerous characteristics. For these reasons, making an objective and definitive size-based determination of the point that a bank becomes systemically important is difficult. Regulators do employ an empirical methodology to identify globally systemically important banks (G-SIBs) based on a score that is calculated using 12 indicators that measure the size, interconnectedness, substitutability, complexity, and cross-jurisdictional activity of a bank. However, the results of this exercise do not produce a clear and uncontestable score threshold at which institutions clearly become systemically important.",
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  "topics": [
    "Economic Policy"
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}