Does the Fed’s Small Bank Policy Statement Need to Apply to Larger Firms? (H.R. 3791)

What is H.R. 3791?

(Updated November 26, 2017)

This bill would require the Federal Reserve to expand its policy statement on the allowable debt levels of small bank holding companies to apply to firms with less than $5 billion in assets, rather than only firms with less than $1 billion in assets. The change would take effect within six months.

Covered banks would be prohibited from engaging in significantly leveraged (i.e. financed with debt) nonbanking activities, and wouldn’t be able to have a substantial amount of outstanding debt held by the public.

Any small bank holding company that is covered by the Federal Reserve’s policy statement would be exempt from the leverage and risk-based capital requirements established by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Argument in favor

Applying the Federal Reserve’s policy statement to bank holding companies with up to $5 billion in assets rather than only those with under $1 billion will allow firms to make more investments with businesses and consumers in the communities they serve.

Argument opposed

By expanding the policy statement to cover banks that are five times larger than those it originally covered, this bill could cause covered banks to engage in more risk-taking and ultimately lead to more small bank failures.

Impact

Small bank holding companies; and the Federal Reserve.

Cost of H.R. 3791

The CBO estimates that the net effects of this legislation would be insignificant.

Additional Info

In-Depth: This legislation was passed by the House Financial Services Committee on a party-line vote of 33-21, and has the support of four Republican cosponsors.

The American Bankers Association has offered its support for this bill in a letter dated December 7, 2015, explaining that:

“This legislation facilitates the ability of community banks to issue debt and raise capital and thus increase their involvement in promoting the growth of their local economies. This is extremely important as regulators have proposed through other regulations to increase capital requirements significantly for both community banks and larger institutions in the coming years.”

Democrats on the Financial Services Committee don’t see it that way, and have expressed concerns that larger banks may have more of a focus on profits than serving customers:

“We are very concerned that a bank with a $5 billion footprint would not provide the same kind of personal service a smaller institution might, and are further concerned that raising the threshold could encourage aggressive growth at a firm that is more concerned with its bottom line than the concerns of the communities it serves.”

Media:

• House Financial Services Committee Press Release
• CBO Cost Estimate
• Bloomberg
• Securities Industry and Financial Markets Association
• ABA Banking Journal (In Favor)