The Fed Wants to Raise the Regulatory Threshold for Banks — Reuters. Who Stands to Gain from This?

The U.S. Federal Reserve System wants to raise the asset thresholds above which large banks are subject to enhanced supervision, sources told Reuters. This would allow some financial institutions to avoid costly additional regulations and could spur consolidation in the banking sector, the agency reports. It named specific banks that would benefit from this.

The Fed is expected to propose in the near future that the thresholds be indexed to inflation and economic growth, once reached, banks are required to undergo stress tests, comply with stricter liquidity and capital requirements, and adhere to other strengthened regulatory standards, sources told Reuters. Three of them expect the Fed to present the changes later this year, the agency reports.

Under current rules, stricter requirements begin to apply when a bank’s assets reach $100 billion, then become more stringent at $250 billion, and again at $700 billion, Reuters explains. Banks argue that these thresholds, established in 2019, are not keeping pace with economic growth, causing lending institutions to be subject to increasingly strict oversight that is disproportionate to their risks, the agency reports.

The Fed is considering raising the upper limit to about $1 trillion and the lower limit to about $150 billion, according to Reuters sources.

According to the banks, crossing the $100 billion threshold typically requires significant investment in stress-testing capabilities, expanding the compliance staff and risk management systems, and building out the infrastructure for regulatory reporting. Annual costs for this can reach tens of millions of dollars, Reuters reports.

A Fed spokesperson declined to comment to Reuters. In January, Fed Vice Chair for Supervision Michelle Bowman stated that the central bank would consider indexing the thresholds and proposed using nominal GDP for that purpose. The agency notes that the Fed has not commented on this issue since then.

Among the banks that could benefit from the changes, Reuters named U.S. Bancorp, Capital One, PNC Financial, and Truist. They are closest to the $700 billion threshold, and if it is raised, they will have more opportunities for growth without being subject to some of the Fed’s strictest requirements, Reuters reports.

"The U.S. economy has grown significantly over the past seven years, and it makes sense to establish rules for all banks that will help consumers and small businesses by expanding banks' lending capacity and increasing competition," a spokesperson for U.S. Bancorp told Reuters.

Western Alliance, Zions, and several other banks will be able to increase their assets to over $100 billion. Pinnacle Financial Partners and one or two other banks with assets ranging from $100 billion to $150 billion will even be able to be exempted from some of their current requirements, Reuters notes.

"Revising the thresholds could mitigate the negative effects of growth and alter the balance between the costs and benefits of acquisitions," Truist analysts wrote on Friday, commenting on a Reuters report.

The plan is part of a broader reform of banking supervision being carried out by the Donald Trump administration. Officials argue that the current system is holding back lending and economic growth. Bowman is also reviewing capital requirements and other elements of the Fed’s supervisory framework, Reuters reports. According to the agency’s sources, the changes could accelerate consolidation among mid-sized banks, which have so far refrained from deals for fear of exceeding regulatory thresholds as a result.

According to S&P Global Market Intelligence, banks with assets ranging from $50 billion to $700 billion have announced only 33 acquisitions of banks and savings institutions over the past decade, Reuters reports. Last year, there were only seven such deals, including Fifth Third Bank’s $10.9 billion acquisition of Comerica, the agency notes.

“We expect this to spur M&A activity among mid-cap and regional banks, which have so far taken a wait-and-see approach,” James Stevens, a partner at the law firm Troutman Pepper Locke, told Reuters. According to him, bank boards of directors will be able to evaluate deals based on their economic viability, “rather than regulatory arithmetic.”

One banking industry executive told the news agency that raising the threshold to $700 billion would allow larger lending institutions to compete more effectively with the country’s four largest consumer banks. Critics of banking sector consolidation argue that it harms consumers by reducing competition and access to services, while simultaneously increasing systemic risks, according to Reuters.

This article was AI-translated and verified by a human editor