Replacing the $50 billion threshold – Senators Sherrod Brown (D-OH) and Mike Crapo (R-ID) hope to reach an agreement shortly that would remove Dodd-Frank’s $50 billion systemically important financial institution (SIFI) threshold, excepting the eight global systemically important banks (G-SIBs), which would continue to be regulated as they are today—that is, subject to current Dodd-Frank enhanced prudential standards and supervisory authority. Adjusting this threshold reflects the fact that large regional banks’ business models are fundamentally different from universal banks, so as not to subject them to enhanced supervision. This agreement will likely include Rep. Blaine Luetkemeyer’s (R-MO) proposal, which gives the Federal Reserve discretion in deciding whether to subject non-G-SIB banks to enhanced regulation and supervision. As currently proposed, this legislation would exempt banks under a new regulatory threshold from the Dodd-Frank Act stress tests (DFAST), living wills requirements, and other regulatory requirements. The Federal Reserve could still require these banks to participate in Dodd-Frank’s Comprehensive Capital Analysis and Review (CCAR) stress test. This bill does not impact the $10 billion threshold or the Volcker rule.

Community bank changes also possible – Observers expect that if Brown and Crapo can agree on changes to the $50 billion threshold, then additional regulatory relief for smaller institutions might also be included in any bill. For example, the $10 billion threshold could be removed as it relates to stress testing and exemptions for smaller institutions from Volcker rule compliance programs. It is unlikely that there will be any changes to the $10 billion threshold as it relates to the Durbin amendment regulation of debit card interchange fees.

Upside for regional and community banks – The ultimate outcome of discussions between the senators remains to be seen; but if Congress raises the $50 billion threshold, it might send a powerful political message to the Federal Reserve as to administration of CCAR for non-G-SIBs. In his last speech, former Vice Chairman Tarullo called for changes to CCAR testing and other burdensome parts of Dodd-Frank. Genuine reduction in asset-side balance sheet regulation could enhance regional bank capital positions and allow management teams to return excess capital.

M&A implications – Raising the $50 billion threshold and installation of a new, business-oriented Vice Chairman of Supervision could have positive implications for bank M&A, by promoting a more free-flowing consolidation cycle relative to the post-crisis environment. If the SIFI threshold is raised and the Federal Reserve changes its supervisory approach, it is possible that a bank could cross the $50 billion mark via M&A, and that more regional banks would consider mergers of equals.