This report focuses on one pillar of that approach—the Federal Reserve's (Fed's) enhanced (heightened) prudential regulation for all banks that have more than $50 billion in assets. H.R. 3312 , the Systemic Risk Designation Improvement Act of 2017, would replace the $50 billion threshold with a case-by-case designation process, while automatically subjecting banks that have been designated as globally-systemically important banks (G-SIBs) by the Financial Stability Board (FSB), an international forum. However, to date, enhanced prudential regulatory requirements have not been applied to thrift (savings and loan) holding companies with $50 billion or more in assets, because implementation of the Dodd-Frank Act is ongoing and prefatory material accompanying a 2014 regulation noted that "the Board may apply additional prudential requirements to certain savings and loan holding companies that are similar to the enhanced prudential standards if it determines that such standards are consistent with the safety and soundness of such companies." The LCR and NSFR apply to two sets of banks. Title I requires publicly traded banks with at least $10 billion in assets to form risk committees on their boards of directors that include a risk management expert responsible for oversight of the bank's risk management. Provisions That Are Triggered in Response to Financial Stability Concerns

Title I of the Dodd-Frank Act provides several powers to—depending on the provision—FSOC, the Fed, or the FDIC to use when the respective entity believes that a bank with more than $50 billion in assets poses a threat to financial stability. FSOC Reporting Requirements. The ratio is applied only if a bank receives written warning from FSOC that it poses a "grave threat to U.S. financial stability," and ceases to apply when the bank no longer poses a grave threat. These requirements all determine how the largest banks have to fund all of their activities on a day-to-day basis. Should Large Banks Be Regulated Differently Than Other Banks? Fear of financial instability being triggered by the failure of large firms led the government to provide extraordinary assistance to prevent the failure of firms, such as Bear Stearns and AIG, during the financial crisis—hence the assertion that large financial firms were "too big to fail." Stress tests are intended to verify that large banks could survive another crisis, living wills are intended to explain to regulators how a failing bank can be safely wound down, counterparty credit limits are intended to limit spillover effects when firms fail, and liquidity requirements attempt to reduce reliance on funding sources that proved to be unreliable during the crisis. Capital planning requirements impose a de facto additional capital requirement in addition to existing capital requirements that apply to all banks. When examining banks' asset sizes, there is substantial variation across a number of bank characteristics, but none that clearly identify a cutoff point at which banks begin or cease to be systemically important. The scoring methodology uses 12 indicators across five categories to calculate a bank's score. This section reviews proposals to alter which banks are subject to enhanced regulation. An example of the former is H.R. Even if size is not the only determinant of systemic importance, size is a much simpler and more transparent metric than some alternatives discussed below. As a practical matter, if size is well correlated with systemic importance—so that policymakers could choose a threshold that did not apply enhanced regulation to too many firms above the threshold that are not systemically important and did not leave out too many firms below the threshold that are not systemically important—it could serve as a good proxy that was easy and inexpensive to administer. Critics of size-based thresholds are skeptical of this criterion. In addition, many economists believe that the economic problem of "too big to fail" is actually a problem of firms that are too complex or too interdependent to fail. Size correlates with complexity and interdependence, but not perfectly, as discussed in the section above entitled " Are All Banks with More Than $50 Billion Systemically Important? " On the other hand, a number of these foreign banks are the U.S. operations of foreign G-SIBs, and may merit additional scrutiny by U.S. regulators because of potential systemic risk via a problem at their parent company. A case-by-case designation process is an alternative to a size threshold.
The 2007-2009 financial crisis highlighted the problem of "too big to fail" financial institutions—the 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's (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:
Stress tests and capital planning ensure banks hold enough capital to survive a crisis. Living wills provide a plan to safely wind down a failing bank. Liquidity requirements ensure that banks are sufficiently liquid if they lose access to funding markets. Counterparty limits restrict the bank's exposure to counterparty default. Risk management requires publicly traded companies to have risk committees on their boards and banks to have chief risk officers. Financial stability, regulatory interventions that can be taken only if a bank poses a threat to the financial stability.
Most 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.
In addition, a number of provisions, such as higher capital requirements, that stem from the international "Basel III" 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.
Congress 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.
Many 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.
This 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.