Policymakers and experts generally agree that bank regulation should be tailored to account for these differences between institutions. To what degree the application of regulation should vary and how those variations should be designed and implemented are debated issues. Instead, this report examines selected classifications of banks, briefly discusses selected legislation that would amend the existing tailoring system, and analyzes three selected characteristics (size, business activities, and reliance on capital funding) across which banking organizations may measurably differ. Community banks are likely to be more concentrated in core commercial bank businesses of making loans and taking deposits and less involved in other activities such as securities trading or holding derivatives. As a result, they have created classifications and thresholds that subject each bank to certain regulations, exempt it from others, or otherwise alter its regulatory treatment. Policymakers have determined it is appropriate to subject banks exceeding this size to additional regulation, due to the amount of harm the failure of these banks could potentially cause to the economy and the resources available to the banks to dedicate to compliance. Other proposals assert this system (whatever the level of individual thresholds) is too heavily focused on one aspect of a bank (size) that does not directly reveal much about other characteristics, such as complexity, interconnectedness, and risk posed. Because these activities are complex and potentially expose individual banks and the financial system to additional risks, they have been proposed as tailoring-based criteria. In the 115 th Congress, S. 2155 , H.R. 10 and H.R. Capital-Based Criteria

A bank secures funding by either issuing liabilities or raising capital. The classification systems discussed above are generally rules-based; if an objective, numerical (sometimes called bright line ) threshold is crossed, then a bank becomes subject to or exempt from certain regulations. 3312 / S. 1893 ) and the TAILOR Act ( H.R. Bank Characteristics

The various classifications and exemptions involved in bank regulation are intended to appropriately tailor regulation based on each bank's characteristics and risks. To examine to what degree existing and proposed classifications accomplish this, it is helpful to understand the differences between banks that do or do not meet the classification criteria. The following section analyzes differences in the size, business activities, and capital levels of U.S. bank organizations and makes comparisons between organizations that meet certain criteria and those that do not meet those criteria. Nevertheless, it can be helpful to review and examine the characteristics of banks that fall within certain thresholds. Banks by Activities

Some observers are critical of asset size thresholds because they do not necessarily reflect the activities in which a bank is engaged, which may be an important component of what regulation should be applied to particular institutions. As shown in Table 5 , the data suggests that banking organizations with no derivative positions tend to be small institutions (average of $2.2 billion in assets), heavily focused on making loans (68% of assets) and taking deposits (91% of liabilities), and holding relatively high level of capital (11% leverage ratio). Because grouping banks with a modified, simplified criteria and comparing their characteristics in aggregate is still illustrative of differences across types of banks, this section compares banks that meet and do not meet the following criteria: (1) no trading assets or liabilities, (2) no equities or commodities derivatives positions, (3) less than $8 billion of total interest rate or exchange rate derivatives positions, and (4) at least a 10% assets minus liabilities-to-equity ratio (an approximation of a 10% leverage ratio). New or Changed Asset-Size Thresholds

Some bills would raise existing asset thresholds at which banks would be subjected to more stringent regulation, thus providing regulatory relief to banks above the current threshold but below the proposed one. H.R. For example,
The Community Lending Enhancement and Regulatory Relief Act ( S. 1002 ) includes provisions that would establish new exemptions from certain regulations based on asset-size thresholds. In addition, they generally further agree over broad characteristics of banks that would warrant greater or lesser regulatory stringency (e.g., small and traditional banks serving the credit needs of a community should be subject to less regulation than large and complex banks operating on a national or global scale). Policymakers and observers disagree over whether simple "bright line" rules based on certain criteria achieve appropriate tailoring. The Financial CHOICE Act ( H.R.
Banking organizations differ across a multitude of characteristics. The amount of assets they hold, the services they provide, and how they secure funding are just a few examples. These differences affect an individual organization's risk of failure and the risk its failure or distress could pose to the overall financial system. Policymakers generally agree that certain banking regulations should be tailored to account for such differences, and as a result, banks are currently subject to or exempt from various regulations if they meet certain criteria. To what degree existing bank classifications adequately tailor regulation and how tailoring should be designed and implemented are debated issues. This report examines
existing and proposed bank regulatory classifications, legislation that proposes to change existing classifications or create new ones, and, the characteristics of bank organizations that fall under existing and proposed classifications.
Banks are classified in a variety of ways. Some are informal classifications that refer to widely understood differences between community and Wall Street banks—two commonly recognized types of banks—but that are unofficial classifications that do not affect banking regulations. For example, community banks are understood to be small institutions that meet the credit needs of a community and Wall Street banks are understood to be large, complex institutions that could individually pose risk to the financial system. Existing regulatory classifications are official classifications applied to banks that meet some criteria and determine whether a bank is subject to certain regulations. In addition, several existing proposals would establish new regulatory classifications and criteria.
Often (but not always) existing criteria are size-based thresholds that subject a bank to more stringent regulation once it exceeds a certain amount of assets. Proponents of this system argue simple, "bright line" rules create certainty and transparency and that asset size is an adequate measurement to identify which institutions should or should not be subject to certain regulation. Critics argue it too narrowly focuses on one aspect of a bank organization, and thus may subject certain banks to inappropriate regulation. Critics may argue that new or additional criteria based on other characteristics (e.g., the business activities a bank engages in or the amount of capital it holds) should be implemented.
To investigate how well certain criteria would appropriately tailor regulation, it is informative to examine characteristics of banking organizations and compare banks that meet some criteria to those that do not. This report examines characteristics such as asset size; concentrations in loans, deposits, trading assets, and trading liabilities; activity in derivatives; and capital levels. The analysis generally suggests that these characteristics are correlated; larger banks tend to be involved in more business lines and hold less capital whereas smaller banks tend to be more focused on making loans and taking deposits and hold more capital. However, the large number of banks and the high degree of variation across multiple variables means that no set of criteria is easily and objectively identifiable as the best means of tailoring regulations.
In the 115th Congress, numerous bills—including H.R. 10, H.R. 1116, H.R. 1948, H.R. 2121, H.R. 3072, H.R. 3312, S. 1002, S. 1284, S. 1499, and S. 1893—would change the existing system of bank regulation tailoring. Some would alter existing size-based classifications or introduce new sized-based criteria, and others would establish new activities-based or capital-based criteria.