Republican members of the House Financial Services Committee have called on federal banking regulators to reconsider their “one-size-fits-all” approach to regulations for mid-sized banks with assets between $100 billion and $250 billion. In a letter dated Friday, Nov. 21, the lawmakers urged the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) to tailor their regulations more closely to the specific risk profiles of banks in this asset range.
“The current framework is a barrier to more robust competition,” the lawmakers said in the letter, emphasizing the need for more flexibility in regulations for banks that fall into Categories II, III, and IV.
The Enhanced Prudential Standards (EPS), originally designed for larger banks, were seen by lawmakers as a misapplied burden on mid-sized financial institutions that face different operational realities than their larger counterparts.
Lawmakers’ Concerns: Tailored Regulations, Not a Blanket Approach
In their letter, the committee members argued that the Federal Reserve’s application of EPS remains too similar to the standards imposed on the largest banks. This “one-size-fits-all” approach, they said, is at odds with a 2018 directive from Congress to tailor regulations based on the size and risk characteristics of individual banks.
The committee members want regulators to move away from the current system and create new categories for mid-sized banks to ensure that regulations are aligned with actual risk profiles rather than arbitrary size thresholds.
| Asset Size | Current Regulatory Category | Suggested Regulation Adjustment |
|---|---|---|
| $100B–$250B | Categories II, III, IV | Tailored to actual risk profiles |
| $250B+ | Category I (Largest banks) | Maintained under current EPS standards |
“Banks with assets between $100 billion and $250 billion are forced to absorb regulatory compliance costs with limited economies of scale,” the lawmakers noted, suggesting that more tailored frameworks could allow for better competition between mid-sized and larger banks.
The Case for Competitive Balance
The lawmakers expressed concern that current EPS regulations put Category II, III, and IV banks at a disadvantage compared to the largest financial institutions. These smaller, mid-tier banks often face higher per-unit costs to comply with the same regulatory requirements that apply to much larger institutions.
According to the lawmakers, the regulatory burden faced by mid-sized banks is exacerbated by their lack of scale compared to their larger counterparts, which have more resources to spread the costs of compliance. This discrepancy has led to reduced competition in the banking sector, as larger institutions have more flexibility to absorb regulatory costs.
“A more flexible regulatory framework would allow banks of different sizes to compete on a more level playing field, fostering greater innovation and competition in the financial sector,” the committee members argued.
Federal Regulators’ Efforts to Address Unique Needs of Banks
While the lawmakers’ letter targets the EPS regulations for mid-sized banks, federal regulators have taken other steps to address the unique needs of different bank sizes.
On Tuesday (Nov. 25), the FRB, OCC, and FDIC unveiled a proposal to adjust the community bank leverage ratio framework, which aims to reduce the regulatory burden on smaller, community-based financial institutions. The regulators emphasized that these tailored modifications are meant to reflect a deeper understanding of the unique business models, risk profiles, and operational realities of community banks.
“These changes are a necessary step in focusing attention on the unique needs of community banks,” the regulators said in a press release.
What’s Next?
The proposal to rethink the application of EPS for mid-sized banks will likely face further scrutiny and debate as it moves through the regulatory process. Lawmakers are calling on regulators to reconsider their approach to banking regulations in a way that would give smaller, mid-sized banks more flexibility and competitiveness.
In the coming months, the Federal Reserve, FDIC, and OCC are expected to solicit public comments and hold discussions on how best to address these concerns while maintaining regulatory protections for consumers and the financial system.
“It is time for the regulators to adjust the framework,” the lawmakers concluded in their letter, “to ensure that the regulatory burden aligns with the actual risks banks face.”
Final Thoughts
The House Financial Services Committee’s request to reconsider the application of Enhanced Prudential Standards (EPS) for mid-sized banks represents an important moment in the ongoing discussion about how regulations should be tailored to risk rather than rigid size categories.
The move is an attempt to ensure that mid-sized banks can compete on a more level playing field with larger institutions, fostering greater innovation and competition within the banking sector, without compromising consumer protection or the stability of the financial system.
FAQs
What is the Enhanced Prudential Standard (EPS)?
EPS are regulations imposed on large banks that aim to reduce systemic risk by enforcing stricter oversight on issues like capital, liquidity, and risk management.
Why do lawmakers want EPS to be reconsidered for mid-sized banks?
The lawmakers argue that applying the same EPS to mid-sized banks with between $100 billion and $250 billion in assets is too burdensome and stifles competition, as these banks do not have the same scale as larger institutions.
What changes are lawmakers requesting?
They want to see new categories for mid-sized banks and more tailored regulations that reflect the actual risk posed by these institutions, instead of a blanket approach based on asset size alone.
How have federal regulators responded?
The FRB, OCC, and FDIC have already made efforts to tailor regulations for different-sized banks, such as the recent proposal to modify the community bank leverage ratio framework to reduce burdens on smaller banks.
What’s the next step in this process?
The regulatory agencies will likely open up a comment period for public feedback on the lawmakers’ suggestions and work to refine the regulatory framework based on those inputs.