The Surprisingly Large Winners in a Bill to Help Small Banks


Three of the biggest winners, in a bill meant to help small and midsize banks, are anything but.

The bill, championed by Senate Banking Committee Chairman Mike Crapo, would raise the threshold for stricter oversight by the Federal Reserve to $250 billion in assets from $50 billion, a boon for midsize regional lenders. It also contains measures to reduce the burden of regulation on smaller community banks.

Thanks to this focus, it has garnered significant Democratic support and is likely to pass in the Senate, despite strong opposition from the likes of Sen. Elizabeth Warren, who calls it a gift to Wall Street.

Another group of banks that dwarf these small lenders stand to get a healthy profit boost if the bill goes through, they being Bank of New York Mellon , BK -0.89% with $372 billion of assets on its balance sheet; State Street, STT -0.13% with $238 billion; and Northern Trust Corp. NTRS -0.24% , at $139 billion. These banks are more important than they might seem because they manage or have under custody trillions of dollars of assets.

These so-called custody banks specialize in safekeeping the securities of institutional investors like mutual funds. Under the bill, they would be able to exclude some deposits they hold at the Federal Reserve or other central banks from their total assets when calculating total leverage. No other banks, big or small, get such a benefit.

The argument is that assets held at the Fed are effectively free of risk, so banks shouldn’t have to hold capital against them. The custody banks hold a disproportionate share of Federal Reserve deposits, but other banks have them too.

The impact could be quite significant. Keefe, Bruyette and Woods analyst Brian Kleinhanzl estimates the change could boost earnings per share at the two biggest custody banks by around 8%, assuming they use the freed-up capital to invest in other profit-generating assets.

JPMorgan Chase and Citigroup , which have their own custody businesses, aren’t granted the same exemption. This exclusion appears to be due to their still having negative reputations on Capitol Hill. Helping them out would jeopardize the bill’s chance of passage.

Still, it makes no sense that central bank deposits, if they are truly risk-free, be treated differently for different banks. The U.S. Treasury Department’s report on financial regulation last year proposed that all banks be able to exclude Federal Reserve deposits from their leverage ratios. It is also jarring that such big custody banks will benefit from a bill designed to help smaller banks.

The fact that Congress narrowed the exemption down to three banks that happen not to be household names says something about the current political climate. Even with Donald Trump in the White House and Republicans controlling Congress, politicians don’t want to appear to be doing anything to help the most well-known Wall Street banks.

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2018-03-14 10:01:33
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