The Senate Banking Committee's Subcommittee on Financial Institutions and Consumer Protection, chaired by Sen. Sherrod Brown, D-Ohio, held a hearing July 16 titled "What Makes a Bank Systemically Important?" A panel of four Ph.D.s, led by Richard Herring, a professor of international banking at the Wharton School, contributed their expertise to the inquiry.

In his opening statement, Brown, who has been a leading advocate of breaking up the largest "too big to fail" banks, complained that three Ohio regional banks that he said stick to "core" banking activities are treated as systemically significant under the Dodd-Frank Act because they are bigger than $50 billion, even though Brown assumes their failure would not threaten the financial stability of the nation.

He noted that the $50 billion threshold was created by the statute, not the Financial Stability Oversight Council (FSOC), but the regulators contend that banks as large as $100 billion could fail without threatening the financial system. (This writer would point out that the track record of these regulators in making such assessments has been pretty spotty.)

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Brown pointed out that banks larger than $250 billion are subject to different liquidity requirements from those for other banks, and those over $700 billion have another layer of leverage regulation. His point is that banks received variable treatment according to their sizes and business models. He declared that the hearing would look at the characteristics of systemically significant banks and what tools the regulators have and should have to deal with them. As legislators usually do, he stressed that "it's important to strike the right balance" as to the extent of bank regulation.

Later, Sen. Pat Toomey, R-Penn., delivered a statement that joined in Brown's criticism of the $50 billion level as the threshold for systemic status, decried the arbitrary powers conferred on the financial regulators under Dodd-Frank and touted a bill he has introduced to create a new section 14 of the Bankruptcy Code to provide greater certainty as to how creditors of failed banks would be treated if a systemically important bank failed. Toomey lamented that at the end of the day the effect of Dodd-Frank has been to reduce the availability of credit to the economy.

Among the panelists, Herring agreed with the senators that the $50 billion threshold for designating banks as systemic is too low, and he has been working with the Hoover Institution at Stanford on a bankruptcy reform project. He testified that what really matters is the decision of the authorities to intervene and the lack of adequate resolution tools when they do.

James Thompson, finance chair at the University of Akron, fingered political expediency as the basis for supporting the too big to fail banks.

Robert DeYoung, a professor of financial markets and institutions at the University of Kansas Business School, said he agreed with the views of the first two professors, and he observed that while the markets should expect that large failing banks will be seized, there is near-unanimous agreement that they won't be.

The divergent view on the panel came from Paul Kupiec, a resident scholar at the American Enterprise Institute, who mainly voiced the industry position that the powers conferred on the authorities by Dodd-Frank are toxic to economic growth.

However, he made an important contribution by explaining that some too big to fail banks have structured themselves to receive a much larger government guarantee under the FDIC's resolution program than they would receive in bankruptcy. Coincidentally, the biggest winners would be the six largest too big to fail banks, led by JPMorgan Chase.

(Archived video can be found here.)

Editor’s Note: New Warning - Stocks on Verge of Major Collapse