INTERVIEW: E*Trade bank growth limited by U.S. regulatory asset threshold – CRO Mike Pizzi

April 21, 2015

The Dodd-Frank $50 billion asset threshold used to categorize systemically important banks has been a strategic business factor for E*Trade, the online broker, and unless there are compelling factors to breach the mark, the firm will continue to limit expansion of its balance sheet, chief risk officer, Mike Pizzi, said in an interview this week.

Speaking to Thomson Reuters, Pizzi said, “We have made the strategic decision to remain below the $50 billion mark, and customer deposits have been directed off of our balance sheet to do so. And while we have made meaningful strides in elevating our (enterprise risk management) framework to be scalable and consistent with that of a much larger institution, crossing the $50 billion line would certainly require investment and additional build out.”

“Additionally, there are several other important factors outside of ERM that we would have to consider before making the decision to cross that threshold,” he added.

E*Trade is New York based financial services company that provides online discount stock brokerage service for self-directed investors. Through its banking subsidiary the firm also provides investor-focused banking products, primarily sweep deposits and savings products, to retail investors. At the end of 2014, E*Trade Bank had consolidated assets of $46 billion on its balance sheet.

The requirement that any U.S. bank holding company with $50 billion or more in assets is considered a systemically important financial institution, and therefore subject to tougher capital, liquidity and other rules, has become increasingly contentious. Critics have argued that banks just above that mark face the same plethora of regulatory burdens as those with much larger asset stockpiles, and who are seen posing greater risk to the system in the event of a crisis.

Apart from the regulatory burdens, the fact that certain firms, such as E*Trade, have consciously chosen to avoid breaching the asset threshold, points to the economic costs for clients and customers even if there are potential benefits from serving a larger group.

Acknowledging the debate, and the broader consequences, Federal Reserve governor Daniel Tarullo said last month that consideration was being given to raise the threshold.

“While enhanced prudential standards are important to ensure that larger banks can continue to provide credit even in periods of stress, some of those same enhancements could actually inhibit credit extension by rendering the reasonable business models of middle-sized and smaller banks unprofitable,” Tarullo told the Senate Banking Committee.

Those against any rise in the asset threshold argue that allowing large regional institutions to get by with less oversight poses systemic risks that could see a repeat of the 2008 crisis. U.S. Senator Elizabeth Warren has been particularly vocal on the topic, saying last month during Tarullo’s testimony that such a move was “a recipe for missing the buildup of excessive risk in the financial system, and it reflects the kind of let- the-banks-run-free mind-set that created the last financial crisis.”

For institutions with assets under $50 billion, while the degree of regulatory compliance is significantly less, there are still costs associated with stress testing, controls and compliance staff that E*Trade has factored into its operating model and enterprise risk management system.

“There has been a degree of build-out that has created expense that you can’t deny,” said Pizzi. “From a forward-looking perspective I think we are at the right compliment of staff and bench strengths.”

“We’re a smaller company . . . and we have a much narrower focus that has allowed us to put the right lens on this,” he added.

Pizzi also noted that regulatory agencies were increasingly focused on internal processes and remediation. What regulators want to see is if firms are able to identify the root causes of control gaps or compliance failures and address them appropriately, he said.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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