Update 302: Senate Banking Hearing Tomorrow
on S. 2155 — Why is Implementation So Slow?
When the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) was signed into law four months ago, we saw risk, not a reason to rush implementation. Industry apparently sees otherwise and so Senate Banking will ask why it’s been so slow.
Per a recent survey of registered voters by Better Markets and The Harris Poll, 58 percent either wanted a return to the protections put in place after the financial crisis or additional regulation on banks with over $50 billion in assets. 70 percent of Democrats, 53 percent of independents, and 49 percent of Republicans agreed.
A majority of voters disagree with S. 2155’s deregulatory agenda. Policy aside (or see below), just five weeks out from the midterms, is this the time for lawmakers to showcase support for, let alone demand rapid implementation of, the biggest rollback of Dodd-Frank yet?
The supervisory regulatory relief to community banks, the provision at the center of S. 2155’s advertising, is not extensive. In raising the Federal Reserve’s Small Bank Holding Company Policy Statement from $1 billion to $3 billion, small banks that qualify may apply for a longer supervisory examination cycle of up to 18 months. Should they meet the appropriate criteria, banks with under $5 billion in assets will enjoy relaxed reporting requirements in the first and third quarters. For community banks holding over $5 billion in assets, this supervisory relief applies less, focusing on modest changes in capital requirements and mortgage regulations, and exemption from the Volcker rule.
The ratcheting up of the SIFI designation threshold from $50 billion in consolidated assets to $250 billion, which has almost no direct impact on community banks, was the number one legislative goal of the ABA much of this decade. . Title IV of S. 2155 does precisely that, and why the banking sector wants the title implemented yesterday is not a mystery.
Not everyone is enthused. Sheila Bair, the FDIC chair during the financial crisis, says that S. 2155 sets “a dangerous global precedent [and] now some in [Congress] have decided to side with self-interested bankers. They argue our stronger capital rules put US banks at a competitive disadvantage, even though they have come to dominate global finance.” Industry has already expressed its gratitude to Democratic members of the Banking Committee in tight re-election races in red states like Indiana, Montana, North Dakota, the leading recipients of commercial banking largess. Democrats trying to present S.2155 as a small-bank bill have some ground to stand on, but also run a serious political risk.
Two Steps Forward, One Leap Back
As we have moved farther away from the Great Recession, much of the public has forgotten what precipitated the crisis. S. 2155’s deregulatory measures take us closer to pre-recession conditions rather than farther by undermining a fundamental pillar of the post-2008 regulatory regime. Although the bill’s messaging is centered around helping community banks, the real winners are the midsize to large regional banks.
Section 401 loosens regulations on 25 of the top 40 largest banks by increasing the asset threshold for the automatic application of post-crisis safeguards, known as enhanced prudential standards, from $50 billion to $250 billion. These 25 banks together hold $3.5 trillion in assets and collected a total of $47 billion in Troubled Asset Relief Program (TARP) funds during the financial crisis.
401 also provides the biggest rollback thus far of DFA, which was put in place to strengthen regulation after the Recession. Although the bill gives the Fed discretion to re-apply enhanced prudential standards to those banks with assets between $100 and $250 billion, President Trump’s appointees, which include Vice Chair of Supervision Randal Quarles, are unlikely to do so. In addition to these already risky changes, the bill also complicates the stress testing system and loosens requirements for the liquidity coverage ratio. The result? A less-insulated financial system with far greater systemic risk.
As we head into tomorrow’s hearing, important questions remain on the implementation and interpretation of S.2155 by the various agencies involved:
- Given the fact that Lehman Brothers had $150 billion in assets when it collapsed during the financial crisis, isn’t the Fed’s newfound discretionary designation power still critically important?
- What methodologies and procedures will the Fed use to make a determination on whether a bank between $100 billion and $250 billion in assets should face enhanced prudential standards?
Fed Chair Jerome Powell suggested in his most recent press conference last week that post-crisis designation powers on nonbanks, while important, should be used “sparingly.” This seemingly innocuous comment comes as other agency chiefs are considering weakening other discretionary powers in the wake of S. 2155. The American people (and voters) may not forgive nor forget a future financial crisis conceived in the legislative details of a lobbyist’s bill in Washington.