The terrain facing the banking industry in its quest for regulatory relief became clearer Thursday as federal bank regulators outlined support for modest rollbacks of the post-crisis banking rules.
Appearing before the Senate Banking Committee, officials from the Federal Reserve and other agencies that oversee banks express support for easing some parts of the new regulatory regime for medium-sized banks, but not major changes for big banks. And the broad overhaul of the 2010 Dodd-Frank law sought by House Republicans isn’t in their plans.
“I don’t think what we’re talking about here amounts to deregulation or broad deregulation,” said Federal Reserve Governor Jerome Powell, testifying before the committee on Thursday. “I think it amounts to making regulation more efficient, protecting the important gains we made. We’re not talking about some massive program here.”
In comparison, House Republicans have passed legislation that would mostly replace Dodd-Frank, eliminating many of its rules and dramatically paring the new authorities given to regulators. That bill, however, is thought to have no chance of getting past a Democratic filibuster in the Senate.
Instead, Mike Crapo, the committee’s Republican chairman, has aimed for bipartisan buy-in for what would be more modest reform. He said Thursday that “we are literally actively engaged right now” in developing legislation to reduce regulatory burdens without hurting the safety and soundness of the banking system.
Democratic leaders, such as the ranking Democrat on the committee, Sherrod Brown of Ohio, and Elizabeth Warren of Massachusetts, have set a high bar for any changes, indicating skepticism of regulators’ remarks at Thursday’s hearing.
Nevertheless, the regulators indicated areas in which bipartisan agreement on changing Dodd-Frank rules might be possible for many banks.
In particular, all three federal bank regulators at the hearing agreed on the need to revisit the Volcker Rule, a key part of the Dodd-Frank law. The rule is meant to prevent banks from speculating with insured deposits or owning hedge funds, and limit them only to trading as needed to meet clients’ needs.
Powell suggested that the rule could be lifted for smaller banks. Keith Noreika, the acting comptroller of the currency, suggested that it could be streamlined. Martin Gruenberg, the chairman of the Federal Deposit Insurance Corporation, said he favored a “safe harbor” for small banks that only engage in traditional banking activities to be exempt from the rule.
And all three testified to the need to revisit $50 billion asset threshold at which banks are considered big for regulatory purposes under Dodd-Frank. The idea is that banks like Cincinnati’s Fifth Third Bank, with around $137 billion in assets, or Columbus’ Huntington National Bank, with just under $100 billion in assets, are not megabanks like JPMorgan Chase, with its $2 trillion-plus in assets. Instead, they should be regulated more like community banks.
That could mean less onerous “stress tests,” the annual examinations in which regulators put the bank’s balance sheets through simulated financial crises. Or it could entail less frequent check-ups of the banks’ “living wills,” the documents they are required to write spelling out ahead of time how they would plan to safely go through bankruptcy in case of a failure.
One option that is not on the table from the point of view of regulators, however, is lower capital requirements, something sought by some top bankers. “We’re not in favor of that,” said Powell.
And Gruenberg, who would be tasked with taking over any bank that failed, warned members of Congress against simply raising the $50 billion cut-off, and suggested instead that they find some way to tailor regulation based on the risks that banks pose.
He noted that, during the financial crisis, the bank failure that proved most costly to the FDIC’s insurance fund was not a megabank. Instead, it was a thrift with just $30 billion in assets, IndyMac.
Later, IndyMac would be bought from the federal government by a group of investors including Steven Mnuchin, who is now Treasury secretary. The bank was renamed OneWest.
