Top federal bank regulators, at the direction of Congress, plan to soon implement the first major shift to the rules and oversight of banks since Dodd-Frank passed into law eight years ago as a response to the 2008 global financial crisis.
Last week, senior officials from the Federal Reserve and other federal regulatory agencies told the Senate Banking Committee that updating their rules for regional banks before the year’s end will be a priority for them.
“That is our highest priority,” said Federal Reserve Vice Chairman for Supervision Randal Quarles. “I expect that … we will be completed with that task very soon. Certainly before the end of the year, and I hope well before that.”
It’s a major victory for banks that are large but not so large that they are counted among the “systemically important,” and who have argued for years that they shouldn’t fall under the same rules as the world’s megabanks or competitors who engage in riskier activities.
Non-megabanks, especially regional banks and community banks, won a big legislative victory in May, when President Trump signed a bipartisan legislative regulatory relief package meant to ease the burden of the Dodd-Frank regulations.
Enacting the legislation was only the first step, though. Now, regulators have to carry out the new law.
In particular, the law provides a new mandate for how regulators treat U.S. banks with between $100 billion and $250 billion in assets, which account for large portions of the banking system but are not believed to pose the same risk to the financial system as a JPMorgan Chase or a Bank of America if they fail. The law passed earlier this year allows regulators more wiggle room to ‘tailor’ regulations to those banks, a relatively new approach debated for the last several years.
Quarles explained that he saw that provisions as an economic boon, one that would improve the functioning of the banking system.
“We have a public interest in the efficiency of the financial sector because it supports economic growth, it supports job creation, and that economic growth is the basis of the ability we’ll have to solve a lot of other problems in the country,” Quarles said in an exchange with Sen. Sherrod Brown D-Ohio, the Senate Banking Committee’s top Democrat.
Tailoring regulations to fit the size and business profile of individual firms is a major shift in the way the U.S. has regulated banks since Dodd-Frank was passed into law by Congress. That landmark financial regulatory law subjected banks of $50 billion or more in total assets to stronger oversight and regulation, but for years regional banks unaffiliated with the root causes of 2008’s financial meltdown lobbied for changes to that provision, which they argued unfairly lumped them in with larger banks that overextended themselves in the lead up to the crisis.
Though regulators had some flexibility for tailoring rules before, the regulatory reform law passed earlier this year made it mandatory — rather than merely possible — for them to do so. The law, primarily authored by Senate Banking Committee Chairman Mike Crapo R-Idaho, gained support from some Democrats after years of debate over the issues it touched on, in part for the tailoring provision, but also for a relaxation of some rules governing community banks.
Though some Democrats crossed the aisle to support the new law, formally known as the Economic Growth, Regulatory Relief, and Consumer Protection Act, others remain skeptical of this approach.
“When I hear conservative regulators who were in charge a decade ago when all this happened, I hear about efficiency,” Brown responded to Quarles. “But efficiencies always seem like more profits for the banks and less stability for the banking system. It just seems like it’s never enough for them.”
Brown, long a proponent of shrinking the largest banks, also advocates for them to face higher capital requirements in case another catastrophic shudder ripples through the financial system. In fact, it’s clear that banks remain a favorite target of the progressive wing of the Democratic Party — Sen. Bernie Sanders I-Vt., has called for a simple cap on bank size, and Sen. Elizabeth Warren D-Mass., also favors much tighter regulations. Their positioning suggests that regulators’ current efforts to ease regulatory burdens could be reversed should Democrats win the White House in 2020.
Still, regulators feel comfortable with the new approach, perhaps bolstered to experiment more by the current strength of the U.S. economy.
During a public interview at Wednesday’s Atlantic Festival, Federal Reserve Chairman Jerome Powell reiterated the strength of the economy and credited, in part, the work of financial regulators since the 2008 crisis.
His interviewer, PBS’s Judy Woodruff, compared the unusual mix of low unemployment and low inflation to ‘Goldilocks’: everything just right.
“Your words, not mine,” Powell quipped.
At every other opportunity, though, Powell has touted the strength of the economy.
During Tuesday’s hearing regulators were asked what the biggest potential risk to financial stability could be.
Quarles and the two other banking regulators present, Federal Deposit Insurance Corp. Chairman Jelena McWilliams and Comptroller of the Currency Joseph Otting, all highlighted the danger hacking poses. In late 2016, those agencies tried to lead a joint rulemaking to prepare banks and other financial institutions for a major cyberattack, but the effort was met by industry resistance, and stalled.
“To me cyber risk is the issue that we should be focused on that we have not,” said Quarles. “We have taken a number of measures with respect to financial stability risk, and those have been effective in my view. The risk that we really need to focus on is cyber.”
