Crapo focuses on raising Dodd-Frank's $50 billion asset threshold 'across the regulatory spectrum,' easing stress tests for banks between $100B - $250B, changing Volcker Rule

On October 2, the Senate Banking Committee held a hearing with federal banking regulators for a status report on their implementation of S. 2155, the Economic Growth, Regulatory Relief and Consumer Protection Act, which the President signed into law in May. Testimony from the hearing is posted here. The witnesses were:

• Comptroller of the Currency Joseph Otting
• Federal Reserve Vice Chairman for Supervision Randal Quarles
• FDIC Chair Jelena McWilliams
• National Credit Union Administration Chairman Mark McWatters

In his statement, Chairman Mike Crapo (R-ID) said the law's primary purpose is to simplify and improve the regulatory regime for community banks, credit unions, mid-sized banks and regional banks to promote economic growth, while also increasing consumer protections for veterans, senior citizens and fraud victims. Crapo noted that the Federal Trade Commission and Consumer Financial Protection Bureau have announced as effective a provision of the law that allows consumers to freeze and unfreeze their credit files at the three major credit reporting bureaus for free. Crapo said there was much work yet to be done by the agencies, and it was imperative for them to carry out all of their responsibilities under the law expeditiously. He specifically cited the priority for agencies to tailor regulations for banks with between $100 billion and $250 billion in assets, "with a particular emphasis on tailoring and streamlining the stress testing regime." Crapo also listed as priority items: 1) tailoring the liquidity coverage ratio for regional banks with more than $250 billion in total consolidated assets; 2) reassessing Basel III's "advanced approaches" thresholds for internationally active banks; 3) providing "meaningful relief" from the Volcker Rule for all institutions, something Crapo and other GOP senators had urged in a letter to the Fed sent on October 1; and 4) examining whether regulations that apply to the standalone US operations of foreign banks should be tailored the same way they will be for US banks.

Crapo noted that several rules are keyed to the "outdated" $50 billion asset threshold set by Dodd-Frank section 165, so he has encouraged regulators "to revisit all regulation and guidance thresholds that were consistent with" the previous threshold "to an amount that reflects actual systemic risk." Crapo said regulators could use either "a systemic risk factors-based approach, or raise all thresholds to at least $250 billion in total assets" to be consistent with S. 2155. (During his questions later, Crapo asked all the witnesses to provide written answers on how they plan to identify and adjust such thresholds "across the regulatory spectrum.") Crapo said the banking agencies should "promptly issue notice of proposed rulemakings for all relevant aspects of this law," but he cautioned that if regulators forgo public notice-and-comment rulemaking in favor of guidance documents or other "informal means," they should follow the Congressional Review Act (CRA) and submit all rules to Congress, "to ensure that Congress can and engage in its proper oversight role as well as ensure that future congresses do not [use the CRA to] overturn the agency's policy statements" related to implementing S. 2155 .

In his statement, Ranking Member Sherrod Brown (D-OH) said, "A decade after the most severe financial crisis since the Great Depression, today, we're discussing how the financial watchdogs will roll back rules put in place after that crisis. Imagine that. These are the same agencies that ignored the buildup to the '08 collapse … In some cases, they are now led by the very people that failed to prevent or who profited from the crisis." Brown said that while S. 2155 purportedly was aimed at helping community banks and credit unions, "in reality, this bill is littered with concessions to the big banks. It offers virtually nothing to American consumers." Based on the letters that had been sent to regulators by Republican members, Brown said, "they are most concerned about how the law will help the largest domestic and foreign banks, or to use a new Republican euphemism, 'regional banks with an international parent,'" even though such banks have been profitable every quarter since the second quarter of 2009. Brown said the five largest US banks "recently announced more than $72 billion in stock buybacks, a 30% increase from last year." Meanwhile, he said, Federal Reserve data showed that 90% of US households have experienced no gains in wealth, and the US poverty rate rose 2.5% between 2007 and 2012.

In his statement, Comptroller of the Currency Joseph Otting said the OCC has recently published an advanced notice for a proposed rule giving federal savings associations with $20 billion or less in assets more flexibility to "operate with national banking power" without changing charters — a part of S. 2155 sponsored by Sens. Jerry Moran (R-KS) and Heidi Heitkamp (D-ND), as well as an interim rule treating certain municipal securities as high-quality liquid assets under the liquidity coverage ratio, and final rules to expand the number of community banks eligible for the 18-month examination cycle. Otting said the OCC had also joined the Fed and the FDIC in clarifying that regulators will not enforce requirements on banks that S. 2155 intends to eliminate, such as Dodd-Frank stress test requirements and exempting institutions with less than $10 billion from the Volcker Rule. Fed Vice Chair of Supervision Randal Quarles said that in August, the Fed issued an interim final rule raising the asset threshold from $1 billion to $3 billion for bank holding companies to qualify for the Small BHC Policy Statement, and the Fed plans to develop a new leverage ratio for community banks "in the very near future." For larger banks, Quarles said the Fed has "placed our highest priority" on issuing a rule tailoring enhanced prudential standards for banking firms with assets between $100 billion and $250 billion. Beyond simply reforming the current rules, Quarles said the Fed wants to build "a framework that will describe, in a principled way, when future institutions may expect enhanced regulation and why," using objective metrics that account for the complexity and interconnectedness among large banks. He said the Fed expects to move much faster on this effort than the 18-month time frame outlined in S. 2155.

Questions

In questions from Chairman Crapo, the FDIC's McWilliams echoed Quarles in saying regulators would release "before year-end, if not much sooner," a rule establishing a community bank leverage ratio requirement, in line with S. 2155's provision calling for a new debt-to-equity ratio for such banks of not less than 8% and not more than 10%. Crapo told Quarles that the Fed should streamline and tailor the supervisory stress tests for banks with assets of between $100 billion and $250 billion. He asked when the Fed would issue a notice of proposed rulemaking (NPR) detailing how such stress tests should be simplified. Quarles said the NPR would be completed "very soon, certainly before the end of the year," and agreed that the Fed must tailor the frequency of stress tests for those banks and "consider some of the burden appropriate to stress testing, even if they occur on a less frequent basis." Quarles said the Fed has not yet completed its analysis of "exactly how we will look at the burden of the tests or the timing," but it is a high priority.

Ranking Member Brown urged the regulators not to reduce capital standards for the biggest banks, asking Quarles if the Fed plans to lower the risk-based capital surcharge for the largest banks. "I think that capital levels, the total loss absorbency capacity in our system, is roughly about right," Quarles told him. When Brown asked if the Fed might ultimately decide to raise that surcharge, Quarles said "we should go where the analysis would lead it to go."

Mike Rounds (R-SD) said he is concerned about the international competitiveness of US global systemically important banks, or GSIBs, asking Quarles if the Fed plans to revisit the capital surcharge faced by such banks. Quarles said the Fed will "inevitably" look at capital rules for GSIBs, but didn't specify how or when: "The GSIB surcharge is part of a complex of regulations that apply to our largest firms and really needs to be considered as part of that," he said, adding that it is "relevant that we try to ensure we have a level playing field internationally … I don't think we should prejudge what the outcome of an honest consideration of that whole complex of rules" would be, but "I think that that principle is quite important in general as we consider all of those rules."

Pat Toomey (R-PA) said he was "frustrated because I just haven't seen the progress that I thought we would have seen by now." He pressed Quarles to move faster to ease the liquidity coverage ratio for banks that have more than $250 billion in assets but are still smaller than the largest global banks. Quarles said the Fed's ability to move quickly on this was slowed down by other work related to implementing S. 2155, but it would be addressed "promptly … . We are working hard on that as part of the overall tailoring package."

Jack Reed (D-RI) focused on the Military Lending Act, saying the CFPB's leaders had recently decided to "downgrade" compliance with the Act by not reviewing how the Bureau's subject institutions comply with it. All four witnesses told Reed they intend to fully and vigorously enforce the Act and the Servicemembers Civil Relief Act (SCRA). When Reed asked what fundamental threats to financial stability remain 10 years after the crisis, Quarles and McWilliams both cited potential exposure to cyber breaches.

In questions with Robert Menendez (D-NJ) on how to modernize the Community Reinvestment Act (CRA), McWilliams and Quarles said physical branches should remain key to defining a bank's "community" under CRA. McWilliams said that "in general, I believe that branches are important. In a number of low- and moderate-income communities, to the extent that the consumers rely on those branches more so than they rely on digital devices, I certainly want to make sure that emphasis remains a part of the CRA." Quarles agreed that a bank's "place is important." Menendez noted that neither the Fed nor the FDIC had signed on to an idea proposed by Otting in August for a single ratio that could determine a bank's compliance with CRA. Quarles said the OCC rulemaking, which solicited responses to a series of questions, would provide "a lot more information. … We're going to work jointly together on the basis of that information" to develop a rule, but he did not want to commit to any proposals before that process has played out.

Elizabeth Warren (D-MA) asked if McWilliams agreed with the assertion by her Democratic predecessor at the FDIC, Martin Gruenberg, that the Fed's proposal this year to loosen the supplemental leverage ratio would reduce capital requirements at the eight largest banks by at least $120 billion. McWilliams said this is an "open rulemaking" that she was not part of generating, and "I would want to understand the logistics and reasoning behind coming up with this proposal." Warren told her that "putting American taxpayers at risk and weakening capital standards by $120 billion at a time when banks are making record profits is insane."

Joseph Schatz (D-HI) asked the OCC's Otting about continuing problems at Wells Fargo, and when the 800,000 auto-loan borrowers who were forced to buy car insurance they didn't need would be compensated. Otting said the OCC is "not comfortable where we are with" Wells Fargo's management and board, that the agency has 100 inspectors working on-site at the bank, and the actions the OCC expects from Wells were spelled out in an April consent order. As to when customers could expect to get their money back, Otting said, "I don't have the date in front of me. … It's not a matter of warning the board, it's about accurately getting the data." Schatz then listed several other offenses that Wells Fargo had committed in the past two years, finally asking, "Isn't this organization just too big?" When Otting said a bank's size alone doesn't necessarily indicate an inability to be managed properly, Schatz said, "It seems like their size is a problem. It does seem beyond repair. They systematically screw their customers. At some point an institution can be so big that you can't manage it and it can't manage itself, and its political influence is so massive that we can't wrangle it to the ground."

Chris Van Hollen (D-MD) asked about the absence of a "real-time payment system in the US" that has the effect of hitting low-income Americans with billions of dollars in overdraft fees, forcing them into the hands of payday lenders. Quarles said developing a faster payment system has been a priority for some time, and the Fed has worked with the private sector to "catalyze efforts to develop technology and systems to move toward faster payments. … This is not something we as the Fed can mandate, but we are using our convening and exhorting power effectively — there has been a lot of progress toward that, and in the next short period you'll see concrete steps in private sector."

If you have questions, or need additional information, please contact either Will Heyniger or Bob Schellhas at Washington Council Ernst & Young at (202) 293-7474.

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