Banking and Finance Law Daily Regulators weigh on promoting economic growth and bank supervision
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Friday, June 23, 2017

Regulators weigh on promoting economic growth and bank supervision

By John M. Pachkowski, J.D.

In the third hearing held by the Senate Banking Committee on measures that can be taken to improve economic growth, federal and state banking regulators gave their perspectives. The Committee heard testimony from Jerome H. Powell, a Governor at the Federal Reserve Board; Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation; J. Mark McWatters, Acting Chairman of National Credit Union Administration; Keith A. Noreika, Acting Comptroller of the Currency; and Charles G. Cooper, Commissioner of the Texas Department of Banking and testifying on behalf of the Conference of State Bank Supervisors.

The hearings followed a call by the Committee’s Chairman and Sen. Mike Crapo (D-Idaho) and Ranking Member Sen. Sherrod Brown (D-Ohio) for legislative proposals that would promote economic growth and/or enable consumers, market participants and financial companies to better participate in the economy (see Banking and Finance Law Daily, March 21, 2017).

The first hearing, held June 8, 2017, examined the role of financial institutions in local communities. The second hearing, held June 15, 2017, heard from banking executives who characterized regulations under the Dodd-Frank Act as unnecessary and stifling to economic growth, while opponents expressed concern over accountability and the potential for more bailouts.

Bipartisan legislation. At the start of the hearing, Crapo noted, "One of my key priorities this Congress is passing bipartisan legislation to improve the bank regulatory framework and promote economic growth." He added, "As this process continues, I will be working with all members of the Committee from both sides of the aisle to bring strong, robust bipartisan legislation forward."

Wall Street wish list. Brown’s opening statement criticized the Treasury Department’s June 2017 report on financial regulatory reform as "a Wall Street wish list, specifically targeting the capital and liquidity rules for the largest banks and seeking to undermine the [Consumer Financial Protection Bureau]." He also raised concern that many of Treasury’s recommendations will undermine or delay the effectiveness of bank supervision, something that was severely lacking leading up to the crisis. Brown did concede that "There are some ideas worth considering in the Treasury report, as evidenced by overlap with some of the recommendations in the Agencies’ [Economic Growth and Regulatory Paperwork Reduction Act of 1996] review for small institutions, but many of Treasury’s recommendations seem like a steep price for Americans to pay after the 2008 financial crisis."

Tailor requirements. Powell focused his testimony on four key regulatory areas designed to improve and maintain the resiliency of the banking industry: capital, stress testing, liquidity, and resolution planning. He noted that the core elements of the reforms for our largest banking firms in capital regulation, stress testing, liquidity regulation, and resolvability should be protected. Also, regulators should continue to tailor their requirements to the size, risk, and complexity of the firms subject to those requirements with a special emphasis on community banks that community banks face higher costs to meet complex requirements. Powell also called on the regulators to "assess whether we can adjust regulation in common-sense ways that will simplify rules and reduce unnecessary regulatory burden without compromising safety and soundness." Finally he stated, "we should strive to provide appropriate transparency to supervised firms and the public regarding our expectations."

Addressing the Volcker Rule, Powell noted, "The Federal Reserve is reassessing whether the Volcker rule implementing regulation most efficiently achieves its policy objectives, and we look forward to working with the other four Volcker rule agencies to find ways to improve the regulation. In our view, there is room for eliminating or relaxing aspects of the implementing regulation that do not directly bear on the Volcker rule's main policy goals."

Simple and straightforward regulations. Gruenberg noted, "It is desirable that financial regulations be simple and straightforward, and that regulatory burdens and costs be minimized, particularly for smaller institutions." Commenting on the agencies’ Economic Growth and Paperwork Reduction Act review, the FDIC Chairman stated that the agencies have taken, or are in the process of taking, actions to address comments received during the EGRPRA process, including but not limited to: simplifying the capital rules; reduced examination frequency; reduced regulatory reporting requirements; raising appraisal threshold; and reviewing and modernizing the examination process.

As for FDIC initiatives, Gruenberg cited the promoting de novo institutions, clarifying capital rules treatment for S-Corporations, and streamlining living will requirements as a few examples.

Commenting on the Treasury Department’s recommendations that the FDIC be removed from the living will process, Gruenberg noted, "The FDIC brings its perspective as the agency charged with the resolution of failed depository institutions. Both perspectives have value, and both agencies should remain involved in the review of living wills."

Strike the right balance. In his testimony, Noreika called the banks that the OCC supervises "engines of economic growth for the nation." He added, "When the federal banking system is running well, it can power growth and prosperity for consumers, businesses, and communities across the country." Noreika continued, "Our job as bank supervisors is to strike the right balance between supervision that effectively ensures safety, soundness, and compliance, while—at the same time—enabling economic growth. To achieve that balance, we need to avoid imposing unnecessary burden and creating an environment so adverse to risk that banks are inhibited from lending and investing in the businesses and communities they serve. Regulation does not work when it impedes progress, and banks cannot fulfill their public purpose if they cannot support and invest in their customers and communities."

One area in which Noreika had sought to promote a regulatory environment that is balanced and that provides the certainty needed to encourage investment is the Volcker Rule. He noted, "There is near unanimous agreement that this framework needs to be simplified and clarified."

Noreika further testified that multiple regulators to solve the same problem can "lead to waste, redundancy, and duplication of resources both in the regulatory agencies and for the institutions we supervise."

Enhanced flexibility. McWatters recommended that Congress support the NCUA’s efforts to ease regulatory burdens on credit unions by tailoring and simplifying federal law. He encouraged "Congress to consider providing regulators with enhanced flexibility to write rules rather than imposing rigid requirements." He continued saying, "Such flexibility would allow the agency to effectively limit additional regulatory burdens consistent with safety and soundness considerations."

Disproportionately burdened. Providing a state regulator’s perspective, Cooper noted that community banks provide about 45 percent of small loans to U.S. businesses and three-fourths of agriculture loans they "are disproportionately burdened by oversight that is not tailored to their business model or activities." He provided four key changes to the Committee to address this issue:

  1. Adopting an activities-based definition for community banks, which lawmakers and regulators can use to exempt smaller banks from regulations aimed at larger banks.
  2. Reducing the complexity of capital rules for smaller banks.
  3. Exempting from certain regulations community banks that retain mortgages in portfolio.
  4. Improving the transparency and timeliness of fair lending supervision.

Industry reaction. In a letter leading up to the hearing, the U.S. Chamber of Commerce called on the Committee and the regulators to "rigorously examine the impact of bank capital and liquidity rules on small and medium enterprises’ access to credit. Such examination is necessary to balance the equally important goals of financial stability and growth—the twin pillars of true prosperity."

Following the hearing, the Regional Bank Coalition issued a statement agreeing with the need to move away from basing regulations solely on asset size. The statement continued, "Matching requirements to the overall risk of an institution—including their interconnectedness and complexity—would ensure the safety and soundness of the financial system without limiting critical Main Street lending, as the current environment has done. A multi-factored approach to risk—one of the only Dodd-Frank reform proposals to garner bipartisan support—would allow regional banks to better serve their communities and thereby foster needed economic growth."

Companies: Conference of State Bank Supervisors; Regional Bank Coalition; U.S. Chamber of Commerce

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