Banking With a Turning Tide

By DirectorCorps

September 10, 2019 Financial Services Regulatory

Listening to banking regulators’ speeches often requires double takes.

Here’s Federal Deposit Insurance Corp. Chairman Jelena McWilliams, speaking at a CATO summit in June: “My job as a regulator is to ensure that our regulatory system encourages innovation so that our financial markets are resilient and our consumers are adequately protected.”

Say what? In a CNBC story, she said the Volcker rule prohibiting proprietary trading is so complex “that it required 21 sets of Frequently Asked Questions, or FAQs, issued by the regulators within three years of its adoption.”

Joseph Otting, Comptroller of the Currency, has often referred to regulation as a “burden” for banks, as he does in this speech.

For the banking industry, the shifting regulatory attitude has been welcome news after the roll-out of the Dodd-Frank Act in 2010, the most significant financial law in decades. Some in the industry charged that some rules seemed nonsensical and were especially onerous for small banks.

The act mandated the formation of the Consumer Financial Protection Bureau. It introduced mandatory stress testing for banks with more than $10 billion in assets. It created the Volcker Rule, which prohibited banks from investing their own money in hedge funds and private equity funds.

Nowadays, both Congress and bank regulators have taken steps to roll back many of those regulations. It’s not a complete reversal of Dodd-Frank, but it has been significant.

The most significant rollback so far has been the Economic Growth Act of 2018. In a rare moment of bipartisanship, Democrats and Republicans passed a bill that offered regulatory relief for banks under $250 billion in assets and freed them from costly and time-consuming paperwork.

There have been even more changes since then, as well as criticism that the changes are weakening the regulatory oversight that is supposed to protect the industry from another crisis. The FDIC has proposed rule changes, already approved by the OCC, that would remove some of the barriers banks faced under the Volcker Rule, making it easier for them to make short-term investments with their own capital and clarify the definition of proprietary training.

Additionally, the Federal Reserve is considering changing rules that would reduce the amount of capital that big banks are required to hold. The 18 largest banks, which include firms like JPMorgan Chase & Co., Goldman Sachs Group, Citigroup and Bank of America Corp., have added more than $650 billion to their common equity capital levels since the beginning of 2009 through the end of 2018. Some bankers say that is enough, according to The New York Times.

Even the Financial Accounting Standards Board seemed to get into the rollback game, proposing in August a delay of the current expected credit loss standard, or CECL, for several more years for small reporting and private companies.

Banking regulators have certainly gotten friendlier to banks. It remains to be seen how long this will last.