October 2, 2018

Senate Banking, Housing & Urban Affairs Committee “Implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act”

Key Takeaways

  • Stress Tests: Quarles explained that the notice of proposed rulemaking on the tailoring of supervisory stress tests is the highest priority at the Fed and he expects for it to be completed “very soon, before the end of the year.” Quarles said the Fed is considering whether the regulatory burden is appropriate for these firms and adjusting the frequency of these exams.
  • Supplemental Leverage Ratio: Quarles said that when it comes to the capital framework, liquidity rules, and special stress testing requirements, there will be consideration of whether the GSIB surcharge has been appropriately calibrated to protect the stability of the financial sector and promote safety and soundness within the system.
  • Volcker Rule: Crapo noted the letter sent yesterday from four Senate Banking Committee Republicans addressed to the heads of agencies that oversee the Volcker Rule. He urged the regulators to continue their work from the notice of proposed rulemaking, noting the absence of proposed reforms in the covered funds provisions. Crapo encouraged the regulators to use their discretion to revise the definition of covered fund or include exclusions to address the “overly-broad application” to venture capital, other long-term investments and loan creation. 

Witnesses

Opening Statements

Sen. Mike Crapo (R-Idaho), Chairman, Senate Banking Committee

In his opening remarks, Crapo noted that the agencies testifying play an “integral role” in implementing key provisions of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, which had “significant bipartisan support.” He explained that the committee is interested in the substance of the agencies’ specific actions to provide regulatory relief, particularly concerning the stress testing regime, liquidity coverage ratio, advanced approaches thresholds, the Volcker rule, and enhanced prudential standards. Crapo stressed that the agencies should “promptly” issue notice for proposed rulemakings on these and other issues, and that in instances where they issue guidance or policy statements in place of formal rulemakings, the agencies should still submit them to Congress for review and oversight.

Sen. Sherrod Brown (D-Ohio), Ranking Member, Senate Banking Committee

In his opening statement, Brown criticized S. 2155, saying it was designed to reduce the burden of regulation on small community banks and credit institutions, but has primarily helped the largest banks. Brown expressed his concern about how the law will help the country’s largest banks, as well as foreign banks, noting that many of these institutions have been profitable since mid-2009. Brown said the committee should be focused on how to build up capital, protect consumers, increase wages, and make housing more affordable and accessible, and the agencies should focus on how to best help middle class families.

Testimony

The Honorable Joseph M. Otting, Comptroller, Office of the Comptroller of the Currency

In his testimony, Otting noted the “good relationship” among regulatory agencies in implementing S.2155 and lifting the burden from small and midsize banks to promote economic growth. He listed some of the work that has already been completed: 1) a notice of proposed rulemaking (NPR) on September 10, 2018 that the OCC issued that provides greater flexibility to federal savings associations by establishing streamlined standards and procedures so those federal savings associations with $20 billion or less in total consolidated assets can operate as a “covered savings association”; 2) a joint interim rule released by the OCC, Fed and FDIC on August 23, 2018 implementing changes to exam cycles for banks with less than $3 billion in total assets to have exams every 18 months rather than 12 months; and 3) an interim rule on August 22, 2018 amending liquidity rules to treat municipal securities as high quality liquid assets.

The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of Governors of the Federal Reserve System

In his testimony, Quarles explained that the Federal Reserve (the Fed) is implementing the changes from S.2155, specifically tailoring regulations to reduce the burden on community banks. He stated that the law directs the Fed to increase the asset threshold from $1 billion to $3 billion for bank holding companies (BHCs) to qualify for the small BHC policy statement. He then echoed Otting’s discussion about updating the exam cycle for small firms with less than $3 billion in total consolidated assets. Regarding the community bank leverage ratio, Quarles stated that he hopes to issue a regulatory proposal “in the very near future.” He stressed that the highest priority for implementation is issuing a proposed rule on tailoring enhanced prudential standards for banks between $100 billion to $250 billion in assets, and added that for banks over $250 billion in total assets but below the global systemically important bank (GSIB) threshold, the Fed is considering how these firms could be “more efficiently regulated by applying more tailored standards” based on the risk profile of firms.

The Honorable Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation

In her testimony, McWilliams said her top priority has been supporting the health of the nation’s community banks and their ability to most effectively serve their communities. McWilliams said S. 2155 has laid a “strong foundation” for delivering on this priority, giving regulators the flexibility to tailor regulations to suit the size and risk profile of an institution. McWilliams said the FDIC has begun looking at the community bank leverage ratio, extending its examination cycle, broker deposit requirements and national rate caps, and eliminating duplicative, unnecessarily burdensome regulations that do not contribute to the safety and soundness of regulated entities. McWilliams added that increasing transparency, engaging with regulated entities and consumers, and reducing regulatory burdens are essential to supporting the health of banks and the nation’s economic growth.

The Honorable J. Mark McWatters, Chairman, National Credit Union Administration

In his testimony, McWatters discussed a number of regulations the National Credit Union Administration (NCUA) is examining in an effort to reduce regulatory burdens and provide “sensible and targeted relief” for the main street credit union system. McWatters noted the NCUA has established a regulatory task force to review regulations, capital standards, improving the examination appeals process, capital planning and stress testing rules, and increasing flexibility in the membership process. McWatters added they are proposing more tailored risk-based capital rules that will not burden the smallest institutions.

Questions & Answers

Community Bank Leverage Ratio

In response to a question from Crapo, McWilliams explained that she expects a notice of proposed rulemaking on Section 201, the community bank leverage ratio, “very soon.” She added that regulators have made regulations “too complicated” for community banks and that only large banks should be subject to Basel III requirements.

Stress Tests

Crapo asked about the tailoring of supervisory stress tests for those institutions between $100 billion to $250 billion in total consolidated assets, to which Quarles explained that this notice of proposed rulemaking is the highest priority at the Fed and he expects for it to be completed “very soon, before the end of the year.” Quarles continued that the Fed is considering whether the regulatory burden is appropriate for these firms and adjusting the frequency of these exams, adding that there is an analysis underway looking at the burden and timing of these tests.

Enhanced Prudential Standards
Crapo asked about Section 165 of Dodd-Frank regarding enhanced prudential standards and if the agencies are reviewing the rules and guidance related to the $10 billion and $50 billion thresholds, stressing the need to “accomplish the intent of S.2155 across the regulatory spectrum.” The witnesses agreed to submit their detailed answers in writing.

Sen. Jon Tester (D-Mont.) asked if the Federal Reserve has the ability to eliminate prudential standards, to which Quarles said it is clear the agency has been instructed to tailor, not eliminate, prudential standards. Quarles agreed they will base regulation on risk profiles and change those regulations as risk profiles change.

Sen. Pat Toomey (R-Pa.) asked for a timeline for the tailoring of enhanced prudential standards. Quarles responded that it is a priority and they will be addressing it “promptly” as part of an overall tailoring package.

Capital Requirements

In response to questions from Brown on the risk-based capital surcharge, Quarles explained that the current capital levels of loss absorbency “is roughly about right,” and that when it comes to the possibility of increasing capital levels for big banks, “we should go where the analysis leads us.”

Supplemental Leverage Ratio

Sen. Mike Rounds (R-S.D.) asked what thought process the Fed has while reviewing the supplemental leverage ratio (SLR), to which Quarles replied that when it comes to the capital framework, liquidity rules, and special stress testing requirements, there will be consideration of whether the GSIB surcharge has been appropriately calibrated to protect the stability of the financial sector and promote safety and soundness within the system.

Sen. Elizabeth Warren (D-Mass.) stated that the Fed and OCC proposed loosening the enhanced SLR for the 8 largest banks, noting that the FDIC did not join the proposal. McWilliams replied that she was not part of the process or consideration of the rulemaking and that she would have to understand the logistics regarding creating the proposal before commenting further.

Community Reinvestment Act

Sen. Robert Menendez (D-N.J.) asked about the witnesses’ views on the Community Reinvestment Act (CRA). McWilliams and Otting agreed that both agencies have systems in place to detect discrimination and refer it to the Department of Justice (DOJ). Both agreed to was important to satisfy the Congressional intent of CRA. Sens. Brian Schatz (D-Hawaii) and Warren also discussed their concern with changes to the way the agencies are interpreting CRA.

Cost-Benefit Analysis

In response to a question from Sen. Richard Shelby (R-Ala.) as to whether agencies take cost-benefit analyses (CBAs) into account when implementing regulations, Quarles stressed that CBAs are extremely important in the regulatory process. Other witnesses agreed, and McWilliams added that CBAs are “crucial” to determining the outcome of a rulemaking.

Volcker Rule

Crapo noted the letter sent yesterday from four Senate Banking Committee Republicans addressed to the heads of agencies that oversee the Volcker Rule. He urged the regulators to continue their work from the notice of proposed rulemaking, noting the absence of proposed reforms in the covered funds provisions. Crapo encouraged the regulators to use their discretion to revise the definition of covered fund or include exclusions to address the “overly-broad application” to venture capital, other long-term investments and loan creation.

For additional information about this hearing, please click here.