Senate bill praised by regulators; one offers changes going forward

Bank regulators lauded financial institution “regulatory relief” legislation approved Tuesday by the Senate Banking Committee, the vice chairman of the Federal Deposit Insurance Corp. (FDIC) board offering suggestions for tweaking the measure.

The Senate panel Tuesday approved the “Economic Growth, Regulatory Relief and Consumer Protection Act” (S2155), voting along partisan lines, to be sent to the Senate floor for consideration. The legislation, with five titles (including the lengthy Title II: “Regulatory Relief And Protecting Consumer Access To Credit” with 12 sections).

Comptroller of the Currency Joseph Otting said the legislation “advances important changes that will help small and midsize banks meet the financial service needs of their consumers and businesses, and spur economic growth in the communities they serve.” He listed several provisions in the legislation supported by the Office of the Comptroller of the Currency (OCC), including a small bank exemption from the Volcker Rule, a simpler capital regime for highly capitalized community banks, additional flexibility for federal savings associations, and a higher threshold for labeling institutions “systemically important.”

FDIC Vice Chairman Thomas Hoenig said the bill’s underlying goal of easing the regulatory burden of banks which “pose less risk and cost to the financial safety net and ultimately to the taxpayer while enabling stronger economic growth” is one he has long advocated.

However, we went beyond praise and offered suggested tweaks for the bill. Among them:

  • Rather than merely raising the asset threshold for applying enhanced prudential standards to banks from $50 billion to $250 billion, Congress might require instead that regulatory mandates be defined around bank activity rather than strictly asset size.
  • An alternative method for simplifying the Volcker Rule and providing regulatory relief for banks that are not “prop traders” without opening a loophole that would invite abuse of the safety net in the future. Hoenig said the bill, as approved by the Banking Committee, provides a blanket exemption from compliance with the Volcker Rule for banks with less than $10 billion of assets that also have less than 5% in total trading assets and trading liabilities. He said Congress could require regulators to “presume compliance” and establish a safe harbor for certain derivatives transactions, such as those that are entered into in conjunction with a loan or for hedge accounting purposes.
  • A provision in the bill excluding central bank reserves from the calculation of the supplemental leverage ratio for custodial banks “poses costs to the public that should be taken into consideration as this legislation is further debated.” Hoenig said custodial bank activities are highly commingled with insured commercial-bank activities. He noted that, while the activities might not pose major credit risk, they carry “significant operational and other risks,” and make up a large portion of the financial footprint of banks.  “Such risk should be funded with investor capital not a taxpayer backstop,” he said.

Statement of FDIC Vice Chairman Thomas M. Hoenig on the Senate Banking Committee passage of S. 2155, the Economic Growth, Regulatory Relief and Consumer Protection Act

Comptroller of the Currency Lauds Progress Toward Meaningful Regulatory Reform