Bloomberg
The House of Representatives voted 258 to 159 late Tuesday to pass a deregulation bill that gives major banks — outside of money-center giants — a measure of relief.
The bill, the Economic Growth, Regulatory Relief and Consumer Protection Act, will now go to President Trump for signature. The changes to the law passed after the financial crisis lighten the banks’ regulatory burden but also help set the stage for agencies to act further, analysts say.
The bill includes breaks that essentially eliminate the possibility of designation as a systemically important financial institution for all but the biggest banks, by raising the threshold from $50 billion to $250 billion in assets. That relieves BB&T , SunTrust Banks Inc. and HSBC USA from much of the strict regulatory oversight imposed by the Dodd-Frank Act of 2010 after the financial crisis.
State Street Corp, while currently under the $250 million asset threshold, is already designated as a Globally Systemically Important Bank, or GSIB, and the Crapo bill exempts those banks from the relief.
The bill also gives regulators more discretion in deciding when to require stress tests of capital adequacy for banks with between $100 billion and $250 billion in assets in the event of another crisis.
Attorney Jonathan McCollum, director of federal government relations at law firm Davidoff Hutcher & Citron LLP, told MarketWatch, “A bipartisan coalition in Congress has recognized that Dodd-Frank imposes enormous burden on mid-sized regional banks that are especially critical in rural, suburban, and exurban areas. These changes will allow regional banks greater flexibility to expand and support investment in local communities.”
During a question-and-answer session at a public appearance on Monday, Minneapolis Fed President Neel Kashkari said, “We’re seeing most of benefits going to super regionals.” Supporters of the legislation are “wrapping themselves in the apple pie of community banking” to get the bill passed. “They are making record profits. I don’t know what the problem is that needs to be solved,” said Kashkari.
The banks are still subject to restrictions on proprietary trading but that, too, is likely to change. The Volcker Rule, also imposed by the Dodd-Frank law, limits banks from engaging in risky trading using insured retail deposits.
The Treasury Department called for changes to the Volcker Rule when it released a series of reports last year on ways to simplify complex rules affecting the financial system. The five agencies who wrote the original rules to implement the Volcker Rule portion of Dodd-Frank — the Fed as well as the Securities and Exchange Commission, Commodity Futures Trading Commission, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp.—have the authority to revise the way the law is interpreted and implemented without waiting for Congress to change the law.
The regulators plan to drop an assumption in the Volcker Rule that positions held by banks for less than 60 days are speculative — and therefore prohibited.
Tom Hoenig, who stepped down last month as FDIC vice chairman, told MarketWatch that the Volcker rule should remain in place but, rather than requiring banks to comply with tedious reporting requirements, allow bank examiners to check compliance with policies and procedures as part of the regular inspection process.
Analysts at KBW wrote that the banking deregulation bill, sponsored by Senator Mike Crapo, the Republican chairman of the Senate Banking, Housing, and Urban Affairs Committee, has few benefits for the global systemically important banks.
The bill, for example, does not explicitly give the biggest banks relief from the complex, time consuming stress tests, called Comprehensive Capital Analysis and Review or CCAR. But KBW said in a note on Monday that raising the threshold “would give the Fed political cover to continue to modify the CCAR, a process the Fed has already begun.”
Ian Katz, a financial policy analyst with Capital Alpha Partners, told MarketWatch, “Yes, I think the bill gives the Fed some political cover. The Fed wants to make the tests more transparent, especially for the non-giant banks, and the bill in Congress is helpful to the Fed in that way. But while the Fed will always tweak CCAR, it sees CCAR as an important tool and it’s going to keep using it as such.”
Since the financial crisis, the Fed has been strict about how much large banks could pay out in dividends, giving a dividend payout ratio—the percentage of net income being paid out—above 30% additional scrutiny.
On its last quarterly earnings conference call, PNC Financial Services Group chief financial officer Robert Reilly told analysts that potential changes in regulations regarding capital adequacy and the CCAR stress test, including potential relaxation of extra scrutiny of higher dividend payout ratios would change PNC’s approach. Chairman and CEO William Demchak agreed and, in response to a follow-up question, said that he could see a dividend payout ratio at PNC in a couple of years that is 40% or north of 40%.
PNC’s current dividend payout ratio is 28.5%.
PNC and HSBC USA did not immediately reply to a request for comment. A spokeswoman for SunTrust declined comment on how passage of the bill may impact the bank.
A spokesman for BB&T sent this statement: “Today, BB&T is already managing our company as if we’re beyond the $250 billion asset level. So, as it stands, the bill wouldn’t really be helpful or harmful to us. But rather than an arbitrary asset threshold, BB&T and other financial institutions have supported a risk-based approach based on multiple factors such as complexity and interconnectedness. If the analysis of a financial institution indicates greater risk, then it makes sense to increase the regulatory scrutiny on that institution. Regardless of size, regional banks like BB&T are traditional lending institutions that provide little or no systemic risk.”
The American Bankers Association echoed this view in a letter to House Speaker Paul Ryan and Minority Leader Rep Nancy Pelosi on Friday. The bank industry trade association wrote it disagrees with the bill’s ongoing reliance on “arbitrary asset thresholds” to determine bank capital adequacy rather than a “risk-based approach to reform.” The ABA wrote it will “continue to advocate strongly for a regulatory approach tailored to a bank’s business model and risk profile, rather than asset size.”