Will the Regulatory Screws Loosen in 2014?

WASHINGTON — Bankers have almost become used to the intense growth of new rules in the five years since the financial crisis, but some see a light at the end of the tunnel as the agencies inch toward the end of Dodd-Frank rulemakings and the economy improves.

Some predict that 2014 may finally be the year when the momentum begins to shift.

"Since the financial meltdown, the pendulum has swung far, far into the favor of regulatory tightening. I believe it has swung about as far as it's going to swing," said Camden Fine, president and chief executive of the Independent Community Bankers of America. "Now I think we'll begin to see it come back toward the middle."

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That view is not universal. Lawmakers are highly unlikely to repeal any significant part of Dodd-Frank, and banks continue to brace for an emphasis on consumer compliance. Even those predicting some loosening of the regulatory screws say the environment will remain tough for quite some time, or even indefinitely.

"I really don't see the regulatory environment easing up in 2014," said Julie Williams, a managing director and head of the domestic advisory practice at Promontory Financial Group, and the former chief lawyer for the Office of the Comptroller of the Currency. "What I say is there is a 'new normal.' Folks just need to get that and not be thinking that this is a temporary aberration and things will go back to the way they were pre-crisis.

"We're operating in an environment of a significantly enhanced framework of regulatory requirements. The winners are going to be the institutions that recognize that and are most effective dealing with that new framework and making their business work, not waiting for the rules to change or hoping they will go away."

But the expectation that all the primary Dodd-Frank rules will be in place by the end of next year, coupled with a sense that bankers and government policymakers have improved how they communicate with each other, is spurring hope for some in the industry that banks can start a new chapter soon.

"We hope we're seeing what seems to be, generally speaking, an end to the agenda. It had seemed like there was an endless list of new regulations coming at us. Now it's feeling more like we're getting near the bottom of the list, or we can see that there is a bottom of the list," said Wayne Abernathy, director of financial institutions policy and regulatory affairs at the American Bankers Association.

"Our hope is we can get to a point of, 'Ok, we're at the end of the list, and, like it or not, this is what the rules are,' and then we can formulate a business strategy to move forward."

Some regulators are also anticipating a transition from the heavy focus on new regulation to one based on how banks incorporate the paradigm shift into their business strategy.

"We've got to be getting pretty close to that," said Doreen Eberley, who heads the Federal Deposit Insurance Corp's division of risk management supervision. "We've worked hard to get the rulemakings done, and I think we are coming to the end of the transition period."

Eberley said the statutory reforms that followed the thrift crisis in the eighties and nineties "changed the way banks and regulators did business.

"The same thing has happened as we emerge from the recent crisis," she said. "I would call each of those phases a time of transition. The tough part is adjusting to the transition and the change. I do think we're getting settled in terms of rules that have to be enacted and implemented. Certainly, the trends in the industry are improving from a financial perspective."

By all accounts, 2013 saw a continuance of the regulatory tightening that followed the 2008 turmoil, mostly due to Dodd-Frank implementation.

The Consumer Financial Protection Bureau unveiled rules redefining mortgage underwriting which go into effect in early 2014. The bank regulators wrapped up the Volcker Rule ban on bank trading. Capital and liquidity standards were strengthened further, and agencies — led by the CFPB — announced a steady stream of enforcement actions and regulatory settlements.

The ramp-up will surely continue into the New Year. Some observers say the CFPB may just be hitting its stride, while regulators are expected to soon release rules dealing with big-bank capital surcharges and final supervisory changes mandated by Dodd-Frank. Regulators have also yet to finish a key rule from the law requiring securitizers to retain credit risk.

"Not all of the Dodd-Frank rules are out there yet. There is still more work to do and more regulations to be written. Obviously, most of the big ones are done, but not all," said Ellen Seidman, a former director of the Office of Thrift Supervision and now a senior fellow at the Urban Institute. "That's going to keep going."

Others said the completion of rules already in place like the CFPB's mortgage regulations and the Volcker Rule simply means the baton moves to the industry to address compliance issues and to the examiners enforcing the new requirements. The mortgage rules create legal protections for a safe class of loans known as "Qualified Mortgages." Loans that fall outside that category face new underwriting standards, but non-QM borrowers can still challenge the bank's process in court.

Banks "want to get a comfort level with the examination process," said Charles Vice, who is Kentucky's financial institutions commissioner and chairman of the Conference of State Bank Supervisors. He added that how courts weigh in on cases involving non-QM loans is still an open question.

"It could be another two to three years before a court needs to look at a non-QM loan to determine how they will rule on it," Vice said. "That creates some uncertainty for banks."

Williams pointed out that the practical effective date for the Volcker Rule is not until July 2015. "There is just a lot of work that institutions are going to need to be doing in 2014 to make sure that they will be ready to go," she said.

Others see much more tightening related to consumer regulation.

"Overall, I think the CFPB and the prudential regulators are all in a very aggressive mode on consumer issues and I don't see any abatement of that in sight," said Jo Ann Barefoot, co-chair of Treliant Risk Advisors.

But there were also encouraging signs in 2013. Following the launch of a 2012 initiative by the Federal Deposit Insurance Corp. to reach out more to community banks, executives continued to report improved communications during exams.

In October, Federal Reserve Board Chairman Ben Bernanke said at a community bank conference hosted by the central bank that Fed officials "are committed to crafting supervisory policies and regulations that are appropriately scaled to banks' size and complexity."

Fine said "there is no question that in 2014 the pendulum will begin to swing back toward the center for community banks."

"Those screws are going to begin to loosen to where the agencies will begin to recognize that banking is a risk business and that prudent and reasonable risks are good for the banking industry and promote growth and economic vitality," he said.

Officials have also indicated they may sign off on more applications for bank charters, which up to now have been virtually extinct, in the near future.

"The current environment of narrow interest margins and still relatively weak credit demand is not an easy environment to start a new institution," FDIC Chairman Martin Gruenberg said in a speech on Dec. 17. "It remains a challenging environment. We've seen few applications."

But, he added, "We fully expect and the historical experience suggests that as the economy improves and the banking industry continues to recover, we expect to be receiving more applications. Frankly, we expect to be approving more applications."

Seidman credited the agencies for sounding willing to reopen newer rulemakings if they need fixes. She noted recent remarks by CFPB Director Richard Cordray about the bureau's intention to monitor implementation of its mortgage rules to consider where amendments are needed.

"He meant that in both directions," she said. "At least with respect to consumer regulation, you're getting the signal that compliance is expected, but if compliance turns out to generate serious problems in terms of access, availability and complexity that are unjustified, they're willing to take another look. I would suspect that you're going to see some of the same kind of thinking among the prudential regulators also."

Seidman added that a key factor in determining the regulatory environment in 2014 and beyond is how examiners interpret the new rules. But there, she said, there is reason to be optimistic.

"The regulations are on paper. How they're actually implemented can vary tremendously," she said. "The examiners have been in a zero tolerance mode for a while. It's likely that that will loosen up some as capital cushions grow and if the examiners and the system as a whole become convinced that what you're not getting is a situation where with capital cushions growing the banks' reaction is, 'Well, we'd better reach for yield because otherwise our ROEs can go down.'"