Clock ticking for regulators to Congressional Review Act-proof new rules

August 29, 2023 9:00 PM

Sen. Tim Scott, R-S.C., on left; Rep. Patrick McHenry, R-N.C., on the right — Senate Banking Committee ranking member Tim Scott, R-S.C., and House Financial Services Committee chair Patrick McHenry, R-N.C., would be in a position to rescind any banking rules if they are finalized within 60 legislative days of the opening of the 119th Congress in January 2025 if Republicans win both chambers and the presidency.

WASHINGTON — As Congress stirs back to life after its August recess, regulators are now up against a looming Congressional Review Act deadline to finish their most important rulemakings.

Should Congress and the administration flip to Republican control in 2024, the incoming Congress would be able to initiate a Congressional Review Act nullification of any rules issued within the last 60 legislative days of the prior Congress. Legislative days can be tricky to predict because of unscheduled breaks, campaign breaks and emergency sessions, but with all of that being considered the deadline for Biden's regulators to finalize rules and publish them in the Federal Register would be in May or June of 2024.

The Congressional Review Act dynamic is always present in any election year, but it's especially important this election cycle now that regulators have proposed a slew of important regulations in the wake of this spring's bank failures — rules that would have a big impact on bank capital, fee income and supervisory stringency.

Here are the top rules under consideration by the Biden administration that regulators will have to compete ahead of that May/June Congressional Review Act deadline.

Customers in line outside Silicon Valley Bank headquarters in Santa Clara, Calif. on March 13. The Federal Deposit Insurance Corp Tuesday unveiled requirements for banks with more than $100 billion of assets to hold long-term debt and submit more frequent resolution plans.

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Living wills and long-term debt

The Federal Deposit Insurance Corp. put forward one of its most ambitious regulatory packages on Tuesday that would expand the requirement for long-term debt and make living will requirements more onerous for mid-sized regional banks. Those proposals were immediately met with strong opposition from bank groups and Republicans.

The FDIC would have to race to get its proposal — which would require banks with more than $100 billion in assets to issue billions more in long-term debt to offset losses in the event of a bank failure — finalized before the timeframe in which Republicans could subject the regulation to a Congressional Review Act challenge. The new rules specifically are designed to make regulatory requirements for large and mid-sized regional banks more similar to those of the country's largest depository institutions, FDIC Chairman Martin Gruenberg said.

Bank groups immediately pushed back, some nodding to the possibility that the agency contradicted Congressional intent, which could be fodder for Congress to review the rule.

"These proposals attempt to fit regional and midsize banks into a regulatory mold designed for the largest globally active banks, a weakening of the bipartisan tailoring framework enacted by Congress," said Bank Policy Institute President and CEO Greg Baer in a statement. "Regional banks have already developed credible resolution plans that reflect their structures, operations and risk profiles. Unlike GSIBs, which may have subsidiaries in multiple countries or other complex considerations, regional banks' resolution framework is not based on a 'capital refill' standard because other resolution options are more appropriate for these banks."

Republicans in Congress raised similar concerns.

"Nothing considered by the FDIC today would prevent bank failures like SVB. With a credit crunch looming, Biden's regulators appear to be busy developing onerous and overly complex rules to the detriment of consumers and our financial system at large," House Financial Services Committee Chairman Rep. Patrick McHenry, R-N.C., said in a statement. "The lack of transparency and meaningful interaction with Congress while attempting to rewrite regulations for financial institutions is even more concerning."

A person walks by a row of Victorian style houses on Dinwiddle Street in the Hill District neighbor of Pittsburgh. The Community Reinvestment Act implementation rules have been widely seen as inadequate for years, but regulations will have to act quickly to finalize them in order to forestall a Congressional Review Act challenge if Republicans win Congress and the presidency in 2024.

Bloomberg News

The other CRA

Bank policy can be a quagmire of acronyms, but even by that standard a Congressional Review Act rescission of Community Reinvestment Act implementation rules would be uncommonly confusing.

Some experts anticipate that the Community Reinvestment Act will be completed around October of this year, which would avoid a Congressional Review Act challenge. That's still a delay from early 2023, which Federal Deposit Insurance Corp. Chairman Martin Gruenberg predicted last fall, most likely because the bank failures in March this last year drained a significant amount of bandwidth at bank regulatory agencies.

Despite early signs that the Community Reinvestment Act proposal could cruise to completion, banks have recently pushed back against the plan, asking for more time. The regulators' proposal would raise the bar for banks passing their Community Reinvestment Act exams and would account for the advent of mobile and online banking in determining what activities would qualify for CRA credit, banks have pushed back against the plan

Federal Reserve vice chair of supervision Michael Barr has heralded regulators' proposal to raise bank capital for large banks, but Republicans in Congress and banks have complained that the proposal goes too far.

Bloomberg News

Basel III: Endgame

The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency's long awaited Basel III endgame proposal would raise capital standards on the highest banks, a notion that bank groups are expected to strongly oppose throughout the next year.

It is possible that regulators could finalize the rule before the Congressional Review Act deadline, although doing so might be a stretch. While the time frame regulators are now working with totals the better part of a year, that's still a relatively short time considering how long most rulemakings take.

Should regulators push the rulemaking process past the May/June timeframe, Republican lawmakers have signaled strong opposition to the Biden administration's proposal rules:

"This overhaul to conform to so-called 'Basel III' global governance standards will also impose requirements on U.S. financial institutions that go well beyond international standards, threatening our competitiveness," said House Financial Services Committee Chairman Rep. Patrick McHenry, R-N.C., in a statement. "With a credit crunch looming and the economy far from out of the woods, this is the last thing financial regulators should be pursuing. The secretive, rushed, and unvetted plans released today make clear that Biden's regulators are more interested in pursuing their partisan priorities than ensuring the safety and soundness of our financial system."

Bank trade groups have called on Gary Gensler, chair of the Securities and Exchange Commission, to rescind and reconsider its custody rule because it would have a detrimental impact on custody banks.

Bloomberg News

SEC's custody rule

One proposal that's flown under the radar so far is the Securities and Exchange Commission's revamp to custody rules.

The SEC published its proposed rule in early 2023, just before the large regional bank failures, largely in an effort to oversee how cryptocurrency companies segregate the cash they hold on behalf of clients. According to bank groups, the SEC's proposed rule would impose unworkable requirements for custody banks.

"In addition to the new requirements for handling deposits, the rule would shift legal liability to custody banks, holding them accountable for actions of third parties well beyond their control," the American Bankers Association said in an article accompanying a joint comment letter with the Bank Policy Institute, the American Bankers Association Securities Association and the Financial Services Forum. "This includes financial market infrastructure, such as central securities depositories that serve as the book of record for issuers and the political risk that clients take when investing in overseas markets via a sub-custodian."

The trade groups asked the SEC to withdraw and reconsider the rulemaking.

There's early signs that Congressional Republicans could challenge the rulemaking should the SEC not complete it by the Congressional Review Act deadline. House Financial Services Committee Chairman Rep. Patrick McHenry, R-N.C., alongside other top Republicans on the committee including Bill Huizenga of Michigan, French Hill of Arkansas, Blaine Luetkemeyer of Missouri and Andy Barr of Kentucky wrote to the SEC in May outlining their objections to the proposal.

The lawmakers said that the proposal would "fundamentally reshape traditional custody practices for market participants."

"For example, the proposed Rule would lower the negligence standard required for indemnification from gross negligence to simple negligence," the lawmakers said in the letter. "This is a significant departure from traditional custody practice and would impose significant new costs on qualified custodians. The rule would also require a qualified custodian to have 'insurance arrangements in place' to 'adequately protect the client' in the event of custodial negligence. As negligence could be extended to cover the loss of a client's assets outside of the qualified custodian's control, this insurance would be exorbitantly expensive and difficult to find."