Reg relief's done. What's next for banks?

Published
  • May 22 2018, 6:18pm EDT
WASHINGTON — Regulatory relief is now close to becoming law, but success in enacting targeted reforms of the Dodd-Frank Act still leaves plenty of legislative issues unresolved for the banking industry.

Following enactment of the Senate reg relief bill sponsored by Banking Committee Chairman Mike Crapo, Republican lawmakers are expected to prioritize consideration of additional measures originating in the House to scale back banking rules.

It is also possible that some lawmakers may try to channel the momentum from the Crapo bill into progress on other pending issues, such as reforming anti-money-laundering rules mandated by the Bank Secrecy Act and the still-unfinished chore of overhauling the housing finance system dominated by Fannie Mae and Freddie Mac.

But the window for any additional legislative progress on banking policy is narrowing just months before lawmakers turn their full attention to the midterm elections, and Congress may have less appetite for additional financial reforms after passage of the Crapo bill. Democrats have resisted efforts to expand the Senate reg relief legislation. The absence of looming crises such as a big data breach or Wall Street failure also likely diverts lawmakers’ attention away from banking policy.

Still, closure on the reg relief bill could also free up some bandwidth to focus on other issues.

Ed Mills, a policy analyst at Raymond James, said the top agenda item for the House Financial Services Committee and Senate Banking Committee will be proposed reforms of the Committee on Foreign Investment in the United States, known as CFIUS.

“After that I would say it is BSA/AML, and the Moby Dick of the committees is housing finance reform; it’s the great white whale we keep on hunting,” Mills said.

Here are four pending legislative items of interest to the industry:

What will Congress do next after reg relief?

WASHINGTON — Regulatory relief is now well within reach, but success in enacting targeted reforms of the Dodd-Frank Act still leaves plenty of legislative issues unresolved for the banking industry.

After the Senate reg relief bill sponsored by Banking Committee Chairman Mike Crapo becomes law, Republican lawmakers are expected to prioritize consideration of additional measures originating in the House to scale back banking rules.

It is also possible that some lawmakers may try to channel the momentum from the Crapo bill into progress on other pending issues, such as reforming anti-money-laundering rules mandated by the Bank Secrecy Act and the still-unfinished chore of overhauling the housing finance system dominated by Fannie Mae and Freddie Mac.

But the window for any additional legislative progress on banking policy is narrowing just months before lawmakers turn their full attention to the midterm elections, and Congress may have less appetite for additional financial reforms after passage of the Crapo bill. Democrats have resisted efforts to expand the Senate reg relief legislation. The absence of looming crises such as a big data breach or Wall Street failure also likely diverts lawmakers’ attention away from banking policy.

Still, closure on the reg relief bill could also free up some bandwidth to focus on other issues.

Ed Mills, a policy analyst at Raymond James, said the top agenda item for the House Financial Services Committee and Senate Banking Committee will be proposed reforms of the Committee on Foreign Investment in the United States, known as CFIUS.

“After that I would say it is BSA/AML, and the Moby Dick of the committees is housing finance reform; it’s the great white whale we keep on hunting,” Mills said.

Here are four pending legislative items of interest to the industry:

Expanding the reg relief package

House Republicans retreated from their earlier goal of adding to the Senate’s regulatory relief bill from among the bipartisan provisions supported by the lower chamber. With moderate Democrats threatening to walk away from the deal if the bill were expanded, Senate Republicans and industry representatives both pressured the House to give in.

But Financial Services Committee Chairman Jeb Hensarling and other House GOP leaders say in exchange for their support of the bipartisan package, they have been assured that Senate leaders will attempt to move some of the additional House provisions separately.

“We’re ... going to be moving in the Senate a package of bills that we think will actually add to this that the Financial Services Committee has acted on as well,” House Speaker Paul Ryan, R-Wis., said earlier this month.

Hensarling has said he has “a commitment” from Senate Majority Leader Mitch McConnell that the Senate will vote on further deregulatory measures after the House passes the Senate’s bipartisan bill.

Industry leaders are also optimistic that there is more to come in terms of regulatory relief.

“I think it’s the beginning of the process of more to come,” said Rebeca Romero Rainey, president and CEO of the Independent Community Bankers of America.

Measures that have passed the House include additional targeted changes, such as consolidating Volcker Rule implementation with the Federal Reserve, and more significant reforms such as a bill to eliminate a numerical asset threshold trigger for qualifying as a “systemically important financial institution.”

But with Democrats having resisted efforts to expand Crapo’s regulatory relief bill, it is unclear how much traction the House measures can gain on a piecemeal basis. Additional regulatory changes following the passage of the Senate’s bill could also be held back by the Senate’s legislative calendar, as well as the potential for Democrats to gain the majority in the House or Senate come November.

“I think that will take some time as there will be continuing efforts by the industry to add on to the list of reforms that they would like to have adopted,” said Quyen Truong, a partner at Stroock & Stroock & Lavan and former assistant director and deputy general counsel at the Consumer Financial Protection Bureau. “The push-pull of that process might take some time.”

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Housing finance reform

Treasury Secretary Steven Mnuchin has expressed interest in reforming the current housing finance system, but said it likely won’t happen until at least 2019.

Lawmakers from both parties have long said that the mortgage giants Fannie Mae and Freddie Mac, which have been under government conservatorship for about a decade following the 2008 housing crisis, should be wound down.

Hensarling said last year that the charters for the government-sponsored enterprises should be repealed, but some in the industry are concerned that the big banks could dominate the secondary market in a world without Fannie and Freddie.

A bipartisan bill failed to make it to the Senate floor in 2014, and a more recent push to revive GSE reform discussions in the Senate similarly fell victim to an array of competing interests.

Such a complex undertaking as GSE reform is also a huge challenge in what is effectively a deadlocked Senate, where the GOP holds a single-vote majority. Among the highly contentious issues related to GSE reform are the status of the government guarantee for the mortgage market, what will become of Fannie and Freddie in any reform effort, and the extent to which the mortgage giants fund affordable housing initiatives.

Modernizing anti-money-laundering laws

Lawmakers and regulators have recently argued that Bank Secrecy Act and anti-money-laundering laws crafted in the 1970s have become more of a paperwork reporting process rather than actually helping law enforcement fight financial crimes. A streamlining of those regulations could be the next big financial services priority for Congress.

House Republicans and Democrats will soon introduce a package that would partly put more of the responsibility on regulators to help banks track suspicious financial transactions, according to congressional aides.

Reps. Blaine Luetkemeyer, R-Mo., and Steve Pearce, R-N.M., are working with Rep. Carolyn Maloney, D-N.Y., to consolidate past efforts to modernize AML requirements.

The House lawmakers have been considering the effectiveness of the suspicious activity reports, or SARs, that banks file when a transaction is flagged. Bankers have argued that they spend more time filing SARs on legitimate business transactions than on actual cases of money laundering.

Lawmakers could potentially raise the dollar threshold for transactions that need to be considered suspicious.

They are also considering requiring the Financial Crimes Enforcement Network to collect data on the beneficial owners of a business when it opens an account at a financial institution. This is in response to a complicated Fincen rule that recently took effect requiring banks to collect the names and personal information of any business owner with at least a 25% stake in the company.

But changes to AML policies could start with the regulators instead of with Congress.

“I think that changes to the BSA and anti-money laundering legal framework would likely be coming more quickly at the agency level than through Congress,” said Truong.

Comptroller of the Currency Joseph Otting has recently said he is working with the Federal Reserve and the Federal Deposit Insurance Corp. on a set of recommendations to Fincen for providing more flexibility on BSA compliance.

Data security

A wild card may be whether lawmakers try to revisit legislative reforms to strengthen data security requirements, which failed to gain passage in the wake of the massage Equifax breach last year.

In February, Luetkemeyer and Maloney unveiled a bipartisan draft bill to establish new standards on breach notifications and data storage that would be enforced by the Federal Trade Commission.

Yet odds remain low that Congress could agree on a new data security bill, an issue that has been debated perennially in Washington and continues to be hampered by jurisdictional questions over which congressional committee runs point.

“It seems like probably a pretty low probability at this time,” said Mills.