Unfinished business: 8 reg-relief items on agencies' docket

August 1, 2019 5:35 PM

WASHINGTON — The federal banking regulators are nearly finished with an extensive effort to ease parts of the banks' regulatory burden. But some key tasks remain.

Most of the unfinished work relates to implementing provisions of last year's regulatory relief legislation, which rolled back several Dodd-Frank Act reforms. The regulators — including the Federal Reserve Board, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency — have issued eight pending proposals, a majority of which were mandated by the new law, that still need to be finalized.

The agencies recently completed work on rules exempting community banks from the Volcker Rule, streamlining call report requirements for banks with less than $5 billion of assets and allowing banks to factor in certain municipal bonds to meet liquidity requirements, among other things.

But a complex set of changes to how the agencies — most notably the Fed — regulate regional banks, a new capital ratio for community banks and narrower requirements for banks that conduct company-run stress tests are among regulations that are still unfinished. In concert with implementing the new law, known commonly as S 2155, the regulators also proposed steps not required by Congress, such as changes to foreign bank prudential standards.

Here is a rundown of the agencies' remaining to-do list:

The consent order between the Federal Reserve and Capital One required the bank to submit progress reports on its efforts to improve its risk management functions.

Michael Nagle/Bloomberg

Domestic bank prudential standards

In a pair of proposals published in October — one by the Fed and the other issued jointly by the three agencies — the regulators revealed their vision for a post-crisis regulatory framework that tailors requirements to more precisely reflect an institution's size and risk profile.

The proposal would cut back on a number of post-financial crisis requirements and ultimately ease regulatory burdens for midsize U.S. banks in particular.

The proposed structure would establish four tiers of banks based on size: U.S. global systemically important banks, or G-SIBs; banks with more than $700 billion of assets or more than $75 billion of cross-border assets; firms with more than $250 billion of assets that exceed certain risk thresholds; and banks with assets of between $100 billion and $250 billion.

The category with the least amount of assets would be exempt from liquidity requirements and company-run stress tests, while firms with more than $250 billion in assets would be subject to tailored prudential standards. The requirements for the two largest categories of banks would remain largely unchanged.

The Fed-only proposal would modify the central bank's stress testing regime both for capital and liquidity and adjust supervisory standards for risk management and single-counterparty credit limits.

Fed Gov. Lael Brainard voted against the proposal, arguing that it would weaken important safeguards imposed after the financial crisis and could pose heightened risk for financial stability and taxpayers.

Community bank leverage ratio

Last year’s regulatory relief law established a simpler capital regime for smaller banks and granted regulators the ability to establish a community bank leverage ratio as low as 8%.

The Fed, FDIC and OCC jointly released a proposal in November that would allow banks with less than $10 billion of assets use the new ratio in lieu of more complicated Basel risk-based capital standards.

The proposed ratio was set at 9% of tangible equity to total assets, but that level drew ire from some community banking organizations that questioned why the agencies didn’t propose the 8% ratio that Congress had authorized.

Still, the FDIC said that more than 80% of the country's 5,400 community banks could qualify for the simplified leverage ratio.

Broadening exemption for home appraisals

In November, the banking regulators proposed raising the threshold for residential real estate sales that require an independent appraisal, in order to provide regulatory relief and keep pace with home prices.

The proposal would raise the threshold from $250,000 to $400,000. Lenders would be required to obtain an “evaluation” instead of a normal appraisal for loans under the $400,000 limit. But some appraisers expressed concern that evaluations do not adhere to the same rigorous standards as a traditional appraisal.

The proposal responded to industry feedback submitted under the Economic Growth and Regulatory Paperwork Reduction Act, which requires the agencies to try to identify outdated or unnecessary rules. Commenters said the current appraisal exemption level has been outpaced by price appreciation in the real estate market.

The same proposal would also exempt many rural properties from the appraisal requirement, as required in last year’s regulatory relief law.

In April 2018, the agencies finalized a similar proposal that raised the appraisal exemption standard for commercial real estate transactions from $250,000 to $500,000.

Finalize company-run stress test requirements

Under a January proposal from the Fed, fewer banks would be required to conduct company-run stress tests, and larger state member banks would face fewer and less complex stress tests. The FDIC and OCC issued the same proposal for their institutions in December.

The agencies sought public comment on raising the threshold for banks required to run internal stress tests from $10 billion to $250 billion, effectively removing the stress testing requirement for all but the largest banks.

Banks with more than $250 billion of assets would be required to conduct supervisory stress tests every other year. Currently, those banks perform stress tests annually.

Revisions to the supplementary leverage ratio

The 2018 regulatory relief law required the regulators to exempt some larger banks from reserving capital for custodial funds under the supplementary leverage ratio, which determines how much capital a bank should hold relative to its total leverage exposure.

As such, the Fed, FDIC and OCC together released a proposal in March that would meet that standard. FDIC Chairman Jelena McWilliams argued that such custodial funds are low-risk, and that these revisions would more appropriately tailor regulations based on a bank’s activities.

According to the proposal the regulators issued in April, only Bank of New York Mellon, Northern Trust and State Street are engaged predominantly in custodial activities, and therefore would be the only banks eligible for excluding such funds from their supplementary leverage ratios. Most banks argue that the exemption should be extended to all financial institutions.

Former FDIC Chairman Martin Gruenberg, who still sits on the agency's board, disagreed with the proposal, saying that it put financial stability and the Deposit Insurance Fund at risk. However, he ultimately voted for the proposal because it was required by Congress.

Changes to foreign bank prudential standards and applicability threshold

As with its October proposal to tailor requirements for domestic banks, the Fed in April proposed implementing four different categories based on size for U.S.-based units of foreign banks.

Foreign banks with assets of $50 billion to $100 billion would also be subject to some liquidity requirements.

Banks in the third category would be subject to reduced liquidity requirements under the "liquidity coverage ratio" and "net stable funding ratio."

But for certain foreign firms, such as Credit Suisse and UBS, liquidity requirements would actually increase. In comment letters to the Fed, banks criticized this provision of the proposal and urged the Fed to offer greater relief to foreign banking organizations.

Although last year’s regulatory relief law did not explicitly require the Fed to revise its standards for foreign banks, the industry widely expected that the agency would do so to align the prudential standards with its domestic proposal.

A separate proposal issued jointly at the same time with the OCC and FDIC would alter U.S. capital and liquidity requirements for overseas banking companies.

Brainard and Gruenberg both dissented.

Finalize resolution plan proposal

The Fed and FDIC proposed in April to relieve living will requirements for banks based on size.

All eight U.S. G-SIBs would be required to submit resolution plans every two years, alternating between full and “targeted” plans. The second and third category of filers would be required to file living wills every three years, also alternating between full and targeted plans.

Other foreign banks would be classified as “triennial reduced filers,” and would have to submit reduced-content plans every three years starting in 2022. And banks in a final category would no longer have any living will requirements.

A targeted plan would only include the main components of a full plan, such as capital and liquidity.

Brainard and Gruenberg dissented from the proposal, arguing that it went far beyond what was required of the agencies in the 2018 regulatory relief law.

Approve new definition of high-volatility commercial real estate

The agencies finalized a series of changes to capital rules for small banks in July, but they omitted a portion related to the definition of “high-volatility commercial real estate exposure.” Days later, they addressed HVCRE assets in a subsequent proposal.

The agencies have previously proposed aligning the definition with that of a “high-volatility commercial real estate acquisition, development or construction loan,” and proposed that one- to four-family residential properties be excluded.

But after reviewing comments from that proposal, the regulators decided that the HVCRE definition should be further clarified, and suggested adding a paragraph to make clear that credit facilities that finance land development activities would not be exempt.

The clarification “would simplify reporting requirements, reduce burden and promote uniform application of the capital rule,” the agencies said.