WASHINGTON — Federal Deposit Insurance Corp. Chairman Martin Gruenberg warned against rolling back “core reforms” to bank regulation that were implemented after the 2008 financial crisis, but said some review of the Dodd-Frank law is warranted.

“Weakening the core reforms that apply to our largest banking organizations would increase the risk of future banking crises that would be very costly for the U.S. financial system and economy,” Gruenberg said Tuesday in prepared remarks before the Brookings Institution.

The FDIC chair cited capital and liquidity requirements, proprietary trading rules and the development of a resolution process for massive banks that pose systemic risk to the financial system.

“I would particularly raise a concern in regard to weakening capital requirements for systemically important financial institutions. I refer specifically to the idea of removing central bank exposures, Treasury securities, and initial margin from the calculation of the enhanced supplementary leverage ratio and lowering the ratio,” he said.

FDIC Chairman Martin Gruenberg
“The danger is that changes to regulations could cross the line into substantial weakening of requirements,” said FDIC Chairman Martin Gruenberg. “Let’s be clear: Our largest banking organizations are not voluntarily holding the enhanced capital and liquid asset cushions required by current rules.” Bloomberg News

While not commenting specifically on the legislation, Gruenberg’s remarks came a day after the Senate Banking Committee announced a bipartisan agreement to roll back some Dodd-Frank regulations. The deal is modest compared to a House proposal to overhaul Dodd-Frank, but it is a significant in that its prospects for passage appear positive.

Under the deal, custody and trust banks, like State Street, would not have to count funds deposited with a central bank as part of the supplementary leverage ratio.

Gruenberg’s term as chairman of the FDIC expires later this month, but he is likely to remain at the post until a replacement is nominated by the White House and confirmed by the Senate. Gruenberg’s term as an FDIC board member doesn’t expire until December of next year, so he can remain on the board if he chooses. The speech Tuesday, however, is expected to be his last public remarks as head of the agency.

Another key aspect of the Senate deal would raise the Dodd-Frank systemically important financial institution threshold to $250 billion from $50 billion, with banks above that asset threshold subject to tougher regulatory requirements.

“The danger is that changes to regulations could cross the line into substantial weakening of requirements,” Gruenberg said. “Let’s be clear: Our largest banking organizations are not voluntarily holding the enhanced capital and liquid asset cushions required by current rules.”

However, Gruenberg did endorse some Dodd-Frank changes.

“The post-crisis reforms collectively constitute a large body of new regulation, and they could benefit from review,” Gruenberg said. “There is doubtless room to simplify or streamline some aspects of prudential regulation without sacrificing important safety-and-soundness objectives.”

Gruenberg said, for example, that the so-called Volcker Rule regulating proprietary trading could be simplified, along with compliance costs associated with company-run stress tests, mandatory resolution plans and small bank capital rules.

Heg noted that bank earnings have been high despite the more onerous regulatory environment and the industry appears to be healthy.

“The U.S. banking industry has transitioned from a position of extreme vulnerability to a position of strength,” said Gruenberg, while pointing out that FDIC-insured banks reported a record $171.3 billion in net income in 2016, a 44% increase from 2011.

Gruenberg also hailed the community bank business model, which relies on relationship lending and “stable core deposits.”

“Community bank performance during this post-crisis period has generally outpaced the banking industry as a whole,” he said.

He pushed back against complaints by bankers at larger institutions that the financial regulatory environment makes them less competitively globally.

“The improved cushions of capital and liquidity at large U.S. banking organizations are not a source of competitive weakness relative to banks in other jurisdictions," he said. "They are a competitive strength for our banking industry and our economy.”

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