WASHINGTON — Last month was a no man's land when it came to bank regulatory policy, with news of the presidential trail dominating most of the discussion — but that is about to change as Congress returns and regulators try to make progress on rules by yearend.
Regulators must still implement the remaining pieces of the Dodd-Frank Act, while the Consumer Financial Protection Bureau undertakes a flurry of activity and other agencies move forward on liquidity and resolution rules for big banks.
Regulators appear on the verge of acting on as many as three reforms from Dodd-Frank that still need to be implemented and could come up for discussion in the fall and winter.
"Are we in the eighth or ninth inning? Maybe. It seems like we're at least in the seventh inning for the Dodd-Frank rulemaking," said Edward Mills, a policy analyst at FBR Capital Markets.
The law required the bank and credit union regulators to team up with the Securities and Exchange Commission and Federal Housing Finance Agency on incentive-based compensation standards.
But the joint rule, designed to mitigate risk from certain pay structures, has languished as regulators have struggled to find common ground since releasing a 2011 draft proposal. The agencies have signaled they will repropose the standards and are trying to do so before yearend. Under the 2011 plan, banks with over $50 billion of assets would defer incentive-based awards to senior officers for at least three years and consider institution risk in the compensation packages for lower-level officers, among other things.
"That is a subject ripe for conclusion in the fall," said Clifford Stanford, who chairs the bank regulatory group at Alston & Bird LLP. "Frankly, I think the market would welcome that. It would be helpful for the market [for the compensation rule] and other provisions in the law, that have been kind of hanging out there, to get resolved to bring certainty and clarity."
Another looming provision from the 2010 financial reform law deals with how banks calculate margin levels in swaps transactions. Five regulators tasked with the rule-writing proposed a framework in 2011 but put it on hold as the international Basel Committee developed global margin standards. They issued a revised proposal last September and are said to be working toward a final regulation.
The final Dodd-Frank holdover expected to garner attention is a proposal by the Federal Deposit Insurance Corp. on how the agency will finish recapitalizing the Deposit Insurance Fund.
As crisis-era failures pulled the DIF into negative territory, Dodd-Frank increased the so-called "reserve ratio" — the minimum goal for the DIF relative to insured deposits — by 20 basis points to 1.35% and gave the agency until 2020 to reach the new threshold. But once the fund hits the previous baseline ratio of 1.15%, the law requires banks with over $10 billion in assets to shoulder the cost of reaching the new ratio. On Wednesday, the agency announced that the ratio stood at 1.06% at the end of the second quarter.
"We think we may be able to release [a proposal]" to implement that requirement "before the end of this year," FDIC Chairman Martin Gruenberg said at the agency's release of the Quarterly Banking Profile.
Still, Stanford said regulators are shifting away from the rulemaking phase of Dodd-Frank implementation to refining regulations stemming from the law that are now being enforced.
"The phase we're in now is much more about how do we live with these rules now, and what are the unanticipated consequences or unresolved questions that weren't set forth in the rules," he said, "Rules can be changed, rules can be amended, examiners can deliver messages. Those things will continue to happen."
Slew of CFPB Actions
When it comes to frequency of new regulatory policy, the CFPB continues to set the pace for everyone else.
In the final months of 2015, the CFPB may finalize changes to the lending data companies submit under the Home Mortgage Disclosure Act, formally propose rules on payday lending and issue a final rule giving some small and rural institutions relief from the bureau's mortgage underwriting regime.
The HMDA rule would finalize a July 2014 proposal expanding the types of mortgage-related data banks submit to gauge lending patterns. The proposal went further than a provision in the Dodd-Frank Act that called for certain changes to the HMDA reporting. A final rule is expected in the fall.
Meanwhile, the CFPB is also expected finally to issue its proposal to curb the risk of payday loan borrowers falling into "debt traps," possibly within the next couple of months. The agency revealed its framework for payday lenders in March, but the measures had to be reviewed by a statutorily required Small Business Review Panel before being formally proposed.
Also due for completion is a rule expanding the definition of "small" and "rural" lenders that qualify for favorable treatment under the agency's "Qualified Mortgage" underwriting standard. The January proposal would benefit potentially thousands more community banks and credit unions by making it easier for them to issue QM loans.
But those are not the only CFPB policies in the pipeline. The industry is still awaiting a proposal for new restrictions on debt collectors after the bureau issued an "advance notice of proposed rulemaking" last year, as well as rules dealing with the supervision of large installment and title lenders. The agency also has yet to finalize a proposal establishing new standards for prepaid card providers, and is said to be considering a rulemaking on overdraft coverage.
Observers say the sheer volume of items on the CFPB's agenda means some things on their priority list could stretch into next year.
"I would say that HMDA, payday, debt collection and prepaid are likely the four top priorities, but even that's a lot and it's going to stretch their resources," said Lucy Miller, a partner at Hudson Cook and formerly the CFPB's deputy enforcement director.
But perhaps the CFPB policy most on bankers' minds will be the rule requiring new mortgage disclosures that consolidate the Truth in Lending Act and Real Estate Settlement Procedures Act into a single regime. The agency has already finished the TILA-Respa rule, but it will become effective Oct. 3.
On the global stage, the Financial Stability Board is working to finalize standards on the amount of loss-absorbing capital and convertible debt big banks must hold to aid authorities should they have to clean up a failed behemoth. The new "total loss-absorbing capacity" — or TLAC — standards are expected to be completed by this fall in time for the November G20 summit in Turkey.
The Federal Reserve Board is said to be working on its own version of the loss absorbency rules for U.S. banks. Requiring large banks to hold minimum amounts of long-term debt, which can converted to equity quickly in the resolution of a failed firm, is seen as a vital piece of establishing the FDIC's resolution regime enacted by Dodd-Frank.
Some have speculated the Fed could issue a proposal on loss absorbency even before the FSB finalizes its standards. The U.S. central bank has already signaled its long-term debt requirement policy could be tougher than the international TLAC framework.
"It seems to be one of the issues that the Fed would like to get done but it has a lot of moving parts and it's something that could easily slip to 2016 before it is proposed," Mills said.
Long-Term Liquidity Standard
Regulators are also expected to revisit liquidity standards for big banks in the near term.
The stability of institutions' funding mechanisms has come up numerous times over the past year. The Fed just recently instituted a framework in which reliance on short-term wholesale funding could be considered in calculating capital surcharges for the biggest banks. And last September, the U.S. regulators issued a rule implementing the international Basel Committee standard known as the liquidity coverage ratio — a measure of banks' ability to withstand liquidity shocks in a short-term crisis.
Next up on the agencies' list is a separate Basel framework — the net stable funding ratio — that gauges a bank's ongoing liquidity strength over the course of a year. Simply put, the NSFR — which the Basel Committee finalized in October 2014 — seeks to ensure banks keep amounts and types of liquidity on-hand that are needed to fund the asset side of their balance sheet.
At an open meeting of the Fed's board of governors in July, Gov. Daniel Tarullo said the U.S. regulators plan to consider a proposal for implementing the NSFR later this year.