WASHINGTON — President Trump's signing of the regulatory relief law in May was a culmination of multiple efforts to enact changes to ease banks' burden. But it also signaled the start of a new chapter: regulatory implementation.

The federal bank regulators issued a joint statement earlier this month identifying certain provisions of the law that took effect immediately. They also pinpointed some sections that will require future rulemaking or where they are weighing whether further action is necessary.

The banking agencies are considering issuing roughly a dozen different rulemakings in response to the bill spearheaded by Senate Banking Committee Chairman Mike Crapo, according to interviews with various regulatory officials. They cover topics ranging from the Volcker Rule to the exam cycle to liquidity requirements.

That workload pales in comparison to the mammoth undertaking needed to implement the Dodd-Frank Act following its 2010 enactment, but will prolong discussions among policymakers and industry representatives on reforming the post-crisis regulatory regime.

“The statement sets forth some of the positions that the agencies are going to be taking in the interim until the agencies have a chance to amend the regulations to incorporate changes to the various statutes that stem from the law,” said Ruth Amberg, an assistant general counsel for the Federal Deposit Insurance Corp., during a July 11 meeting with community bankers at the FDIC to discuss the implementation process.

The required rulemakings include about 10 issued jointly by multiple agencies, with additional rules likely to come from individual regulators with specific authorities.

Here is a breakdown of the agencies' implementation workload:

Stress tests and enhanced prudential standards

The Crapo bill curtailed targeted areas of Dodd-Frank in order to garner the needed Democratic support.

The most significant measure arguably was a hike in the asset threshold for "systemically important" bank holding companies — subject to the Federal Reserve's enhanced supervisory regime — to $250 billion, up from $50 billion. But the law also authorizes the Fed to tailor requirements for banks with between $100 billion and $250 billion.

In a recent speech, Randal Quarles, vice chairman for supervision at the Fed, said the central bank has begun to develop its approach for setting standards for midsize banks.

"The recent legislation requires us to reevaluate how we regulate banks that have between $100 billion and $250 billion in total assets," Quarles said. "In particular, we need to make a tailoring-related decision in the near term: How will we decide which enhanced prudential standards should apply to which firms with total assets between $100 billion and $250 billion?"

Randal Quarles
"We need to make a tailoring-related decision in the near term: How will we decide which enhanced prudential standards should apply to which firms with total assets between $100 billion and $250 billion?" said Fed Vice Chairman for Supervision Randal Quarles. Bloomberg News

Tailoring requirements for banks based on size and activity is a theme running throughout the Crapo bill and will likely help guide the rulemaking phase for the regulatory agencies.

“This is very important because they are beginning to recognize the issue of systemic importance . . . and tailoring risk,” said Wayne Abernathy, executive vice president of financial institutions policy and regulatory affairs at the American Bankers Association. “It means you’re focusing much better with where the risks are.”

The law included a separate provision that, 18 months after enactment, financial institutions other than bank holding companies are exempt from Dodd-Frank's "company-run" stress test requirements if they have less than $250 billion in assets.

In their July 6 statement, the FDIC, Fed and Office of the Comptroller of the Currency took the initial step of confirming that that exemption applies immediately to institutions with less than $100 billion in assets.

However, the statement left some analysts wanting more details. That 18-month period is similar to the timeline for banking companies with assets of $100 billion to $250 billion to no longer be considered "systemically important."

“While early relief is still possible, and specific provisions could be reassessed in the interim, the prudential statements suggest that banks in the $100-$250B bucket will be forced to wait until November 2019 for full relief under” the Crapo bill, Isaac Boltansky, director of policy research at Compass Point Research & Trading, wrote in a July 8 note.

The time frames for submission of stress tests and an adjustment in the number of stress test scenarios, from three to two, are areas that regulators are expected to formally address through rulemaking.

Capital off-ramp for community banks

Another challenge for regulators will be where to set the bar for community banks to enjoy the law's "off-ramp" for capital requirements.

The Crapo bill says banks with $10 billion in assets or less could be exempt from other capital requirements if they meet a leverage ratio minimum to be determined by the agencies. The bill requires the regulators to pick a measure between 8% and 10%.

“That’s obviously a little bit of a range there. I don't have an answer for you today on where we are going to land on that,” said Ryan Billingsley, the corporate expert in the FDIC’s division of risk management supervision, during the agency's meeting with community bankers. “But that’s something we're thinking about ... as well.”

Regulators must also establish the “risk profile” of community banks that would qualify for the off-ramp.

But it is unclear if bankers would opt for the simplified capital requirement. based on concerns raised during the FDIC’s meeting, if they set the ratio at the upper end of that range.

Bankers asked regulators to set the bar closer to the 8% floor in order to free up more capital for shareholders so banks would not be pressured to sell.

“If it’s the FDIC’s objective to keep as many community banks alive in the country as possible, allowing us to leverage capital, allowing us to generate the returns we need for stockholders and therefore remain independent, goes a long way to keeping the maximum number of community banks in the country,” said David Hanrahan, president and CEO of Capital Bank of New Jersey.

High-volatility commercial real estate

The Crapo bill also eases some of the risk-weighting for "high volatility commercial real estate exposures," requiring regulators to narrow the definition.

“The broad goal of this provision was to provide clarity as to what is a high volatility commercial real estate [asset] so small institutions would have greater confidence about their transactions when they are providing these loans,” said an OCC official who spoke on the condition of anonymity.

The regulators provided a little clarity in their initial statement by simply saying banks can opt to continue reporting HVCRE exposures the way they always have until they release a formal rulemaking.

Billingsley, the corporate expert in the FDIC’s division of risk management supervision, said regulators have received many questions on how to apply the terms of the new definition in the Crapo bill.

“We have to wait to think through that with the other agencies for the rulemaking process,” he said during the FDIC’s meeting with community bankers. “At this point, it’s just a best-efforts basis to apply the definition as you see appropriate vis-a-vis the call report until we iron out the details.”

Mortgage rules will get a makeover

The regulators are also gearing up to roll out a handful of changes to various mortgage-related requirements as mandated under the Crapo bill.

One of the biggest and more complex changes will be reducing some of the reporting requirements under the Home Mortgage Disclosure Act, which the government often uses to try root out discriminatory lending.

The Crapo bill exempts more banks from having to report certain HMDA data items if they do not make as many mortgages. It also reduces some of the new data fields added by the Consumer Financial Protection Bureau under Dodd-Frank.

However, it remains unclear which of the new and old HMDA data fields would apply to the exemptions in the Crapo bill.

“We are going to have to wait for the CFPB to issue some rules to tell us exactly which fields have to continue to be reported and which fields do not,” Robert Storch, the chief accountant in the FDIC’s division of risk management supervision, said during their meeting.

After the changes to the Crapo bill, about 244 FDIC-insured banks will have to continue full HMDA reporting, representing about 76% of the volume of mortgages nationwide, Storch added.

The Crapo bill also set a new threshold for community banks to make a so-called qualified mortgage, which gives them a legal safe harbor. Mortgages made by banks with less than $10 billion in assets are QM so long as the bank holds the mortgage in portfolio for the life of the loan.

The FDIC estimates the change will qualify another 191 new banks for QM status in addition to the 2,300 already covered by exemptions in the current QM rule.

Reporting relief for small banks

Regulators are looking at a number of ways to reduce the call reporting requirements for community banks.

Under the Crapo bill, for banks with less than $5 billion in assets, certain quarterly reporting items only have to be included twice during the year; eligible banks can leave them out in first-quarter and third-quarter reports.

But FDIC officials recently indicated that regulators might go further.

“That is probably the biggest area where burden reduction can be achieved, but it depends on rulemaking,” Storch said during the meeting. “There is recognition that we need to consider what additional burden reduction there can be beyond just the capital [reporting] to satisfy what” the Crapo bill requires.

Volcker Rule changes

Regulators are also working on a series of rulemakings meant to simplify the Volcker Rule and give some relief to smaller banks.

Under the Crapo bill, banks with assets of $10 billion or less are exempted from the Volcker rule that was meant to restrict large banks from speculative trading. Banks seeking the exemption must also have trading assets and liabilities below 5% of their total assets.

Billingsley at the FDIC estimated more than 5,000 banks would fall under that $10 billion asset threshold.

There are other changes to the Volcker rule that Congress requires that lifts restrictions on certain funds.

The regulators had already proposed sweeping changes to the Volcker rule shortly before the Congress passed the Crapo bill. It’s unclear whether the changes under the Crapo bill will be merged with the proposal already issued by regulators or issued in a separate rulemaking.

“The regulators will not enforce the Volcker Rule in a manner inconsistent with the law, but there is currently an ongoing rulemaking,” said Boltansky. “The prudential regulators are already overburdened with a lengthy agenda and we continue to believe that many — if not all — of these rulemaking efforts will bleed into 2019.”

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