Why are policymakers so afraid of the word 'deregulation'?
WASHINGTON — When the Federal Reserve Board issued proposals this week easing resolution plan requirements and revising supervisory standards for foreign banks, Chairman Jerome Powell described the proposals in specific terms.
Powell said a pair of proposals to tailor supervision for foreign banks and revise their liquidity and capital requirements would “modify our regulation of foreign banks based on their size, activities, and risks.” The changes would bring foreign bank rules in line with the agency’s prior proposal for domestic banks with more than $100 billion in assets — a proposal he characterized as “refining” those banks’ rules.
The Fed’s vice chairman for supervision, Randal Quarles, similarly welcomed the proposals as part of the central bank’s critical work of “tailoring prudential requirements … based on their size, business model, and risk profile.”
The word you will not hear from Fed leaders or the principals at other bank regulatory agencies is “deregulation.” They all go to some lengths to avoid it.
In a previous example, Quarles said in a written response to a question from Rep. Maxine Waters, D-Calif., now the chair of the House Financial Services Committee, that the Fed is interested in preserving the “core” post-crisis regulatory reforms rather than removing them entirely. As such, he did not think the central bank's proposals constituted deregulation.
“I believe that the core regulatory reforms, heightened capital and liquidity standards, stress testing and resolution planning should be preserved,” Quarles said. “My focus is not deregulation.”
Federal Deposit Insurance Corp. Chairman Jelena McWilliams has similarly pushed back against using the term in reference to her agency's proposing reforms. Speaking to reporters recently, she said the agency was trying to make rules commensurate with bank risks.
“I wouldn’t call them deregulatory efforts at the agency, at this level. I don’t know what other people are calling them. But we’re looking at some of the efforts that we’re working on as finely tailoring where the regulatory regime is.”
An article posted to Encyclopedia Brittanica's website defines deregulation as the "removal or reduction of laws or other demands of governmental control. Deregulation often takes the form of eliminating a regulation entirely or altering an existing regulation to reduce its impact."
Many of the recent policy reforms put forward by Trump administration-appointed regulators appear to be consistent with that meaning. At the very least, many of the revisions have reduced the impact of post-crisis regulations on varying swaths of the industry.
Since Quarles — President Trump’s first appointee to a bank regulatory agency — was sworn into office in October 2017, the agencies have proposed several changes to the core post-crisis innovations that Quarles said ought to be preserved. The joint proposals by the Fed, FDIC and Office of the Comptroller of the Currency to revise banks’ enhanced prudential standards include more narrow applicability for the Liquidity Coverage Ratio, the Net Stable Funding Ratio, resolution planning and stress testing.
The Fed and OCC also proposed changes to the enhanced Supplementary Leverage Ratio that would effectively lower the leverage capital requirements for the banking subsidiaries of the largest banks, though regulators have insisted that changes to their capital rules would not result in an overall reduction in capital at the holding company level.
The Fed in early 2018 proposed a “stress capital buffer” to replace many of the capital ratios banks must meet in their stress tests. The Fed more recently said it would limit its use of the qualitative objection for this year’s stress tests to only five of the 18 firms that would potentially face such an objection and waived most regional banks from stress testing in 2019 altogether. And the agency also released a trove of additional information about its stress testing models to firms in the interest of transparency.
The FDIC has begun to look into steps to revise the process for considering de novo bank applications, as well as to alter its restrictions for brokered deposits held by banks that are less than "well-capitalized." The industry is hopeful that both will result in more flexibility.
The Consumer Financial Protection Bureau under former acting director Mick Mulvaney took a number of steps to limit the bureau’s collection of data and issuance of enforcement actions. Under permanent Director Kathy Kraninger, meanwhile, the bureau has proposed loosening restrictions on payday lending activities — a business Comptroller of the Currency Joseph Otting has encouraged banks to explore.
Regulators are not the only ones who object to use of the d-word.
At the House Financial Services Committee hearing Wednesday, Rep. Patrick McHenry, R-N.C. — the panel's top Republican — said Chairwoman Maxine Waters was wrong to describe the bill enacted last spring to roll back sections of the 2010 Dodd-Frank Act as deregulation. The legislation became law with support from both Democrats and Republicans.
“Perhaps we didn’t get it right with the first draft” of Dodd-Frank, McHenry said. “Bipartisanship fixed what is the most egregious parts of Dodd-Frank. That’s not deregulation.”
Last year's bill mandated much of the Fed's proposed changes as well as a simpler leverage ratio for community banks that allows them to avoid other risk-based capital requirements.
Lumping those actions together can be misleading. They address different issues, their impacts on systemic risk vary and some go farther than others.
But when taken together, they amount to a regulatory landscape that is less strenuous — particularly for smaller institutions — and with fewer moving parts than the landscape prior to 2017.
Bankshot is American Banker’s column for real-time analysis of today's news.