CRA, capital rules, reg relief: Regulators’ busy fall to-do list

October 8, 2018 10:00 PM

WASHINGTON — It has been more than four months since President Trump signed a bill into law that gave certain banks relief from Dodd-Frank Act regulatory burdens, and they are waiting for regulators to implement the changes.

The Federal Reserve Board is developing a proposal, mandated by the law, that revises the central bank’s scheme for supervising large banks. Specifically, the central bank must figure out which enhanced supervisory standards to apply to banks with assets of $100 billion to $250 billion.

But at a Senate Banking Committee hearing this past week with key principals from the regulatory agencies, it was clear that the agencies’ workload is only partly tied to the reg relief law.

Fed Vice Chairman of Supervision Randal Quarles, Federal Deposit Insurance Corp. Chairman Jelena McWilliams, Comptroller of the Currency Joseph Otting and National Credit Union Administration Chairman J. Mark McWatters also discussed their progress in updating capital requirements, modernizing how they enforce the Community Reinvestment Act and continuing to deal with the continuing enforcement issues at Wells Fargo.

Here are some of the key items on regulators’ to-do list:

Comptroller of the Currency Joseph Otting

Joseph Otting, comptroller of the U.S. currency, speaks during a Senate Banking Committee hearing in Washington, D.C., U.S., on Tuesday, Oct. 2, 2018. The hearing focused on implementation of a new law easing Dodd-Frank Act rules on community and midsize banks. Photographer: Andrew Harrer/Bloomberg

Andrew Harrer/Bloomberg

Community Reinvestment Act

The bank regulatory agencies have yet to develop a joint proposal on reforming their CRA policy to keep pace with how the industry has changed since the community reinvestment law was enacted in 1977.

The rare step taken by Office of the Comptroller of the Currency to issue its own advance notice of proposed rulemaking — asking the public questions to gather feedback on a future reform plan — without the other agencies has fed speculation that the regulators don’t see eye to eye.

Sen. Elizabeth Warren, D-Mass., pointed to this fact when she sparred with Otting at the hearing Tuesday.

“Notably, the Fed and FDIC did not join in that proposal, even though usually all three agencies work together on CRA,” Warren said. “Now that was a pretty sharp sign that there are problems with your proposal and … I dug into the details.”

The OCC and the other agencies say they are still in discussions and intend to issue a joint proposal. But Warren said there were signs that the OCC’s approach had ruffled some feathers. For examples, she said some of the OCC’s questions for comment suggested an interest giving more CRA investments equal weight.

“So a dollar to help a family buy a home is the same as a dollar to print a financial education pamphlet,” Warren said.

Otting objected to that interpretation, calling it “incorrect.” He said the agency is simply seeking feedback on a “concept,” and is focused on making the CRA measurement system clearer.

“This is in an ANPR. … It's a document to get feedback from people,” Otting said. “We spent time with over 1,100 people before that document was produced. We gathered that feedback from civil rights groups [and] community organizations."

McWilliams and Quarles were somewhat guarded about their agencies’ thinking.

“The OCC put out an ANPR. We are going to work jointly on the basis of that information to put out an NPR,” Quarles said. “I don’t want to front-run that process of committing now.”

McWilliams echoed in others in saying that CRA reforms should not result in a dilution of resources for banks’ direct communities.

“I would want the final rule to ensure that the original congressional intent behind the CRA satisfies it,” said McWilliams. “Banks are supposed to serve the communities in which they operate.”

Capital surcharge for the biggest banks

Republicans in both the House and Senate have been pushing the Fed to “re-calibrate” its rule for imposing an additional capital surcharge on the U.S.-based “global systemically important banks.” The central bank finalized its rule — which builds off of an international Basel Committee plan — in 2015.

Republicans have argued that U.S. banks subject to the Fed rule face a tougher surcharge than that of foreign G-SIBs, putting them at a competitive disadvantage.

“We're concerned about competition,” said Sen. Mike Rounds, R-S.D. “And it's not so much about favoritism. It's about trying to level the playing field. And what our concern was is that we have competition on an international basis right now.”

But Sherrod Brown, D-Ohio, the Senate Banking Committee’s ranking member, argued that banks still don’t have the proper capital to maintain financial stability.

“Research indicates that bank capital is below the level needed to insulate taxpayers from risk,” Brown said.

Quarles said the he thinks bank capital levels are “roughly about right” and would not say whether the Fed planned to change the current surcharge. The Fed should “go where the analysis would lead it to go,” he said.

Enhanced Supplementary Leverage Ratio

The Fed and the OCC have proposed changes to the “enhanced supplementary leverage ratio” that would transition it from a fixed ratio applied to all of the biggest banks to a variable ratio based in part on a bank’s capital surcharge.

But a remaining question is whether the FDIC under McWilliams will join the proposal. Under former Chairman Martin Gruenberg, the FDIC had helped craft the current eSLR, but Gruenberg did not support the Fed and OCC’s proposal to ease the measure, arguing that it would weaken the biggest banks’ capital.

“I certainly appreciate his views … as well as I appreciate the views of all our board members,” said McWilliams, the former chief legal officer at Fifth Third Bank who has also worked as a lawyer at the Fed. “It's an open rulemaking. I wasn't privy to the process that went into consideration of the rulemaking. And I certainly would want to understand the logistics and the reasoning behind coming up with a proposal as it is.”

Wells Fargo

In response to questions from the Senate panel, Otting said the OCC is still not satisfied with steps by Wells Fargo to address the enforcement issues that have plagued the bank in scandal after scandal.

Last month, the bank agreed to pay $1 billion to settle claims it overcharged customers for auto insurance. Wells Fargo also admitted it foreclosed on hundreds of homes over a five-year period.

“Where are we with the 800,000 consumers who were ripped off by Wells Fargo by purchasing auto insurance that they didn't need?" Sen. Brian Schatz, D-Hawaii. "If I’m one of those 800,000 consumers, when can I expect to be made whole?"

Otting did not provide a timetable. He said the OCC continues to review the bank’s remedial steps and is not yet satisfied.

“I would say that we continue to work with the management and the board,” Otting said. “We are not comfortable where we are with them. In April you may recall that we issued a consent order that clearly spelled out all the actions that we expected from the bank. We continue to monitor that. I have high confidence on the over our 100 examiners that are on-site at Wells Fargo, have confidence in their process to monitor.”

SIFI threshold

Republicans have continued to pressure the Fed to release rules on the treatment of regional and midsize banks under the recent reg relief law.

The new law, spearheaded by Senate Banking Committee Chairman Mike Crapo, R-Idaho, raised from $50 billion to $250 billion the asset threshold at which banks are considered “systemically important financial institutions.” SIFIs face a tougher supervision process overseen by the Fed.

Yet the Fed still has the discretion to apply enhanced standards to certain banks above $100 billion that the central bank determines still have risky characteristics.

Republicans in both the House and Senate have called for banks with between $100 and $250 billion immediately to be relieved from certain stress tests and other requirements. To provide clarity, the Fed is developing a proposal on how it will supervise banks in that middle tier.

“Agencies should significantly tailor regulations for banks with between $100 billion and $250 billion in total consolidated assets, with a particular emphasis on tailoring the stress testing regime,” said Crapo. “It should be noted that the primary reason we gave the regulators time to implement this provision was to develop a streamlined stress testing regime. I encourage you to move quickly here.”

Quarles said the Fed has placed its “highest priority” on issuing a proposed rule for tailoring regulations for those institutions, and will have a proposal out before the end of the year.