Five Key Takeaways from Senate Banking's First Look at Reg Relief

WASHINGTON — The Senate Banking Committee's first look at regulatory relief for small institutions provided key insights into how the panel is likely to tackle the topic legislatively this year, suggesting it could be a long and contentious debate.

Although both Republicans and Democrats expressed support for a bill, lawmakers signaled different approaches, with the GOP favoring broad legislation that tackles changes to the Dodd-Frank Act, while Democrats want to keep it narrower.

"Today we will focus on regulatory relief for smaller financial institutions. In the near future we will continue this examination by focusing on unnecessary statutory and regulatory impediments across the financial services spectrum," said Senate Banking Committee Chairman Richard Shelby.

The hearing, which featured regulatory officials as witnesses, was the first of two planned for this week looking at regulatory relief for small banks and credit unions. While lawmakers tended to focus on general concerns rather than specifics of a future bill, the hearing provides clues to where they are headed next.

The following are five critical takeaways from the hearing, and what it means for those pursuing banking reforms.

Contours of the debate are taking shape

The Banking Committee held a hearing and markup around Iran sanctions last month, but Tuesday's hearing marks the panel's first steps on banking-centered activities under new leadership.

The biggest question facing the committee is where — and whether — Republicans and Democrats can find common ground on regulatory reform and Dodd-Frank.

While Shelby sent a clear signal he favors a broader approach, Sen. Sherrod Brown appeared skeptical. The Ohio Democrat said he's open to "solving real problems affecting community institutions," but reiterated that Democrats will not be friendly to provisions attached to must-passed legislation or that include major cuts to Dodd-Frank.

Many Democrats were frustrated late last year when President Obama supported passage of a spending bill despite the inclusion of language easing of a Dodd-Frank derivatives provision. The move has set the tone for changes around the law in the new Congress.

"We will not be successful this Congress in providing regulatory relief if our proposals do not have broad bipartisan consensus, and are attached to unrelated, must-pass legislation," Brown said. "Our prospects are even less likely if we try to pair regulatory relief with attempts to roll back Wall Street reform."

Still, it's possible a middle ground can be established, at least on some issues. Several Democrats raised concerns of their own about the regulatory burdens facing smaller financial institutions, arguing that some of the standards for the biggest banks trickle down to smaller banks under the guise of "best practices."

"My belief is that enhanced prudential standards for the larger institutions … have kind of seeped down into the examiners at the smaller banks, and I don't know how you grapple with that best practices standard," said Sen. Mark Warner, D-Va.

Asset size remains a key part of the discussion

Some Democrats expressed concern about the scope of potential regulatory relief efforts, arguing that they should be applied to the very smallest of institutions, which represent the vast majority of the country's nearly 7,000 institutions.

Sen. Elizabeth Warren, D-Mass., pressed regulators for a sense of how many institutions they supervise fall below $10 billion in assets, urging them to focus on those banks and not their bigger counterparts.

"When members of Congress start talking about rolling back regulations in the name of community banks, I want to be sure it's really about helping community banks, and not about helping their much larger competitors," she said.

How that view will shape Warren's position — and that of other progressives — in related fights over raising the $50 billion threshold for systemically important institutions and other asset thresholds under Dodd-Frank remains to be seen.

At the same time, regulators emphasized that they do consider business activity in addition to asset size when considering their oversight of banks — a key issue that industry advocates have been pushing in the fight over the SIFI threshold.

"When you look at what's happening with the industry today... we have to be careful of prescribing certain limits... [on] what a bank can do under those limits, because we run the risk of threatening innovation in the industry," said Toney Bland, senior deputy comptroller for midsize and community bank supervision at the Office of the Comptroller of the Currency. "So at the OCC we do use asset sizes as a pointer, but then we try to delve deeper into what activities and the complexity that those institutions are involved in."

Regulators knock additional cost-benefit analysis requirements

Shelby repeatedly pressed regulators about weighing the costs and benefits for new rules, telling reporters after the hearing that he is looking to push forward with legislation on that issue.

"We're laying the groundwork for that," he said.

House Republicans have already moved forward with several bills mandating all regulatory agencies adopt new procedures to provide additional cost-benefit analyses as part of the rulemaking process, and those provisions would also provide additional recourse for critics to bring challenges to those rules in court. Many Democrats have criticized the effort, and it's not likely the issue would gain any more bipartisan support in the Senate.

Brown asked the witnesses about the potential impacts of new cost-benefit requirements, raising questions about whether such provisions would "actually stop rulemaking in its tracks or slow it down so the burden is too great to move forward."

Regulators largely defended their current process and underscored that they already do complete cost-benefit analyses when they write new rules.

"NCUA does take into account all the costs and benefits that we can reasonably catalogue and quantify in our rulemaking process and try to speak to that in the preambles to our rules," said Larry Fazio, director of the office of examination and insurance at the National Credit Union Administration. "We also find very useful the comments we receive during the rulemaking process and respond to those in the preamble to our final rules — and that's very helpful in fine-tuning and calibrating the rules."

Witnesses also warned that additional mandates would create new hurdles for rulemaking.

"Any time you add additional requirements it makes the process of conducting the analysis more difficult and would open it up to more legal challenges," said Doreen Eberley, director of risk management supervision at the Federal Deposit Insurance Corp. "It could certainly slow the process and would certainly make it more cumbersome and limit our flexibility."

Maryann Hunter, deputy director of the division of banking supervision and regulation at the Federal Reserve Board, added that a slower rulemaking process could even impose new burdens on financial institutions.

"In some occasions, the lack of clarity... can impose burdens on banks as well, because they aren't sure how various requirements will be implemented," she said.

EGRPA process continues

Regulators also updated the committee on mandated regulatory review efforts under the Economic Growth and Regulatory Paperwork Act, saying they continue to hold meetings with community bankers and other stakeholders around the country. Regulators must submit findings on "outdated, unnecessary or unduly burdensome" rules to Congress by next year.

Critically, the witnesses said they won't be considering Dodd-Frank rules as part of that process, because many of the provisions are so new and are still being implemented.

"Given that the EGRPA process is looking at established rules that are outdated and overly burdensome and unnecessary, most of the Dodd-Frank rules that the OCC has been responsible for haven't been implemented yet or haven't taken effect, so it's not, we feel, appropriate to look at those rules at this time," said Bland.

But the agencies are moving forward with reviews in other areas. The Fed's Hunter noted, for example, that the Fed is reviewing a $250,000 appraisal threshold for real estate deals and may consider raising that threshold.

"The difficulty in getting appraisers who know the community and are able to do the work that's required has been a real challenge," she said.

OCC flags Volcker carve-out

The OCC's Bland reiterated earlier comments by Comptroller of the Currency Thomas Curry that the agency supports a full exemption for small banks under $10 billion from the Volcker Rule, noting in written testimony that the agency has prepared proposed language for a change.

Critics, including Sen. Pat Toomey, R-Pa., who raised the issue at the hearing, argue that while small banks are already excused from compliance requirements if they aren't involved in activities covered by the rule, they still must grapple with the complicated regulation to ensure they're in the clear.

That's why the OCC has proposed carving out the smallest banks, Bland said. He added in written testimony that the change could exempt "more than 6,000" banks from the rule, which bans propriety trading and limits risky investments.

"To require the compliance effort to make that determination seems costly compared to the actual activities that they have. Even if institutions were involved in activities that would follow the rule, the extent of those activities isn't significant," said Bland, noting that regulators can keep tabs on that activity through the supervision process.