Four Reasons for Banks to Care About D.C.'s Summer Doldrums

WASHINGTON — With Congress set to start a monthlong recess at the beginning of August, it is natural to expect banking policy news to dwindle.

The dog days of summer in the nation's capital are traditionally a time when policymakers turn their attention to vacations, muggy temperatures and non-Washington news, while bureau chiefs fret over filling news holes.

But like last August — and most since the onset of the financial crisis six years ago -- signs point to the upcoming recess being an eventful one. There is still plenty of unfinished regulatory business that could be resolved with Congress of out of town.

Some events may happen even sooner. The Government Accountability Office will release a much-anticipated report on Thursday looking at whether big banks continue to enjoy market advantages. Meanwhile, many of the midterm congressional races attracting attention over the coming weeks, with lawmakers not in session, have important implications for financial services policy.

Here are four reasons banks should care about the D.C. summer doldrums:

Regulators have plenty of work they may unveil

Perhaps the biggest case for an eventful August is the stack of still-unfinished Dodd-Frank Act rules, reports and other actions ripe for summer completion.

Though the regulators have made substantial progress toward finishing Dodd-Frank implementation, one holdout is a closely watched rule requiring securitizers to retain 5% of a loan's credit risk while ultra-safe loans meeting the new "qualified residential mortgage" standard will be exempt. Defining QRM has been among the challenges slowing down the rule, which was proposed for the second time nearly a year ago.

Yet the most anticipated summer development is the imminent release of a GAO report — requested by Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La. — on whether the size of the biggest banks results in their getting a subsidy from the market based on the perception that government will not let them fail.

"The biggest thing we're looking at is… the GAO release of its report on whether big banks have any market funding advantages," said Wayne Abernathy, the executive vice president of financial institutions policy and regulatory affairs for the American Bankers Association.

The report is expected to be released Thursday, at the same time that Brown holds a Senate subcommittee hearing on the issue. While the final details of the report remain unclear, several sources said the GAO was expected to say the funding advantage held by the largest banks has been reduced. The size of the subsidy may change over time, however, potentially increasing in the event of another crisis.

Other than the GAO report, it is hard to predict what might happen next month. But other policy efforts due for completion include finalizing the "liquidity coverage ratio" for large banks, still-pending negotiations between the Justice Department and Bank of America over a potential settlement of mortgage-related charges and yet-to-be released feedback from the Fed and Federal Deposit Insurance Corp. on the biggest banks' "living wills."

Regulators often act when Congress is out of town

Some years, the month of August turns newsy. Take last year, when lawmakers leaving town actually gave way to a pretty steady stream of regulatory developments. There was the aftermath of the previous month's shocking federal court ruling throwing out the Federal Reserve's swipe fee limits.

Early on in the month, President Obama finally weighed in on how to restructure the housing finance system, supporting a now-stalled legislative plan to replace Fannie Mae and Freddie Mac with a private mortgage market protected by a government backstop. The Fed released a report providing an update on capital planning at stress-tested banks.

The biggest news came toward the end of the month when bank regulators issued a revised proposal on the risk retention rule. Changing course on their earlier proposal — which required a 20% down payment on securitized loans exempt from risk retention — the new plan did away with a down payment requirement.

"In general, you see a lot of regulatory actions when Congress is away. It's not just the case during the August recession either; it could be one of the other breaks that Capitol Hill takes," said Jaret Seiberg, an analyst at Guggenheim Securities. "When Congress is away, the regulators often like to come out and play."

The regulatory world does not revolve around Washington

While the congressional recess may cool the frequency of federal regulatory news, banking policy is not limited to the nation's capital. The clearest example of that are the visible and aggressive moves on multiple regulatory fronts taken by Benjamin Lawsky, New York's financial services superintendent, who never has to deal with Congress.

It was last August that Lawsky famously told 117 banks to stop doing business with unregulated online lenders, and ordered 35 online lenders to stop charging New York consumers rates that were allegedly above New York's usury limits.

Earlier this month, Lawsky blazed another trail, proposing the first regulatory framework of its kind for Bitcoin companies, which would include steps for businesses involved in virtual currency to obtain a "BitLicense" in the state.

Next month, "you could see companies applying for a Bitcoin license for the first time in the country in New York," said V. Gerard Comizio, a partner at Paul Hastings. "These days, in the banking industry if you're not keeping your eye on Washington D.C., you still need to keep your eye on New York City."

Some lawmakers are still fighting for their jobs

Even if news slows, there are plenty of intriguing midterm congressional races of interest to bankers that will likely continue to heat up next month as incumbents get time away from Washington.

Which party controls the Senate hangs in the balance this November, and the outcome will have a huge impact on whether Congress considers steps to ease banks' regulatory burden. Specific Senate races with implications for the industry include: House Financial Services Committee GOP member Tom Cotton's bid to unseat Arkansas Democrat Mark Pryor; the West Virginia race involving Republican congresswoman Shelley Moore Capito, a key industry advocate; and the North Carolina Senate race where Democratic incumbent Kay Hagan is fighting for reelection.