WASHINGTON — The Federal Reserve Board commanded much attention after passage of the 2010 Dodd-Frank Act for the agency's expanded authority to supervise big banks. The spotlight is again shining on the central bank as regulators implement a new law to ease regulatory burden.
As the Senate Banking Committee prepares to hold its first hearing on implementing the regulatory relief law, some lawmakers are expected to pressure the Fed to be generous in using new power to excuse midsize banks from Dodd-Frank prudential standards. Some Democrats, meanwhile, will likely urge the agency to be more cautious.
“As a result of S 2155, the Federal Reserve has even more regulatory discretion and I think both sides of the congressional aisle, those who are happy with it and those who are unhappy with it, are going to be interested in how the Fed plans to use its discretion,” Aaron Klein, a fellow at the Brookings Institution and former Senate Banking Committee staffer, said in reference to the new law.
Some Republicans, for example, have
The new law raised the asset threshold for "systemically important financial institutions" to $250 billion from $50 billion, but granted the Fed discretion to determine which banks between $100 billion and $250 billion should still face enhanced standards.
"There will be questions asked to Gov. Quarles as to what framework and methodology the Fed is planning to implement to make that assessment,” Klein said, referring to Fed Gov. Randal Quarles.
But Democrats will likely urge Quarles, the agency's vice chairman of supervision, to use the Fed’s authority to keep the microscope on banks in that middle range.
“I think [Democrats will be] grilling them to make sure they’re not rolling back more Dodd-Frank regulations because the regulators can reinterpret those,” said Justin Schardin, a fellow at the Bipartisan Policy Center and former director of the center’s financial regulatory reform initiative.
However, the hearing Thursday with principals from the Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and National Credit Union Administration is expected to touch on a whole range of subjects, some even going beyond the legislation. Those include modernization of the Community Reinvestment Act, the OCC's proposed limited-purpose charter for fintech firms, changes to the Volcker Rule and ongoing deliberations about capital requirements.
“This is going to be much broader than the bank deregulatory bill,” said Jaret Seiberg, an analyst with Cowen Washington Research Group. “I think you’ll be able to play issue-based bingo at this hearing. ... The diverse range of interests on the committee and the hearing is all-encompassing.”
Brandon Barford, a partner at Beacon Policy Advisors, added that lawmakers will likely go “off-topic” because “it’s rare to get that many people from that many agencies on one panel.” Also testifying besides Quarles will be Comptroller of the Currency Joseph Otting, FDIC Chairman Jelena McWilliams and NCUA Chairman J. Mark McWatters.
The reg relief law was a victory mostly for community banks, but a higher SIFI asset threshold was also seen as benefiting midsize institutions that Dodd-Frank had placed in the same bucket with the largest globally active banks.
But a group of seven GOP senators, led by Sen. David Perdue, R-Ga., sent a letter to the Fed last month asking the agency not to broadly apply stricter standards for banks with assets of $100 billion to $250 billion, and to consider relieving some banks with assets of more than $250 billion if they don’t impose systemic risks.
"The Fed has consistently made representations to both Congress and the public that it has and will use its powers to tailor regulations to the appropriate risk profile," they wrote.
But aside from the $250 billion threshold, which is considered the most high-profile provision of S 2155, the hearing will likely turn into a free-for-all for senators depending on the issues on which they are most focused.
“The problem with all these hearings is always that they’re more soundbites than they are a case study for detailed analysis,” said Klein. “What you don’t typically get is more thoughtful analysis about how this all will work in practice.”
Regulators can expect a wide scope of questions relating to things like regulators' quest to modernize CRA, a looming proposal by the Fed and OCC to ease the "enhanced supplementary leverage ratio," the Fed's capital surcharge for global systemically important banks, and a proposal to revamp Volcker Rule compliance procedures.
After the OCC issued an advance notice of proposed rulemaking to revamp CRA policies, Democrats will likely put pressure on Otting over concerns about how affordable housing will play into the modernization effort.
“I would expect Democrats to pressure Otting on the CRA advance rulemaking to really question what the OCC is trying to achieve and whether it will help with affordable housing and serving a full community,” said Barford.
The OCC’s ANPR posed questions about redefining community assessment areas and expanding the types of loans that could get CRA credit. Community groups are concerned that expanding the types of loans would simply make it easier for banks to get CRA credit, rather than focusing on areas that need loans most.
Klein also suggested that Democrats could probe McWilliams on proposed changes to the enhanced supplementary leverage ratio. Before McWilliams was sworn in, the FDIC refused to back the OCC and Fed's proposal, with former Chairman Martin Gruenberg arguing it would weaken bank capital.
Now a member of the FDIC's board, Gruenberg has continued to be outspoken against the proposal. But McWilliams could move to have the FDIC join the effort.
Meanwhile, just two months before the November midterm elections, some senators up for re-election — particularly moderate Democrats running in states won by President Trump — could try to use the hearing as a platform to tout their support for the reg relief law.
“I think the hearing is also going to be an opportunity for some of the senators who are up for re-election this fall to show that some progress is being made, that they passed a bill and it’s turning into actual results,” said Schardin.
Similarly, Wall Street critics said to be mulling a run for president in 2020, such as Democrat Elizabeth Warren, will likely use the hearing to advance their progressive agenda.
“At a time when Socialist candidates are beating incumbent members of Congress, debate over the appropriateness of regulation has become a proxy for the larger question of whether we should be moving toward a managed economy,” said Dan Crowley, a partner at K&L Gates.
Despite the expected political posturing from lawmakers, regulators’ responses won’t go unnoticed.
“I think it will be interesting to see if the regulators, when they are all on one panel together, do any of them seek to make a name for themselves and be more combative with Democrats?” said Barford. “Or do they kind of look to kind of blend into the background?”
But Crowley said the regulators’ comments will likely reflect goals set by Treasury Department reports that Trump requested in a February 2017 executive order.
“Yes, they’ve got a tremendous amount of discretion, but the expectation is that they will exercise their discretion in a way that adheres to the road map set forth in the Treasury reports,” Crowley said. “The regulators are going to be under pressure from the administration to pursue the deregulatory agenda.”
