Regulatory Activity Building to 'Crescendo' in Fall

WASHINGTON — The lazy days of summer are poised to transition into a very busy autumn for financial services policymakers in the nation's capital.

Congress has yet to return to Washington from its recess — lawmakers get back next week — but a flood of regulatory action is already gearing up this week.

"The period of Labor Day to Thanksgiving is traditionally the crescendo for the financial services policy world," said Thomas Vartanian, a partner at Dechert LLP. "It's usually a frenzied period in terms of regulatory policy and congressional oversight."

The Federal Reserve Board and Federal Deposit Insurance Corp. will kick off the early fall with open board meetings Wednesday to consider new rules for large banks. Also set to come are likely steps by the Financial Stability Oversight Council, possible regulatory rulings on mergers and acquisitions and proposals from the Consumer Financial Protection Bureau.

Here is a sample rundown of anticipated activity for the days, weeks and months ahead:

The Return of Basel
The bank regulatory agencies are expected to advance three rules implementing Basel Committee reforms this week, including a tough new liquidity requirement for banks with more than $50 billion of assets.

In October, the FDIC, Fed and Office of the Comptroller of the Currency proposed a stricter version of the so-called "liquidity coverage ratio" than the Basel accord, outlining what types of high-quality liquid assets banks must hold to fund themselves over a 30-day period in the event of a crisis. The Fed is scheduled to discuss the liquidity rule at an open board meeting Wednesday afternoon, followed by an FDIC board meeting in the afternoon.

The agencies will also discuss a re-proposal of a three-year-old rule imposing margin requirements for non-cleared swaps of FDIC-insured banks. Regulators originally proposed margin rules in 2011 under the Dodd-Frank Act. The proposal would provide, among other things, favorable treatment of swaps involving nonfinancial end users. But U.S. rule-writers were forced to scrap the proposal when the Basel Committee, in 2012, proposed international margin standards for non-centrally cleared derivatives. The Basel plan was finalized last year.

Meanwhile, the FDIC's meeting agenda indicates regulators will also consider a final rule incorporating Basel Committee changes to calculating the "supplementary leverage ratio." The U.S. already set a higher ratio for their biggest banks — 5% for holding companies and 6% for their insured subsidiaries — than that imposed under the Basel accord's leverage ratio rule. But the Fed, FDIC and OCC must still implement recent Basel changes to what constitutes the denominator of the ratio. Their April proposal, which was generally consistent with the Basel plan, would detail how certain derivatives and other instruments factor into calculating a bank's exposures.

Systemic Designation for MetLife?
The Treasury Department announced a closed meeting this Thursday of the Financial Stability Oversight Council to discuss "nonbank financial company designations."

While the release lacked any mention of a specific company under review, it has been widely speculated that the council is close to proposing a designation of MetLife as a systemically important financial institution. On Aug. 20, FSOC said it had closed the "evidentiary record" for an unnamed company, signaling a move toward a designation. Once a designation is proposed, a company has 30 days to request a hearing to oppose the designation. Another FSOC vote is required to finalize the designation.

If designated as a nonbank SIFI, MetLife would join Prudential Financial, American International Group and GE Capital as institutions that must face enhanced bank-like supervision from the Federal Reserve as mandated under the Dodd-Frank Act.

"It's tough to be sure, with the FSOC's transparency process, but it's highly likely based on all the signals that the FSOC is going to hold its vote on whether to designate MetLife at the Sept. 4 meeting," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading.

M&A Decisions
Some experts are also looking to the fall period as when regulators may finally sign off on a number of pending mergers and acquisitions.

Several deals have yet to close in the face of regulatory complications. Most notably, the sale of Hudson City Bancorp to M&T Bank has been continually delayed since August 2012, with compliance concerns about M&T — particularly in its anti-money laundering program — hampering regulatory approval. In another example, the OCC in July forced Banc of California, based in Irvine, to file a second public notice about plans to buy 20 branches from Banco Popular. The agency also established a 30-day comment period on the deal, which was agreed to in April.

But observers say regulatory movement on pending M&A deals could come in the short term.

"The regulators have been looking at mergers and acquisitions with a much more scrupulous eye both in terms of the financial stability rules required in Dodd-Frank and heightened requirements for consumer compliance and anti-money laundering," Vartanian said. "The process has been more intense and time-consuming and there have been a number of deals that have been hanging around. One would expect they would either be approved or rejected in the next couple of months."

Some determinations could come sooner if regulators view the end of the third quarter as an unofficial deadline on M&A rulings. Deals closing after quarter's end would leave additional accounting complexity for banks trying to complete a transaction.

Regulators "would have to act by Sept. 15 in order to facilitate transaction closings by quarter end," said Lawrence Kaplan, an attorney at Paul Hastings.

More CFPB rules
The accelerated pace of Consumer Financial Protection Bureau actions is also expected to continue this fall. Two potential areas in which the bureau could make waves soon are auto lending and prepaid cards.

At a congressional hearing in June, CFPB Director Richard Cordray indicated plans to release a white paper on the bureau's controversial use of "disparate impact" theory in fair lending cases against indirect auto lenders. Meanwhile, a $2.8 million fine announced last month against a Texas-based auto lender targeted its vendor oversight.

Observers said the CFPB could announce a new auto lending policy as early as this month, corresponding with a Sept. 18 field hearing on auto finance issues scheduled in Indianapolis. One option for the agency is to use authority under the Dodd-Frank Act to create a "larger participant" supervisory program for nonbank auto lenders, like it has for other financial entities outside the commercial banking industry.

"I would bet money they will announce a larger participant rule for the nonbank auto finance industry.… Whenever they hold a hearing, it is almost invariably the case that they announce some important development," said Alan Kaplinsky, a partner at Ballard & Spahr LLP. "They will propose it, there will be a comment period and then they will likely finalize it in the first quarter of next year."

Meanwhile, the bureau at one point had signaled plans to propose prepaid card rules this summer, setting its own tentative deadline for June. While Cordray later told lawmakers that the rule would not come out before the end of the summer, he said it was still "a very high priority."

A prepaid cards proposal "could very well happen before Thanksgiving," Kaplinsky said.