WASHINGTON — Financial regulators sought to walk a fine line Tuesday between reassuring Republican senators that they are quickly implementing regulatory relief enacted by Congress and defending themselves against Democratic criticism that they are going too far, too fast.
Following enactment in May of the bipartisan bill unwinding certain provisions of the Dodd-Frank Act, some Senate Banking Committee members have been concerned about the pace of Federal Reserve Board actions to provide relief to regional and midsize banks.
"I encourage you to move quickly here,” Senate Banking Committee Chairman Mike Crapo, R-Idaho, the bill's chief author, told Fed Vice Chairman of Supervision Randal Quarles, at a hearing with the principals for the bank and credit union agencies.
The Fed rules for implementing sections of the bill known as S 2155 was a key focus at the hearing, but the agency chiefs also got a mouthful on other topics at the hearing, including the status of a capital surcharge for the biggest banks and the agencies' progress in modernizing the Community Reinvestment Act. Besides Quarles, also testifying were the heads of the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and National Credit Union Administration.
The new law raised the asset threshold, from $50 billion to $250 billion, for "systemically important financial institutions" that are subject to enhanced Fed supervision. But the Fed can still apply SIFI-like standards to certain banks with assets of $100 billion to $250 billion. The Fed has 18 months from enactment to issue rules on how it will supervise banks in that middle tier.
But some congressional critics have wanted the Fed to move more quickly to relieve banks below $250 billion, and fear that some regional banks may still be left out in the cold.
In prepared remarks for the hearing released late Monday, Fed Vice Chairman of Supervision Randal Quarles indicated that the central bank would act before the 18-month deadline. On Tuesday, he signaled the Fed could release a proposal before the end of the year.
“That is our highest priority in the sort of necessary sequencing of tasks associated with the implementation,” Quarles said. “I expect … that we will be completed with that task very soon, certainly before the end of the year and I hope well before that.”
Crapo said the 18-month window was intended to allow regulators to tailor stress-testing requirements for banks of different sizes.
“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,” Crapo said in his opening remarks. “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.
But on the other side of the coin, a key Democratic sponsor of the bill, Sen. Jon Tester, D-Mont., also pressed Quarles to explain how the central bank will ensure that risky banks below the new asset threshold are still being monitored.
Tester asked Quarles to clarify whether the bill automatically requires the Fed to remove banks between $100 billion and $250 billion from the enhanced prudential standards, or whether the Fed can still apply the standards to banks with SIFI-like characteristics. He used the example of a bank that at first demonstrates a low risk profile, that then grows riskier over time.
"Let’s say you find a bank … and you’ve changed the standards on them because you find that their portfolio is pretty reasonable and lacks risk, and they change it, do you have the ability to bring them in regardless of the size?” Tester said.
Quarles assured Tester that the Fed could “absolutely” redesignate a bank within the $100 billion and $250 billion asset range.
But lawmakers' concerns went beyond the regulatory relief law.
Republicans in the House and Senate have recently called for the Fed to recalibrate a capital surcharge for "global systemically important banks," or G-SIBs. They have argued that the surcharge puts U.S. banks at a competitive disadvantage.
“We are concerned about competition,” said Sen. Mike Rounds, R-S.D. “What our concern was is that we have competition on an international basis right now.”
But Sen. Sherrod Brown, D-Ohio, the committee’s ranking member, pushed back on Republicans' requests to change the GSIB surcharge.
“The eight largest U.S. banks are asking the Fed to lower the risk-based capital surcharge,” Brown said. “If there was anything that Republicans and Democrats agreed on after the crash, if there was anything, it was the largest banks needed more capital to make them safer. ... Do you agree we shouldn’t lower big-bank capital standards.”
While Quarles said he believed current capital levels are “roughly about right,” he also said at the hearing that as the Fed reconsiders capital rules and stress testing regimes, the “G-SIB surcharge will inevitably be part of considering whether we have appropriately calibrated this complex of rules.”
