The incoming administration has already made several public statements suggesting a desire to reduce
But what does this mean in practice? Having modernized regulation during my time in government, I suggest steps that, when taken responsibly, can benefit all stakeholders, including the regulatory agencies. Some regulations are redundant. Some outdated. Others miss the mark entirely. By streamlining and refining current regulations, we can create a less-burdensome regulatory environment without compromising essential safeguards. A responsible approach to regulatory modernization can be durable. "Deregulation" can often lead to unintended consequences and invite the swing of the pendulum in years to come. Instead, a modern, simplified regulatory framework can be of lasting benefit to all stakeholders.
First, the industry itself should take the lead in this effort. By collaborating through its trade associations, the industry can define specific parameters for regulatory modernization, compiling a list of the rules it most wants to see streamlined or eliminated. For rules that cannot or should not be just eliminated, each trade association should establish or enhance its existing regulatory modernization group to suggest refinements. Ideally, each financial institution and trade association should designate a "regulatory modernization czar" to identify areas for improvement, draft specific proposals and present them to the relevant agencies, where appropriate. Ideally, the industry would present a unified front, advocating for specific regulatory reforms. This can both move things along faster and help to ensure regulators and the industry can come together over something concrete.
Further, to reduce burden and increase national well-being, an effort should be made to consolidate regulatory authority and focus on core competencies. For example, the Consumer Financial Protection Bureau could focus solely on regulating and supervising nonbanks, while traditional banking agencies could resume oversight of consumer compliance for banks. This shift would allow the CFPB to redirect its limited supervisory and enforcement resources to under-regulated nonbank entities. And as demonstrated by the Wells Fargo scandal, consumer compliance is a critical component of safety and soundness, necessitating direct oversight by banking agencies.
Importantly, the current quantitative categorization for determining heightened supervision expectations should be revised. After all, these thresholds were established over a decade ago, and inflation has made them overly intrusive for many banks. Why not consider any bank below $25 billion in assets a community bank; banks between $25 and $200 billion in assets regional banks; banks over $200 billion in assets large banks, and so on? Once established, these categorization thresholds should be reviewed and adjusted at least every five years to account for inflation and other economic factors.
The Federal Deposit Insurance Corp.'s Q3 Quarterly Banking Profile report highlighted net bank income falling 8.6%, but also showed slow delinquency growth in commercial real estate and core income metrics improving across the banking sector.
Finally, a significant challenge in the current regulatory landscape is the frequent use of the examination process, informal guidance and enforcement actions to impose new requirements on financial institutions. This approach, while effective for regulators, can create significant burdens for banks.
For example, in the realm of anti-money laundering, regulators often issue informal guidance or enforcement actions that establish new expectations for banks. This lack of transparency and consistency can make it difficult for banks to comply with regulatory requirements and can, and often does, lead to severe penalties.
To address these challenges, regulators should adopt a more transparent and predictable approach to supervision. By formalizing supervisory expectations through clear and specific regulations, regulators can reduce uncertainty and provide a level playing field for financial institutions. Additionally, decoupling the advancement of supervisory expectations from the examination and enforcement process can mitigate the risk of unintended consequences and promote a more collaborative regulatory environment.
The current regulatory landscape presents opportunities for significant modernization. In future articles, I will delve deeper into specific proposals for enhancing regulation, supervision, and mergers and acquisitions processes. It's important to recognize, as most do, that we have dedicated banking agencies and talented supervisors. However, the current framework often leads to inconsistencies in regulatory oversight. For example, there is something inherently wrong when supervision rights and wrongs vary depending upon the supervisor in charge or the area of the country in which supervision is applied.
Bottom line: It is incumbent upon every new administration and/or agency head to modernize the bank regulatory framework. With both houses of Congress and the executive branch changing, now is a particularly good time to turn serious attention to this effort.
