Today, non-U.S. banks encounter a variety of challenges when operating and investing in the U.S. Principal among these are capital treatment, anti-money laundering and sanctions rule enforcement, and a regulatory climate where foreign banks believe, with some justification, they face harsher scrutiny from U.S. regulators. For U.S. banks, the regulatory framework is overly burdensome, particularly concerning sensible levels of equity investments. After all, investments like loans are the primary financing tools for businesses and job creation, and it is far from clear that prudently managed equity investments, made in reasonable proportions, pose a greater risk than lending.
For some time, I have advocated that both the domestic and foreign banking industries present their most-compelling proposals for comprehensive amendments to the regulatory rule books and to supervisory practices to bank regulators. The objective is to enhance the effectiveness of these frameworks in ensuring safety and soundness and compliance while significantly reducing the regulatory burden. This should be followed by a collaborative effort between regulators and banks to develop an agreed-upon set of refined rules and regulations. When legislative changes are necessary, regulators and bankers should jointly approach Congress with a well-prepared legislative package. Given the current administration's stated objectives, this moment presents an ideal opportunity for such progress.
Chief among the changes should be a much more collaborative effort between government agencies, including law enforcement and bank regulators, and the industry to enhance information sharing and efforts to more-effectively combat AML and improve sanctions enforcement. Currently, I fear too much effort is placed on catching and penalizing banks for errors, rather than vigorously pursuing and prosecuting the money launderers and sanctions violators themselves. Furthermore, the capital rules need to be simplified and refined, and the Federal Reserve's Comprehensive Capital Analysis and Review should either be eliminated and/or refocused from primarily concentrating on capital charges to becoming a program designed to identify and minimize tail risk dangers.
Banks should be permitted to make equity investments up to an agreed-upon percentage of assets, a level unlikely to pose serious safety and soundness risks. This investment portfolio should be subject to maximum flexibility and a modest, non-excessive degree of agency scrutiny. Similarly, banks should be allowed to make character loans up to a set amount of assets, with agreed-upon rules to prevent illegal discrimination, intended or not. Properly administered, this loan portfolio can lower bank costs and, importantly, extend the bank's ability to safely make smaller-dollar loans to small businesses and middle- and lower-income Americans.
As President Donald Trump's tariffs whipsaw bank shares and threaten recession, the House Financial Services Committee chairman told a large room of bankers that efforts like repealing the small business data collection rule and passing legislation to Congressionally appropriate the Consumer Financial Protection Bureau are among his priorities.
Governmental complications with respect to M&A activity should be modernized. Antitrust analysis should include nonbank financial activity, not just banks and bank activities. Regulatory time frames for approval should be enforced to allow for mergers within reasonable periods, ideally under a year, with a bias toward approval rather than prevention.
Regarding foreign banks, the banking agencies should ensure their standards and supervisory activity are no more stringent than those applied to domestically chartered banking organizations. Indeed, we should examine our banking rules to actively encourage foreign bank investment in the U.S.
As a practical matter, I would encourage foreign banks to move their global heads of AML and sanctions, and perhaps their entire compliance function, to the U.S. Because U.S. rules are globally the most stringent in these areas, experience has shown that banking organizations have an easier time complying with U.S. law when this is the case. This is my experience with several foreign banking organizations.
Finally, a point I want to emphasize is the creation of effective and active mechanisms for informal and formal bank-initiated reviews of regulatory and supervisory practices. This is crucial where the bank believes errors have occurred, including errors in judgment or fairness. While I have great respect for our bank regulators and supervisors, acknowledging their talent and dedication, we are all human. And we all benefit when our work is subject to critical examination and review.
With an administration signaling a willingness to rethink longstanding regulatory norms, this moment presents a meaningful opportunity to reshape the supervisory landscape. By making targeted reforms that enhance clarity, consistency and efficiency, policymakers can position the United States as a more attractive and competitive destination for both domestic and foreign financial institutions. In doing so, we not only foster a more dynamic and resilient financial system, but also unlock the potential for increased investment, innovation and job creation across the country.
