As the first anniversary of the Trump administration fast approaches, we decided to take a quick look at where matters stand on financial services reform.
This is what we see at the present time:
On the congressional front, we have not been optimistic about the general prospects for changes to the Dodd-Frank Act or other financial reform legislation. But Senate Banking Committee Chair Mike Crapo and several Banking Committee Democrats on November 13 announced a bipartisan agreement in principle on the outlines of targeted “economic growth” legislation. The new proposal would, among other things, raise the current Dodd-Frank Act $50 billion asset threshold for a bank to be treated as “systemically important”—and therefore subject to more stringent Dodd-Frank systemic regulation—to $250 billion. The proposal also contains other “community bank relief” measures, including an exemption from the Volcker Rule for banking organizations with less than $10 billion in assets and limited trading assets. As is generally the case these days, prospects for further action on this proposal are uncertain, with progressive members of Congress already beginning to speak out against it. The fact that the proposal has (some) bipartisan support, however, may give this initiative the “legs” that prior congressional initiatives such as the Financial CHOICE Act never really had.
In addition, the House Financial Services Committee is in the process of marking up a number of financial services reform bills that address a more ambitious range of subjects—including mortgage financing and disclosures, stress tests, the authority of the Financial Stability Oversight Council to designate systemically important financial market utilities, clarifying the “valid when made” principle for bank loan interest rates, and various restrictions on the Federal Reserve’s emergency lending authority. That said, limited (or targeted) legislative changes in the nature of the November 13 Senate Banking Committee proposal discussed above are more likely what we can expect, if anything, on the legislative front for the foreseeable future.
Federal Banking Agency Action
In turn, it may be up to the federal banking agencies to advance the ball on financial reform, albeit within the boundaries of what the agencies can do in the absence of enabling legislation. Two presentations given at The Clearing House annual banking conference last week by new Federal Reserve Board Governor and Vice Chair for Supervision Randal Quarles and acting Comptroller of the Currency Keith Noreika, respectively, as well as a November 14 speech given to the Brookings Institution Center on Regulation and Markets by Federal Deposit Insurance Corporation (FDIC) Chair Martin Gruenberg, may provide some insights into what the agencies are prepared to do on the reform front.
Governor Quarles’ remarks, given during a lunchtime “conversation” and question-and-answer session, were his first public remarks on financial reform since his Senate confirmation. He said that the Federal Reserve Board should take “a fresh look” at all aspects of the current regulatory structure, stating that the Federal Reserve Board should be more transparent on regulatory and supervisory activities such as stress-testing. Although Mr. Quarles’ remarks had a deregulatory tilt, his overall support for the current framework of financial regulation does not suggest that any radical change in course on financial regulation is in the offing from the Federal Reserve Board perspective.
Acting Comptroller Noreika, however, plainly would like to do more. In his remarks the day after Mr. Quarles’ lunchtime session, Mr. Noreika proposed a reexamination of the separation between banking and commerce. Putting aside Mr. Noreika’s acting status and the not inconsiderable merits of his thesis (based in part on a discussion of the motivations behind the Glass-Steagall Act of 1932, which first codified the separation of banking and commerce), his statements probably fall more into the aspirational rather than attainable category, given the current political climate and the Federal Reserve Board’s historical primary role in policing the banking-commerce divide. Mr. Noreika also remarked that the financial regulatory agencies are making progress in developing proposed changes to the Volcker Rule that might be announced in the spring of 2018. Any such changes, however, would require agreement among the five federal regulatory agencies that administer the Volcker Rule, which, even under the best of circumstances, is a challenging task.
By the same token, it appears that FDIC Chair Gruenberg would prefer an even more cautious approach to financial reform. Warning against the dangers of becoming complacent about the risks facing the financial system, Mr. Gruenberg noted that the post-financial crisis legislative and regulatory reforms were “strongly in the public interest” and that he would not change the core prudential reforms put into place, although he acknowledged that the large body of post-crisis regulation could benefit from review, streamlining, or simplification. Mr. Gruenberg’s term as FDIC chair is expiring, and we do not know how much longer he will stay in his position, but we would not look for any material change in the FDIC’s views on financial reform in the short term.
There clearly is continuing interest in financial services reform at the congressional, executive, and regulatory agency levels. In addition to the developments noted above, the US Department of the Treasury recently issued two reports on capital markets and asset management and insurance reform.
The persistent question, however, is whether there will be a confluence of the necessary political and regulatory circumstances—meaning primarily, in our view, a willingness of the interested players to cooperate meaningfully with one another—to bring about change. We are not sure that there is, but for the time being, we will keep our expectations modest and our outlook cautiously optimistic.