This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.
Bank regulators ease capital rules. The three main federal bank regulatory agencies have issued new simplified regulatory capital rules, finalizing a plan first proposed in 2017. The changes jointly announced by the Fed, FDIC and OCC on July 9 apply only to banks that do not use the "advanced approaches" framework for calculating their capital requirements, generally those with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure. Under the final rule, those banking organizations will be subject to simpler regulatory capital requirements for mortgage servicing assets, certain deferred tax assets arising from temporary differences, and investments in the capital of unconsolidated financial institutions than those currently applied. Non-advanced approaches banks would also have a simplified calculation for the amount of capital issued by a consolidated subsidiary and held by third parties (i.e., minority interest) that can be included in regulatory capital. The agencies said that revisions to the definition of high-volatility commercial real estate exposure in the capital rule will be addressed in a separate rulemaking. The final rule was issued as part of a March 2017 report to Congress pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 in which the three agencies committed to meaningfully reduce regulatory burden, especially on community banking organizations.
Community banks exempted from Volcker Rule. Five federal financial regulators have adopted a final rule to exclude community banks from the Volcker Rule, consistent with the banking deregulation law enacted last year. The final rule, announced on July 9, exempts community banks with up to $10 billion in total consolidated assets, and trading assets and liabilities of five percent or less of total assets, from having to comply with Volcker, which generally prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds or covered funds. Named for the former Fed chairman who had championed the measure, the original Volcker Rule is spelled out in section 619 of Dodd-Frank. But under Section 203 of the Economic Growth, Regulatory Relief, and Consumer Protection Act – the Dodd-Frank partial rollback that became law in May 2018 – smaller banks were exempted. Consistent with Section 204 of the Dodd-Frank rewrite, the final rule also permits a hedge fund or private equity fund, under certain circumstances, to share the same name or a variation thereof with an investment adviser as long as the adviser is not an insured depository institution, a company that controls an insured depository institution, or a bank holding company. The final rule was issued jointly by the Fed, FDIC, OCC, CFTC and SEC.
Fed's Quarles: revised stress capital buffer proposal to be ready in the 'near future.' In what could amount to one of the most major revisions to the post-crisis stress testing program, Randal Quarles, Federal Reserve vice chair for supervision, announced that the Fed will finalize a revised stress capital buffer (SCB) "in the near future." In a July 9 speech at a conference sponsored by the Federal Reserve Bank of Boston, Quarles said the simplified new metrics for assessing a bank's capital adequacy could be in place in time for next year's stress tests. Following an overview of how the stress test regime has evolved over the past decade, Quarles laid out recent and proposed changes to the Comprehensive Capital Analysis and Review (CCAR) intended to make the process "more transparent and simple and to feature less unnecessary volatility." He pushed back against criticism that the Fed's "proposed changes to stress testing amounts to providing banks with the answers to the tests," arguing that, "Like a teacher, we don't want banks to fail, we want them to learn." The SCB would replace the current methodology requiring banks to achieve minimum targets measuring capital strength with what Quarles described as a simpler and more tailored, though still stringent, framework where banks would "be held to a single, integrated capital regime" and that regulators could average the test results from previous years. "By my math, the number of different capital requirements applicable to large banks would fall from 18 to eight and the number of different total loss absorbing capacity requirements for large banks would fall from 24 to 14," Quarles said.
President announces new Fed nominees. President Trump has announced his intention to nominate Christopher Waller, executive vice president at the Federal Reserve Bank of St. Louis, and Judy Shelton, an economic adviser to the president's 2016 campaign, to the Federal Reserve Board of Governors. In two tweets issued on July 2, Trump made known the names of his planned nominees to fill the two remaining vacant seats on the Fed Board. Three of the president's four previous candidates for the two slots have had to withdraw their names from consideration after facing opposition in the Senate, while one previous nominee got as far as approval by the Senate Banking Committee but then languished without receiving a vote in the full Senate during the previous session of Congress. Both Shelton and Waller have recently expressed support for cutting interest rates, a key priority for the president and a stance that has put him at odds with the Fed's more cautious approach, although Fed Chairman Jerome Powell has recently indicated that the central bank could be moving toward lowering rates. Shelton – who has been a strong proponent of returning the US to the gold standard – had criticized the Fed for cutting interest rates during the financial crisis, but now favors lower rates. Waller was the only member of the rate-setting Federal Open Market Committee to vote for an interest rate cut at the Fed's June meeting. Shelton has already been vetted and received Senate confirmation as the US member of the board of directors of the European Bank for Reconstruction and Development. Waller has worked at the St. Louis Fed since 2009, and previously was a chair of economics at the University of Notre Dame and a chair in macroeconomics and monetary theory at the University of Kentucky. Key Senate Republicans who opposed Trump's previous candidates for the board have indicated that they are more inclined to support Shelton and Waller.
- In the July 10 testimony before the House Financial Services Committee, Fed Chairman Powell expressed his opposition to a return to the gold standard, the policy stance for which Shelton has received significant attention, though he sought to minimize potential friction with the president's proposed nominee. "I don't share that view, but I would never comment on the views or any particular nominee," Powell said in response to a question from a Democratic committee member. "We do not play a role in the nomination process. It's totally up to the president and the Senate in that, and we are just completely on the sidelines there."
- Amid persistent reports that Powell's own position may be in jeopardy, Larry Kudlow, the director of the White House's National Economic Council, said of Powell in a July 2 CNBC interview that "at the present time, yes, he's safe" and that there is "no effort to remove him." Kudlow also indicated that he played a leading role in the search for candidates to fill the two open Fed Board seats.
- Lawmakers from both parties and both congressional chambers praised Powell for his independence during his semiannual monetary policy testimony before the House Financial Services Committee on July 10 and the Senate Banking Committee the following day.