Sunday, July 16,
2017 09.29 PM / by Sidley Austin LLP / ILO
June 12 2017, just days after the House of Representatives passed the Financial
CHOICE Act – a bill to repeal and replace many of the banking reforms
implemented by the Dodd-Frank Wall Street Reform and Consumer Protection Act –
the Treasury Department released its long-awaited report to reform the US
financial system. The report is entitled "A Financial System That
Creates Economic Opportunities: Banks and Credit Unions".
includes dozens of recommendations to reform "laws, treaties, regulations,
guidance, reporting and record keeping requirements, and other Government
policies" that inhibit federal regulation of the US financial system in a
manner consistent with the set of core principles enunciated by President Trump
in Executive Order 13772, issued on February 3 2017.
most cases, the report's recommendations are more modest than the CHOICE Act's,
and many of the report's recommendations require action only by the federal
financial regulatory agencies.
seems to be an acknowledgement that legislative change will be challenging,
while regulatory action will be more achievable. Trump and the
Republican-controlled Senate will have the opportunity to reshape the leadership
at the financial regulatory bodies. Even if the independent chairs serve their
full terms, every leader's term expires during the current Congress. Trump will
nominate and the Republican-controlled Senate will confirm their replacements.
Nonetheless, if the changes recommended by the report were implemented in full
or in large part, they would represent a significant overhaul of the
post-Dodd-Frank bank regulatory framework.
though enacting legislation to amend Dodd-Frank will be difficult, there may be
room for compromise related to the oversight of mid-sized and regional banks.
In comments after the report's release, both Senator Mike Crapo, chairman of
the Senate Committee on Banking, Housing and Urban Affairs, and Senator Sherrod
Brown, the committee's ranking Democratic member, focused on better tailoring
standards and rules. Crapo said he was "very encouraged" by the
report as it "includes reasonable and meaningful recommendations to the
existing, and all too often, one-size-fits-all regulatory landscape".
Brown slammed "proposals to weaken oversight of the biggest banks",
but he expressed hope that "there is room for agreement on a modified
regime for overseeing regional banks", including related to stress tests and
This chart outlines the
similarities and differences between the CHOICE Act and the report, which is
After setting out a series of economic, market and regulatory justifications
for the reform recommendations to follow, the 147-page report summarises the
Treasury's "significant areas" for reforming the regulatory framework
for the depository sector as:
the U.S. regulatory structure";
capital, liquidity, and leverage standards";
credit to fund consumers and businesses to drive economic growth";
community banks and credit unions to thrive";
American interests and global competitiveness";
the regulatory engagement model";
use of regulatory cost-benefit analysis"; and
foreign investment in the U.S. banking system".
As to reforms in regulatory structure, the report provides specific
recommendations for Congress to:
regulatory fragmentation and overlap;
that the Financial Stability Oversight Council (FSOC) assign a lead
regulator as a primary regulator where jurisdictions overlap; and
the structure and mission of the Office of Financial Research (OFR),
making it a non-independent agency of the Treasury.
The report seeks harmonisation of cybersecurity efforts by the federal and
state financial regulatory agencies.
The report next addresses capital and liquidity issues at banks and their
holding companies. The report requests that Congress and the federal financial
- tailor Dodd-Frank
Act Stress Test, Comprehensive Capital Analysis and Review, liquidity
coverage ratio, single-counterparty credit limits stress-testing and
enhanced prudential standards (EPS) to the larger institutions;
regulatory burdens and improve transparency;
the US implementation of international regulatory standards affecting
globally systemic important bank risk-based charges and total
loss-absorbing capacity; and
the Basel Committee capital standards.
report recommends less frequent stress-testing cycles, improved transparency of
the testing process and that the EPS be applied based on the complexity of the
institution. It also suggests that Congress provide a "regulatory
off-ramp" for banks that elect to be highly capitalised from the liquidity
and capital requirements, and aspects of Dodd-Frank's EPS and Volcker Rule
The report makes several recommendations targeted at easing consumer credit
regulations. They include:
the capital regimes of community banks;
the Federal Reserve's asset threshold for small bank holding companies;
community development financial institution and minority depository
institution banks greater flexibility with their capital structure, easing
stress-testing and capital regulations on national credit unions; and
the dollar threshold for when stress-testing applies to credit unions.
report also proposes a number of changes that would reduce the reporting,
examination and de
novo banking application process requirements for this class
As to the regulatory engagement model, the report seeks to address a number of
the frequent and virtually unanimous complaints that bank management and boards
of directors have made over the years. Importantly, it recommends a review of
the extent to which the regulatory framework and requirements have created an
imbalance in the relationship between the regulators, the banks' boards of
directors and bank management. For example, in response to concerns about
regulatory and compliance requirements diverting bank board of directors'
attention from their principal roles of governance, oversight and strategy, the
report emphasises cost-benefit analyses with respect to proposed regulations
and a review of the volume and nature of matters requiring attention and
matters requiring immediate attention and consent orders to avoid overlap and
inconsistency among agencies. Finally, the report recommends a comprehensive
assessment of the supervisory and regulatory framework of the Community
Reinvestment Act and better alignment of the regulatory oversight of Community
Reinvestment Act activities with community investments. The report indicates
this Community Reinvestment Act review is a "high priority" for the
Consistent with other recommendations, the report suggests:
the threshold for the living wills requirement in Dodd-Frank to match the
revised threshold for EPS;
the living will process to a two-year cycle; and
the guidance that is provided by the regulators for the submission and assessment
of the living wills.
the report would remove the Federal Deposit Insurance Corporation from the
living will process altogether and impose a time limit of six months on the
Federal Reserve to review and provide feedback to banks on their living wills.
For foreign banking organisations, the report recommends revising the
thresholds for EPS and living wills requirements to be based on a foreign
banking organisation's US risk profile and not its global consolidated assets.
It also recommends raising the threshold for intermediate holding companies to
comply with US Comprehensive Capital Analysis and Review and recalibrating
other intermediate holding companies' regulatory standards, including
resolution planning, liquidity and total loss-absorbing capacity.
Rather than repeal the Volcker Rule in its entirety, the report would exempt
banks with $10 billion or less in assets and banks with greater than $10
billion in assets from the proprietary trading prohibitions of the Volcker Rule
if they are not subject to the market risk capital rules. The report asks
their guidance and enforcement of the Volcker Rule;
the 60-day rebuttable presumption from the definition of 'proprietary
eliminating the purpose test from that definition;
flexibility for market making;
the burden of hedging risk under the Volcker Rule;
the burden of Volcker Rule compliance regimes;
the covered funds restrictions; and
an 'off-ramp' for well-capitalised banks.
The report would subject the director of the Consumer Financial Protection
Bureau (CPFB) to at-will removal by the president or a restructuring of the
entire agency as an independent multi-member commission. The agency would be
funded by congressional appropriation rather than through the Federal Reserve
and subject to Office of Management and Budget apportionment. The report
recommends a number of actions that would limit the CFPB's mandate and its
The report cites a number of recommendations for reformation of the mortgage
loan origination, mortgage serving and private sector mortgage market-making
activities. It also recommends the reissuance of the regulators' leveraged
lending guidance for public comment, and various simplifications of the
small-business lending process.
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