Congress Passes New Banking Legislation to Reduce Regulatory Burden

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This post is part of a series titled “Supervising Our Nation’s Financial Institutions.” The series, written by Julie Stackhouse, executive vice president and officer-in-charge of supervision at the St. Louis Federal Reserve, appears at least once each month.

Last month, President Donald Trump signed into law “The Economic Growth, Regulatory Relief and Consumer Protection Act.” Billed as significant regulatory relief for banks by some—and not enough regulatory relief by others—the new law calibrates a massive piece of banking legislation enacted after the 2007-08 financial crisis. That law is the Dodd-Frank Act (the Act).

The Reason for Dodd-Frank

Major goals of the Act included:

• Improving the resiliency of the financial system
• Reducing the likelihood that the federal government (and thus taxpayers) would someday again be in the position of rescuing faltering large financial institutions

Among the many provisions in the Act are requirements for enhanced safety and standards for large banking organizations. In short, these enhanced standards raise the bar for banking firms with more than $50 billion in assets, creating strong incentives to strengthen capital and liquidity, among many things.

Legislators, regulators, bankers and others have gained experience with the legislation, its costs and benefits in the near decade since the Act’s enactment. Therefore, it is not surprising that Congress decided recently to modify provisions of the Act where the costs seemingly outweighed the social benefits.

Relief for Banks Big and Small

Most news coverage of the law has focused on the raising of the $50 billion threshold for many enhanced standards to $250 billion. For institutions with assets of $50 billion to $100 billion, exemption from these standards is immediate. Institutions with assets of more than $100 billion will be exempt from most standards in 18 months; however, the Federal Reserve will continue to conduct capital stress tests of these institutions on a periodic basis.

The law also provides some regulatory relief for community banks. See https://www.congress.gov/bill/115th-congress/senate-bill/2155 for a complete summary of the new law’s provisions.

A Potential Simplified Capital Standard

The simplified standard will be available only to community banks with assets of less than $10 billion that also meet any other criteria established by regulators. The capital standard will be in the form of a leverage ratio and will be set between 8 and 10 percent.

Volcker Rule Exemption

This would apply to institutions with less than $10 billion in total consolidated assets and total trading assets and liabilities of less than 5 percent of total consolidated assets.

The purpose of the Volcker Rule is to eliminate unsafe “proprietary trading,” where a firm trades for simple corporate profit opportunities and not at the instruction of customers or to reduce other firm risks. The Volcker Rule has proven exceptionally difficult to implement, and small banks will no longer be concerned about how it might affect their normal banking operations.

Reduced Reporting

There is also a reduction in the number of items reported on first- and third-quarter balance sheets/income statements for qualifying banks with consolidated assets of less than $5 billion. This provision is intended to reduce lower-value paperwork.

Less Frequent Safety and Soundness Exams

Banks with less than $3 billion in assets would experience less frequent safety and soundness examinations. Today, banks with assets of between $1 billion and $3 billion are examined every 12 months. This provision of the legislation will increase that mandate to 18 months.

Reduced Cost of Mortgage Lending

Small banks gain more flexibility in making mortgages and filing reports on them. For example, banks that originate a relatively small number of mortgages will no longer be required to submit expanded Home Mortgage Disclosure Act data.

These provisions provide practical tweaks to reduce the cost of mortgage lending to small banks while remaining consistent with safe and sound banking practices and fair lending.

A Delicate Balancing Act

The Dodd-Frank Act was an important piece of legislation that has served to improve the safety of the financial system over the past eight years. But safety must be balanced with costs, and the provisions of the new legislation attempt to achieve this balance.

Although some in the industry might desire more burden reduction, the provisions of the new regulatory reduction law move us closer to meeting that goal.

Notes and References

¹ See https://www.congress.gov/bill/115th-congress/senate-bill/2155 for a complete summary of the new law’s provisions.

Additional Resources

• On the Economy: Can Anyone Own a Commercial Bank?
• On the Economy: The Community Reinvestment Act’s History and Future