On Tuesday October 2, leaders of the federal prudential regulators testified before the Senate Committee on Banking, Housing, and Urban Affairs (“Banking Committee”) on their agencies’ efforts to implement the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA” or the “Act”). All of the regulators expressed support for the goals of EGRRCPA, particularly with respect to tailoring regulations, and highlighted the steps being taken to implement the law.
The witnesses at the hearing were: Joseph Otting, Comptroller, Office of the Comptroller of the Currency (“OCC”); Randal Quarles, Vice Chairman for Supervision, Board of Governors of the Federal Reserve System (“FRB”); Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation (“FDIC”); and J. Mark McWatters, Chairman, National Credit Union Administration (“NCUA”).
This post summarizes below, as highlighted in the witnesses’ testimony:
- some of the key steps these agencies have taken to implement the Act, which include the release of a number of proposed and interim final rules; and
- the steps the agencies intend to take next, including tailoring enhanced prudential standards for larger bank holding companies (“BHCs”).
Summary of Implementation of EGRRCPA Thus Far
Each of the witnesses summarized the steps their agencies have already taken to implement the Act. Some key examples include:
- Interagency Statement. Shortly after the passage of the Act, the FRB, OCC, and FDIC (collectively, the “Banking Agencies”) issued an interagency statement describing the positions the agencies intended to take in the interim between passage of the law and when they finalized new regulations. Among other things, this statement clarified that the Banking Agencies would no longer require depository institutions with less than $100 billion in assets to conduct company-run stress tests, and also would not enforce the Volcker Rule against institutions covered by the in-effect rule, but which have been exempted from its coverage under the Act. The FRB issued a separate statement at the same time that addressed the inapplicability of enhanced prudential standards to BHCs with less than $100 billion in total consolidated assets and other matters.
- Covered Savings Associations. As we discussed in detail in a previous post, the OCC released a proposed rule on September 10 to implement section 206 of the Act, which permits a federal savings association with total consolidated assets of $20 billion or less as of December 31, 2017, to elect to operate as a “covered savings association.” A covered savings association would have the same rights and privileges as a national bank that has its main office situated in the same location as the home office of the covered savings association.
- HVCRE Loans Capital Treatment. We also previously explained in detail the Banking Agencies’ proposed rule, released on September 18, to implement section 214 of the Act. The proposed rule provides regulatory relief in the form of changes to the capital treatment of certain high-volatility commercial real estate (“HVCRE”) loans.
- Small BHC Policy Statement. The FRB released an interim final rule on August 28 to implement section 207 of the Act. The rule revises the FRB’s policy statement on small BHCs to raise from $1 billion to $3 billion the asset threshold at which BHCs can permissibly incur higher debt levels than would otherwise be allowed.
- Municipal Securities HQLA Treatment. The Banking Agencies also issued an interim final rule on August 22 to implement section 403 of the Act. The interim final rule amends the agencies’ liquidity coverage ratio rule to treat municipal securities that are “liquid and readily-marketable” and “investment grade” as high-quality liquid assets (“HQLA”).
- Extended Examination Cycles. The Banking Agencies issued an interim final rule on August 23 to implement section 210 of the Act, which generally allows qualifying insured depository institutions and branches and agencies of foreign banks with less than $3 billion in total assets to move from the standard 12-month examination cycle to an extended 18-month examination cycle. Previously, only institutions with less than $1 billion in total assets were eligible for the extended cycle.
- Reciprocal Deposits. The FDIC (working through the Federal Financial Institutions Examination Council) revised the Call Report Instructions for the quarter ending June 30, 2018, to reflect that reciprocal deposits may be excluded from brokered deposits, and on September 13, 2018, the FDIC proposed appropriate changes to its brokered deposit rule.
Next Steps in Implementing EGRRCPA
The witnesses further explained that the agencies are continuing to move forward in implementing other parts of the Act. For example:
- Tailoring of Enhanced Prudential Standards. The Act generally exempts BHCs with under $250 billion in total assets from enhanced prudential standards under the Dodd-Frank Act, with the caveat that the FRB could re-impose enhanced standards on a BHC with between $100 billion and $250 billion in total assets to prevent or mitigate risks to financial stability or to promote safety and soundness of the company. While the FRB has already stated that these standards no longer apply to institutions with assets below $100 billion, the FRB is still in the process of tailoring regulations for BHCs with assets between $100 billion and $250 billion. Vice Chairman Quarles’ testimony emphasized that the FRB’s “highest priority” is issuing such a proposed rule. More generally, Vice Chairman Quarles again asserted the need to use factors other than asset size in tailoring regulations. This approach has previously proved controversial with some Senate Republicans, who believe the presumption should be that enhanced standards do not apply to BHCs with assets below $250 billion.
- Community Bank Leverage Ratio. The Banking Agencies are working on regulations to exempt institutions that exceed a “community bank leverage ratio” and engage only in traditional banking activities from the risk-based capital requirements. According to Vice Chairman Quarles, this issue is a “high priority,” and he expects a proposal to be issued “in the very near future.”
- Tailoring of Regulations for Large BHCs. The FRB is also reviewing its application of enhanced prudential standards for BHCs with assets of $250 billion or more that do not qualify as global systemically important banks (“G-SIBs”), with an intention to further tailor regulations to the risk profile of firms.
- Custodial Bank SLR. The Banking Agencies are working on regulations to revise the supplementary leverage ratio (“SLR”) requirements that apply to the largest U.S. banking organizations engaged in custody, safekeeping, and asset servicing activities. Consistent with the requirements of the Act, these regulations would generally exclude funds of a custodial bank that are deposited with a central bank from the custodial bank’s SLR calculation.
- Short Form Call Reports. The Banking Agencies are also working on regulations, which, according to FDIC Chairman McWilliams, will be issued for comment “in the very near term,” to reduce the reporting requirement in first and third-quarter Call Reports for institutions with less than $5 billion in total assets and that satisfy certain other criteria.