This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.
- SF Fed's Williams seen as likely next NY Fed president: Amid reports that John Williams, current president and CEO of the Federal Reserve Bank of San Francisco, is the frontrunner to replace William Dudley as chief of the New York Fed, some progressive and labor groups are calling for a more open selection process, a tougher regulatory agenda and more diversity in the Fed's top posts. In a March 16 New York Fed Presidential Search Update, Sara Horowitz and Glenn Hutchins, Co-Chairs of the Presidential Search Committee, said their list has narrowed down to a "handful" of candidates. With published reports identifying Williams as the leading candidate, Senator Elizabeth Warren (D-MA) called for the co-chairs to testify before the Senate Banking Committee "about [Williams's] qualifications and the process that led to his selection." Williams has led the Fed's 12th District bank in San Francisco since 2011 (succeeding Janet Yellen). The New York Fed presidency is among the nation's most powerful financial sector positions, with a permanent vote on the Federal Open Market Committee and oversight of financial markets and Wall Street firms. The post does not require Senate confirmation.
- Who is John Williams? Expert in monetary policy, interest-rate dove: John Williams began his career in 1994 as an economist at the Fed's Board of Governors, earned his PhD in economics at Stanford University – where he still teaches – and his master's from the London School of Economics, and he has served as senior economist at the White House Council of Economic Advisers. His research focuses on monetary policy under uncertainty, innovation and business cycles. His support for gradual interest rate hikes in the short term puts him in the current Fed mainstream, but he has been a proponent of keeping a relatively low interest rate for the economy in the long run. Learn more about Dr. Williams.
- House and Senate not yet together on regulatory reform: House Financial Services Committee Chairman Jeb Hensarling (R-TX) called on the Senate to negotiate with the House on a "bucket of bipartisan bills" the lower chamber has passed over the last several months. As noted in our previous issue, the House and Senate will need to hold a conference committee to reconcile their differing legislative approaches to rolling back Dodd-Frank if banking regulatory reform is to be enacted this year. Appearing on CNBC on March 28, Hensarling said, "the bill that the Senate passed – which is sitting on the Speaker's desk – is going to remain on the Speaker's desk until and unless the Senate negotiates." Senate Banking Chairman Mike Crapo (R-ID) has said "there are and there will be" discussions with House lawmakers.
- A flurry of House regulatory reform bills: While the March 14 passage of the Senate's bipartisan banking regulatory legislation grabbed most of the headlines last month, the House continued to move a series of stand-alone bills that could figure in a final version of a banking regulatory package. On March 20, the House passed the Alleviating Stress Test Burdens to Help Investors Act (HR 4566) – to amend "one-size fits all, bank-centric capital-based stress testing requirements for nonbanks, such as mutual funds" – with broad bipartisan support, 395-19. And on March 21, the Financial Services Committee approved bipartisan proposals to consolidate the Fed's power over the Volcker rule and exempt smaller banks from it (HR 4790), relax bank capital requirements under the supplementary leverage ratio by changing the treatment of margin posted for cleared derivatives (HR 4659), ease bank capital requirements related to non-cleared derivatives (HR 5323) and allow banks to offer deposit advance loans by repealing a 2013 FDIC guidance, while exempting banks from the CFPB's payday lending rule (HR 4861).
- Powell "fully prepared" to scrutinize banks below $250B: Fed Chair Jerome Powell said that if Congress raises the asset threshold for mandatory application of enhanced prudential standards, the Federal Reserve is "fully prepared" to subject some banks below that threshold to heightened regulation. The Senate's banking bill raises the SIFI threshold for automatic application of enhanced prudential standards from $50 billion in assets to $250 billion, while giving the Fed some flexibility to extend those standards to banks with between $100 billion and $250 billion in assets. The legislation calls for supervisory stress tests on a "periodic" basis, instead of annually for banks in that range, but Powell said the Fed has not determined how that term would be applied.
- Unintended consequence of living wills? Outgoing FDIC Vice Chairman Thomas M. Hoenig criticized the resolution plan, or living will, process under Dodd-Frank, warning that it "may be having the unintended result of institutionalizing" the Too-Big-to-Fail effect. Calling it a candidate for regulatory relief, Hoenig said the "living will process is cumbersome, political, and misleading." In a March 28 speech to the Peterson Institute for International Economics in Washington, he noted that large banks "have adopted single point of entry (SPOE) as a resolution strategy," which "has the effect of signaling that creditors of operating units will be able to get out of their position, which effectively is a bailout." Saying that large banks should be subject to bankruptcy, Hoenig called for "a clear expectation that private ownership and substantial private capital, not taxpayer funding, will minimize the likelihood of crisis and its effects should it occur."
- Should bank execs be on the hook for regulatory fines? Outgoing New York Fed President William Dudley suggested that one way to improve banking culture is to make senior management bear some of the burden when their institutions are fined by regulators. In remarks before the US Chamber of Commerce on March 26 titled "The Importance of Incentives in Ensuring a Resilient and Robust Financial System," Dudley said, "It doesn't seem fair or prudent to shield the decision-makers from responsibility for costly breakdowns as much as they are now," adding that exposure to such liability "would lead senior managers to encourage their staff to speak up earlier about emerging risks, be more attentive when red flags are raised and respond sooner and more forcefully." Dudley also suggested conducting an independent survey of bank employees with anonymous results to learn more about the cultures within companies and establishing a registry of bankers fired for misconduct to help prevent other banks from unwittingly hiring them.
- Quarles calls for CRA changes: Randal Quarles, the Fed's vice chairman for supervision, said changes to the Community Reinvestment Act may be necessary due to the rise of fintech firms, as well as industry consolidation. In a March 26 speech to the HOPE Global Forums Annual Meeting in Atlanta, Quarles said technological and structural developments have led to changes in how banks lend in communities, including the low- and moderate-income communities where CRA is intended to promote financial inclusion, driving calls for regulators to modernize the CRA.