This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.

  • Banking bill to Senate floor this week: Debate on bipartisan banking regulatory reform legislation (S. 2155) is set to begin in the Senate the week of March 5. The bill's author, Senate Banking Chairman Mike Crapo (R-ID), is expecting "significant additions" to the current text of the bill and looking to maintain bipartisanship, though the measure has divided Democrats. House Financial Services Committee Vice Chairman Patrick McHenry (R-SC) told mid-size banking sector representatives on February 26 that the House will likely pass the Senate bill by the August recess. While House Republicans favor a broader Dodd-Frank rollback, McHenry recognized that the Senate was "at its limit" in terms of bipartisan buy-in, but said he is looking for the Senate to add some of the House proposals.
  • Powell's Capitol Hill debut – economic outlook "strong," interest rate increases to continue: In his first Congressional appearances as Chair of the Federal Reserve, Jerome Powell offered an upbeat assessment for continued growth in incomes and consumer spending as he presented the Semiannual Monetary Policy Report to the House Financial Services and Senate Banking committees on February 27 and March 1. The Federal Open Market Committee remains on track to continue its policy of gradually increasing interest rates, with at least three small rate hikes currently foreseen for 2018.
  • Powell offers assurances on Senate deregulation bill: Amid efforts by Banking Committee Republicans and Democrats to get him to endorse or otherwise comment on the implications of the legislation, Powell said its "most significant" provision is the raising of the Dodd-Frank threshold from $50 billion in assets to $250 billion, reducing the number of banks affected from 44 to 13. But Powell said the legislation would still allow for regulation of smaller banks involved in riskier activities, would not exempt foreign banks with less than $250 billion in US assets from stricter oversight and would not require any change to the Fed's intermediate holding company requirements for foreign banks. The bill gives the Fed discretion over how to conduct stress tests of banks with between $100 billion and $250 billion in assets. "Supervisory stress testing is probably the most successful regulatory innovation of the post-crisis era," Powell said, adding that "these institutions would continue to have meaningful, strong, regular, periodic stress tests, frequent stress tests."

  • Fed wants to "strengthen and protect" post-crisis rules: Powell told lawmakers that Fed officials want to "strengthen and protect" the "primary pillars of post-crisis financial regulation," citing high risk-based capital, high liquidity, stress testing and resolution. He stressed "transparency" with regard to the largest institutions and "tailored regulation" for community banks and other smaller institutions. Powell had been asked if he agreed with Fed Governor Randal Quarles, Vice Chairman for Supervision, who said the day before that the Fed was not aiming to relax regulations or reduce capital levels. In remarks February 26 before the National Association for Business Economists, Quarles stated, "We are not looking to significantly reduce the level of risk-weighted capital in the [banking] system. That has been a strength... a global competitive advantage, relative to the capital levels of non-US competitive institutions."

  • Powell defends Fed's payment of interest on reserves: House Financial Services Committee Chairman Jeb Hensarling (R-TX) challenged Powell about the Fed's payment of interest on excess bank reserves, which Hensarling described as usurping Congress' authority over credit allocation policies, adding that the Fed should stay "in their lane." While Powell left the door open to a return to the pre-financial crisis framework on guiding the federal funds rate, he maintained, "Our current approach seems to be working very well. It gives us control over rates, and the market seems to understand it."

  • Fed looking to fix eSLR: Powell also testified that the current calibration of the enhanced Supplemental Leverage Ratio was "not appropriate" and "went a little too far" and that the Fed was looking at ways to roll back the rule on backup capital to provide relief. He agreed with members of Congress that the leverage ratio is deterring institutions, particularly custody banks, from engaging in low-risk wholesale activities. Powell indicated that the Fed could tie the level of the eSLR, which applies to eight institutions deemed global systemically important banks, to their capital surcharge for being a G-SIB. The Fed and the OCC are preparing a proposed rule to implement the changes.

  • House votes to ease operational capital requirements: The House of Representatives on February 27 approved legislation (HR 4296) that would use a "methods-based approach" to modify operational capital standards, freeing up billions in capital currently locked up by limiting the imposition of risk capital requirements to a bank's current activities and businesses, and permitting adjustments to mitigate operational risk. House Republicans hope the measure, strongly supported by the banking industry but passed on a mostly party-line vote, will be among several free-standing provisions ultimately included in the banking regulatory reform bill working its way through the Senate.

  • Treasury releases OLA report: The Treasury Department on February 21 released recommendations on the Orderly Liquidation Authority and bankruptcy reform, calling for a new chapter 14 of the Bankruptcy Code for large, distressed and interconnected financial companies. The recommendations include eliminating the FDIC's authority to treat similarly situated creditors differently on an ad hoc basis; repeal of the tax-exempt status of the bridge company; under the Orderly Liquidation Fund, guarantees of private sector lending to be used as opposed to direct loans, and that premium rates of interest or guarantee fees be charged; and reforms to the OLA judicial review provisions. Treasury Secretary Steven Mnuchin said the recommendations ensure that taxpayers are protected by strengthening the bankruptcy procedure for a failed financial company and retaining OLA in very limited circumstances with significant reforms. But Chairman Hensarling faulted the report for not recommending repeal of OLA, rendering it "inconsistent" with President Trump's core principle on bailouts.

  • State bankers associations call for end to credit unions' tax-exempt status: A coalition of bankers associations from all 50 states and Puerto Rico said Congress missed an opportunity to reform the "outdated and increasingly wasteful tax advantages enjoyed by the most aggressive credit unions" when it passed the Tax Act in December. In a February 20 letter to Senate Finance Committee Chairman Orrin Hatch (D-UT), the bankers said the exemption – valued at $2.9 billion this year – creates a "market distortion where the tax code effectively subsidizes one financial services entity (the largest credit unions) over another (the smaller community bank)." Hatch had previously written to the National Credit Union Administration expressing concern that credit unions may be operating beyond their original tax-exempt mission by engaging in many of the same activities as taxable banks, and seeking information on oversight within the sector.

  • GAO says CFPB should review mortgage disclosure guidance: The Government Accountability Office said in a February 13 report that the Consumer Financial Protection Bureau should review its guidance on mortgage disclosure regulations and make sure its requirements are understood by bankers. At the request of House Small Business Committee Chairman Steve Chabot (R-OH), who chaired a February 27 hearing on the report titled "How Red Tape Affects Community Banks and Credit Unions," GAO conducted interviews and focus groups with representatives of over 60 community banks and credit unions who indicated that regulations for reporting mortgage characteristics, reviewing transactions for potentially illicit activity and disclosing mortgage terms and costs to consumers were the most burdensome.

  • CFPB transformation continues: The CFPB on February 21 and again on March 1 issued requests for information seeking comments and information from consumers and covered entities on ways to engage the public and receive feedback on the work of the agency and on complaint reporting and analysis. These are the fifth and sixth in an ongoing series of RFIs announced as part of Acting Director Mick Mulvaney's call for evidence to ensure the Bureau is fulfilling its proper and appropriate functions. In a reference to Alexis de Tocqueville, Mulvaney told the Credit Union National Association Governmental Affairs Conference on February 27 that the CFPB will be "mild" but "certain." Speaking to a gathering of states' attorneys general the same day, Mulvaney urged states to take greater initiative in enforcement actions against financial companies.

  • Volcker Rule changes coming? US regulators are said to be considering changes to the Volcker Rule that would ease compliance and allow financial institutions more latitude in trading and investing. According to a published report, changes under consideration include "scrapping the presumption that short-term trades are proprietary unless banks prove otherwise, making it clearer which types of funds banks are banned from investing in, permanently exempting some foreign funds from the ban and anointing a lead regulator to oversee the rule's enforcement." In his House testimony, Powell did allow that "we're taking a fresh look at the Volcker rule."