Trump’s Financial Regulators: One Year in and Changing the Game Already (Feb. 28)

Update 252 — Trump’s Financial Regulators: One Year in and Changing the Game Already

From consumer protection to regulation of firms, the financial regulatory landscape has changed markedly in some areas and is stillborn in others. Trump regulators have made a variety of decisions that has escaped broader notice.

We take a tour of the financial agencies and review major policy and rule making decisions as well as the resulting overall impact of the Trump administration on the financial regulatory world, providing some context for the debate coming up on S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, now slated for Senate floor action next week.

Best,

Dana

FSOC Shedding Designations

During the Obama years, Financial Stability Oversight Council (FSOC) designated four companies as systemically important non-financial institutions in addition to the large banks that are statutorily designated. These included American International Group (AIG), General Electric Capital Corporation (GE Capital), Prudential Financial, Inc., and MetLife, Inc. These designations were short lived. GE Capital was delisted in June, 2016 after it was spun off from its parent company and deemed no longer interconnected enough to warrant SIFI regulation.

Since President Trump has assumed office, FSOC has moved assertively to delist the insurance companies that were at the heart of the 2008 financial Crisis.

Last September, the Council delisted AIG from its list of systemically important non-financial institutions. While the move won the vote of Janet Yellen, many commenters raised concern for the deregulation of a company that was at the heart of the financial crisis. MetLife challenged it’s SIFI status in court, and had its designation rescinded by District Court Judge Rosemary Collyer in March of 2016. Last month, MetLife and FSOC filed a joint motion to dismiss the federal government’s appeal of that decision.

All indications are that Prudential, the last nonfinancial SIFI, may soon find regulatory relief as well. Last week, FSOC made good on its promise to reexamine Prudential’s designation status. While a final decision on the matter is not expected until later in 2018, the company is lobby hard that its designation is unwarranted. Given the deregulatory zeal of Trump’s FSOC, don’t be surprised to see the nonbank SIFI list at zero before the year is out.

 

 

Fed Makes Regulatory Accommodations

  • Living Will Deadline Extension

At the end of September, the Fed issued an accommodating rule on living will submissions, allowing eight of the biggest banks to wait until July, 2019 to submit remediated living will plans to fix weaknesses in earlier submissions. Resolution planning is a key Dodd-Frank Act systemic protection, requiring the largest banks to plan their own failure so the financial system does not plunge into crisis if one banks fails. The groups of banks that benefit from the ruling include the nation’s largest: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs Group, JP Morgan Chase, Morgan Stanley, State Street Corporation, and Wells Fargo.

  • CCAR Transparency

The word “transparency” has been used frequently in conversations about new approaches to financial regulation. Fed Chair Jay Powell has repeatedly floated the concept as imperative in his reevaluation systemic risk rules. In December, the Fed solicited public comment on its proposals to increase transparency of its CCAR stress testing. These proposals include disclosing the Fed’s modeled range of loss rates for loans held by banks subject to CCAR, portfolios of loans used under stress testing scenarios, and an in-depth description of the Fed’s models, including equations used and variables that influence the outcome of the models.

Just this month, the Fed moved forward to release its scenarios for both CCAR and DFAST stress testing. This year the severely adverse scenario, the most stressful condition tested, will simulate a global recession during which the unemployment rate increases from 4 percent to 10 percent and interest rates on treasuries increase substantially. Now that the banks subject to CCAR have these conditions, they can prepare their balance sheet for the test.

  • Fed Restricts Wells Fargo

In a surprise move, the Fed at the beginning of February that Wells Fargo not be permitted to grow beyond its asset size at the conclusion of 2017. This after a lengthy public revelation about consumer abuses and compliance failures. Most notably, the nearly $2 trillion bank created more than 1.5 million fake checking and savings accounts, as well as 500,000 credit cards that were unauthorized. The edict was Chair Yellen’s final act.

 

 

Leadership Change at the OCC and FDIC

  • Undoing Obama Era Safeguards

Trump has filled key financial industry regulators positions at a glacial pace since assuming office. It wasn’t until November 27th that Joseph Otting was sworn in as Comptroller at the OCC. However, the agency has since taking up the charge against the Volcker rule on Wall Street’s behalf. The OCC has also begun the process of weakening its enforcement of the Community Reinvestment Act and softening its position against leveraged lending.

Trump’s appointee to run the FDIC, Jelena McWilliams, was cleared by the Senate Banking Committee with only Elizabeth Warren expressing concerns over the former Fifth Third Bank executive taking charge of the agency. McWilliams has spent time on the Hill as chief council for the same committee that approved her nomination, and at the Fed. While she has been guarded about her regulatory views she has expressed interest in relieving regulatory burden from “community banks” and will play a significant role in the rumored rewrite of the Volcker Rule.

The news has not been all bad at the OCC. Just last month, the bureau levied a $70 million fine on Citibank for failure to adhere to a 2012 directive regarding money laundering. On top of that, the most recent round of indictments from Mueller’s team should draw the attention of the OCC to “Lender B”, which appears to have ventured beyond the law in it’s issuance of loans to Paul Manafort.

 

 

The SEC: 180 Degree Turn

Securities and Exchange Commission (SEC) Chair Jay Clayton has pursued fewer penalties under the Trump Administration.  Chair Clayton has expressed that the penalties hurt shareholders and not just the individuals who have been responsible for wrongdoing.

Under Chair Clayton, the SEC has done what Michael Piwowar, a Republican appointee, calls “a full 180” in regulatory enforcement. Between the Obama and Trump Administrations there has been a stark contrast in enforcement. From January to September 2016, the Obama administration issued several regulatory punishments worth $702 million, where the Trump administration only issued around $100 million in punishments from January to September 2017.

 

 

CFTC Pullback from DFA Enforcement

Like the SEC under Chair Jay Clayton, the Commodities and Futures Trade Commission (CFTC) under Chair J. Chris Giancarlo has pursued a broad agenda aimed at deregulation and fewer enforcement actions in the derivatives markets.

  • Pullback from Dodd-Frank

Giancarlo’s plan to roll-back Dodd-Frank regulations entitled “Reg Reform 2.0,” features the intent to roll-back Title VII protections. At a Senate Agriculture Committee hearing earlier in February, Sen. Tina Smith (D-MN) questioned Chair Giancarlo about this roll back could increase the risk of a financial crisis. Giancarlo replied that while Title VII is being implemented by the CFTC, many of the reforms are not working and that the Commissioners will look at every section to either strike or significantly reduce regulations.

  • Decline of Enforcement Actions

Chair Giancarlo has also taken far fewer enforcement actions than his predecessors. Sen. Sherrod Brown called the inaction “a deliberate pullback in enforcement.” During the fiscal year that ended in September, 2017, enforcement actions totaled 49, down from 68 the previous year, and the total fines issued were just $413 million, down from $1.29 billion the previous year.

Enforcement actions may, however, be on a rebound. The CFTC announced yesterday that it is expected to file “more than 10” fraud and market-manipulation cases in the coming weeks. Perhaps Chair Giancarlo, a former Obama appointee, understands the importance of enforcement after all.

 

 

CFPB: Hostile Takeover

An obsession of conservatives since its inception, the Consumer Financial Protection Bureau (CFPB) has been under steady assault since Trump assumed office. While last month’s legal challenge to the agencies legitimacy fell short in D.C. Court of Appeals (read more in Update 247), managing director Mick Mulvaney has been doing his best to undermine the agency from the inside. Upon assuming office, Mulvaney issued a letter to regulators explaining that he would refuse to “push the line” in order to protect consumers. Three months into his tenure it appears that this means doing everything in his power to make the CFPB dysfunctional.

In December, Mulvaney directed the bureau to freeze the collection of any personally identifiable information from companies it supervises. The move ostensibly about addressing cybersecurity concerns, but Sen. Warren, one of the CFPB’s most vocal defenders, argued the freeze was more about sabotage than substance. Ending the collection of personally identifiable information could potentially slow fraud investigations and cripple the CFPB’s enforcement functions.

All indications are that Mulvaney does not plan on stopping with data freezes. Last month, he issued a Request for Information about the Bureau’s Civil Investigative Demands in order to collect suggestions on how to “improve outcomes for both consumers and covered entities.”  Given Mulvaney’s tenure thus far this strongly suggests an even greater deregulatory push to come at the CFPB.  Expect similar rollbacks at the other regulatory bodies as Trump appointees slowly but surely take over and enact the administration’s agenda at the Fed, OCC, FDIC, SEC, and CFTC.

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