Wall St. Regulators Face Music of House ‘18 Class

Update 352 — Wall St. Regulators Face Music of House ‘18 Class at HFSC Hearing Tomorrow

Today, we mourn the loss of Alice Rivlin, founding director of the Congressional Budget Office and a “decathlete” of high-level public office.  Her steady hand and even temper weathered multiple administrations and several financial crises, both local and national. She and the quality of her public service will be deeply missed in the policy community in Washington and nationally.   

Below, a look at a hearing tomorrow in which a clutch of first-term progressive House Democrats  will question a panel of regulators steadily walking back Dodd-Frank protections. What would you ask the regulators if you could?




This morning, the Senate Banking Committee heard from the four prudential regulator chiefs, who gave testimony on the safety, soundness, and accountability of depository institutions.  

The witnesses today were:

  • Joseph Otting, Office of the Comptroller of the Currency (OCC);
  • Randal Quarles, Vice Chair for Supervision, Board of Governors of the Federal Reserve System (Fed);
  • Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation (FDIC);
  • Rodney Hood, Chairman, National Credit Union Administration (NCUA).

Tomorrow, all four will be witnesses before the House Financial Services Committee for a similar oversight hearing. Both hearings give members an opportunity to interrogate the regulator chiefs over their implementation of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, and examine the deregulatory push at this juncture in the macroeconomic and capital market cycle.

Who (Most) Needs Supervision?

In conjunction with this week’s House and Senate hearings, the Fed published its second-ever Federal Reserve Supervision and Regulation Report. The inaugural report was published in November last year and detailed banking system conditions, as well as regulatory and supervisory developments.

The Fed report this week noted the strong performance of the banking industry and increased levels of lending, as well as increased corporate debt and leverage financing. It also outlined the Fed’s actions since enactment of S. 2155, the deregulatory banking legislation passed last year. The Fed maintains that it follows a “risk-focused approach” to enhance system resilience and reduce market downturn risk.

S. 2155:  Mandate vs. Discretion Recap

S. 2155’s passage marked the beginning of a dangerous deregulatory agenda. The bill mandated changes that freed banks up from supervision and certain Dodd-Frank regulatory requirements. For instance:

  • DFA created an enhanced prudential regulatory regime that applied to all banks with more than $50 billion in assets; S. 2155 automatically exempted banks with assets between $50 billion and $100 billion from such regulation, except for the risk committee requirements.
  • DFA also created the Volcker Rule; S. 2155 automatically exempted banks with assets under $10 billion from Volcker Rule restrictions (provided that their trading assets and liabilities are less than 5 percent of total assets).
  • S. 2155 makes “tailoring” mandatory instead of discretionary and has resulted in reduced regulation for all banks with assets over $100 billion. Tailoring can generally  be read as a euphemism for deregulation.

Along with statutory changes, regulators were given discretionary authority to relax safety and soundness supervisory requirements. Before S. 2155, regulators could use their discretion to apply DFA enhanced prudential standards only for banks with assets under $50 billion. That threshold is now $250 billion in most cases. Regulators have also adopted rules to provide unnecessary relief to banks with assets under $700 billion, including relaxed stress test, and capital and liquidity requirements.

Last Lines of Defense Still Left

Among current Federal Reserve Board Governors, Lael Brainard is often the lone dissenting voice opposing wide-scale deregulatory action. She was nominated by President Obama in 2014 after serving in his Treasury Department. Gov. Brainard has rebuffed many of her colleagues by supporting living will obligations and increased capital and liquidity requirements for large banks.  

This past March, Fed Governors voted against activating the counter cyclical capital buffer tool (CCyB), which forces banks to increase their loss-absorbing capacity during economic downturns. Gov. Brainard was the only vote in support of activating CCyB. CCyB was created in 2013 and can be triggered when the Fed considers systemic vulnerabilities to be “meaningfully above normal.”

With corporate debt at record highs, many are worried that the Fed is ignoring lessons from the 2007 financial crisis. Other prominent voices, such as former Fed Vice Chair Donald Kohn and former FDIC Chair Martin Gruenberg, agree with Gov. Brainard that the CCyB should be activated given our point in the market cycle. Gruenberg, who still sits on the FDIC Board, has also voiced strong concern about the current Fed Board’s failure to manage systemic risk.

Senate Hearing

A prelude to tomorrow, at today’s Senate Banking hearing, Ranking Member Brown referred to a remarkable letter sent this week by two former Treasury secretaries and two former Fed chairs. The authors take issue with proposed interpretive guidance released by the Financial Stability Oversight Council (FSOC) to move to an “activities-based” approach to nonbank financial institution designation.

The letter says that the proposed guidance risks extending the designation process to a six-year long ordeal. Senator Smith smartly asserted that a lot can change in six years, noting that AIG quadrupled in size from 2002 to 2005. Brown also pointed to the lack of action by regulators over the recent surge in leveraged lending to already highly indebted companies, drawing parallels between the leveraged lending market and the subprime mortgage market that precipitated the financial crisis. In response, Quarles argued that there is a difference between a risk to financial stability and the risk this asset class could have in amplifying a downturn, if one were to occur.

Tomorrow, the House Financial Services Committee will have a chance to build on some of the lines of inquiry taken by Democratic members in the Senate, with perhaps even greater scrutiny of some of the specific deregulatory changes affecting financial stability.

Ranking Member McHenry has already made the House Republican position clear: you’re not deregulating fast enough. He sent a letter to the prudential regulators last week, saying that “Congress expects swift action [on S. 2155].”  What say the Democrats on House Financial Services? Tune in tomorrow.

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