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?

Best,

Dana

————

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.

35 thoughts on “Wall St. Regulators Face Music of House ‘18 Class”

  1. Its like you read my mind! You seem to know a lot
    about this, like you wrote the book in it or something.
    I think that you could do with a few pics to drive the message home a little bit, but other than that, this is excellent
    blog. A fantastic read. I’ll definitely be back.

    asmr 0mniartist

  2. I am extremely impressed along with your writing talents as smartly as with the structure
    to your weblog. Is that this a paid theme or did you modify it your self?

    Either way keep up the nice high quality writing, it’s uncommon to look a
    nice weblog like this one today.. 0mniartist asmr

  3. Greetings! I know this is kinda off topic however , I’d figured
    I’d ask. Would you be interested in trading links or maybe guest authoring a blog article or vice-versa?
    My blog covers a lot of the same subjects as yours and I
    feel we could greatly benefit from each other.

    If you’re interested feel free to send me an e-mail.

    I look forward to hearing from you! Wonderful blog by the way!
    0mniartist asmr

  4. It’s remarkable to visit this web site and reading the views of all colleagues regarding this article, while
    I am also zealous of getting knowledge. asmr 0mniartist

  5. Yesterday, while I was at work, my cousin stole my apple ipad
    and tested to see if it can survive a forty foot drop,
    just so she can be a youtube sensation. My iPad is now destroyed
    and she has 83 views. I know this is entirely off topic but I had to
    share it with someone!

  6. What’s up every one, here every one is sharing these know-how, thus it’s good to read this website, and I
    used to visit this web site everyday.

  7. Please let me know if you’re looking for a article writer
    for your site. You have some really good articles and
    I believe I would be a good asset. If you ever want to take some of the load off, I’d absolutely
    love to write some content for your blog in exchange for a link back to mine.
    Please shoot me an e-mail if interested. Regards!

  8. It’s in reality a great and helpful piece of info.
    I am happy that you shared this helpful information with us.
    Please keep us informed like this. Thanks for
    sharing.

  9. Wonderful web site. Plenty of useful information here. I am sending it to several
    buddies ans additionally sharing in delicious.
    And obviously, thanks on your effort!

  10. scoliosis
    Hmm it looks like your site ate my first comment (it was
    extremely long) so I guess I’ll just sum it up what I submitted and say,
    I’m thoroughly enjoying your blog. I as well am an aspiring
    blog writer but I’m still new to everything.
    Do you have any tips and hints for rookie blog writers?
    I’d really appreciate it. scoliosis

  11. scoliosis
    You really make it appear so easy along with your presentation but I
    to find this topic to be really one thing that I believe I’d never understand.

    It sort of feels too complex and extremely broad for
    me. I’m looking forward on your subsequent submit, I’ll attempt to get the cling of it!
    scoliosis

  12. scoliosis
    It’s appropriate time to make some plans for the future
    and it is time to be happy. I have read this submit and if I may just I
    wish to counsel you some interesting issues or tips.

    Maybe you could write subsequent articles regarding this article.
    I desire to learn even more things approximately it! scoliosis

  13. This is very interesting, You are a very skilled blogger. I’ve
    joined your rss feed and look forward to seeking more of
    your wonderful post. Also, I’ve shared your website in my social networks!

  14. I absolutely love your blog.. Very nice colors & theme. Did
    you develop this website yourself? Please reply back as I’m planning to create my own personal site and want
    to know where you got this from or what the theme is called.
    Kudos!

  15. I was curious if you ever thought of changing the structure of your
    blog? Its very well written; I love what youve got to say.
    But maybe you could a little more in the way of content so people could
    connect with it better. Youve got an awful lot of text for only having one or two images.

    Maybe you could space it out better?

  16. You’re so cool! I don’t suppose I’ve truly read anything like that before.
    So good to discover someone with some original thoughts on this
    subject. Seriously.. many thanks for starting this up.
    This website is one thing that’s needed on the
    web, someone with some originality!

  17. Can I simply just say what a relief to discover somebody that really
    knows what they are talking about on the net. You definitely understand how
    to bring a problem to light and make it important.
    A lot more people ought to read this and understand this side of the story.

    I was surprised you are not more popular since you
    most certainly have the gift.

  18. Hello there, just became aware of your blog through
    Google, and found that it is really informative. I’m going to watch
    out for brussels. I will be grateful if you continue this in future.
    Numerous people will be benefited from your writing.
    Cheers!

  19. Howdy just wanted to give you a quick heads up.
    The text in your article seem to be running off the screen in Opera.
    I’m not sure if this is a formatting issue or something to do with browser compatibility but I figured I’d post to let you know.
    The style and design look great though! Hope you get the issue resolved soon. Kudos

  20. I think this is among the most vital information for me.

    And i’m glad reading your article. But should remark on some general things, The site style is perfect, the articles
    is really excellent : D. Good job, cheers

Leave a Comment

Your email address will not be published. Required fields are marked *