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Senate Banking Committee Seeks Perspectives of Midsized, Regional, and Large Institutions, Regulators on Economic Growth
On June 15, the Senate Committee on Banking, Housing, and Urban Affairs (Committee) held a hearing entitled, “Fostering Economic Growth: Midsized, Regional and Large Institution Perspective”. This is the third in a series of hearings to address economic growth. Frequent topics of discussion in the hearing included stress testing and capital planning—specifically the Federal Reserve’s Comprehensive Capital Analysis and Review stress test. Also discussed was the Systemically Important Financial Institution designation and costs incurred as a result, as well as the Volcker Rule.
Sen. Mike Crapo (R-Idaho), Chairman of the Committee, remarked in his opening statement that the current regulatory framework is “insufficiently tailored for many of the firms subject to it.”
Sen. Sherrod Brown (D-Ohio) – ranking member of the Committee—released an opening statement in which he stated “Let me be clear: proposals to weaken oversight of the biggest banks have no place in this committee’s process. . . Having said that, I am optimistic that there is room for agreement on a modified regime for overseeing regional banks.”
The June 15 hearing—a video of which can be accessed here—included testimony from the following witnesses:
- Mr. Harris Simmons, Chief Executive Officer and Chairman of Zions Bancorporation, on behalf of the Regional Bank Coalition (prepared statement)
- Mr. Greg Baer, President of The Clearing House Association (prepared statement)
- Mr. Robert Hill, Chief Executive Officer of South State Corporation, on behalf of the Midsize Bank Coalition of America (prepared statement)
- Ms. Saule Omarova, Professor of Law at Cornell University Law School (prepared statement)
On June 22, the Senate Banking Committee held another hearing entitled “Fostering Economic Growth: Regulator Perspective, the fourth in its series of hearings focusing on economic growth. The hearing is available via webcast here.
Federal Reserve Chair Comments on CCAR and Stress Test Transparency
On June 16, Federal Reserve (Fed) Chair Janet Yellen sent a letter to Rep. Blaine Luetkemeyer (R-Mo.) underscoring the Fed’s understanding of the need to provide transparency in its Comprehensive Capital Analysis and Review (CCAR) process and stress test scenarios. The Fed, Yellen asserts, will continue to published CCAR instructions in advance of the submission date for capital plans. Yellen further committed to releasing instructions and scenarios for the stress tests by February 15. The guidance will offer banks more details about the qualitative and quantitative components of the exam. However, Yellen warned that disclosing all the details of the Fed's modeling on the annual exams “would give banks an incentive to adjust their business practices in ways that change the results of the stress test without changing the risks faced by the firms . . . [resulting in] less effective stress tests that present a misleading picture of the actual vulnerabilities faced by firms. There would also be a risk of increased correlations in asset holdings among large banks, making the financial system more vulnerable to adverse economic shocks.” However, Yellen said the Fed is weighing different approaches to provide banks with more information about the agency's modeling.
Financial CHOICE Act of 2017 Approved by House Financial Services Committee
On May 4, GOP efforts to overhaul existing financial regulations took a step forward as the House Financial Services Committee approved H.R. 10, a revised version of the “Financial CHOICE Act of 2017” in a party-line vote, 34-26. The vote concluded a two week period that included both a three-day markup, of the GOP-backed legislation—during which several Democrat committee members sought, unsuccessfully, to remove various provisions of the bill—and, a two-day hearing that included testimony from 18 different witnesses.
Originally introduced by Committee Chairman Jeb Hensarling (R-TX) in September 2016, the main focus of the CHOICE Act was to give financial institutions the option of avoiding many of the rules set up by the 2010 Dodd-Frank law if they maintain a high level of capital and are “well-managed” as defined in the bill. The legislation, if enacted, would also end the Dodd-Frank Act’s taxpayer-funded bailouts of large financial institutions and would impose greater penalties on those who commit fraud and insider trading, while also demanding greater accountability from banking regulators. A summary of changes incorporated in the latest iteration of the proposed legislation—recently referred to as “CHOICE Act 2.0”—was released by the Committee last week and included, among other things:
- the elimination of the CFPB supervisory and examination authority;
- a restructuring of the CFPB, FHFA, OCC, and FDIC into bipartisan commissions appointed by the President;
- an opt-out of many regulatory requirements for banks and other financial institutions if they maintain a 10% leverage ratio (among other conditions);
- subjecting the federal banking regulators to greater congressional oversight and tighter budgetary control;
- reforms in bank stress tests;
- materially reducing the authority of the Financial Stability Oversight Council (FSOC) and the establishment of a new process of identifying financial institutions as "systemically important";
- a repeal of the Orderly Liquidation Authority and the creation of a new bankruptcy process for banks;
- a repeal of the Volcker Rule; and
- facilitated capital raising by small companies, including through crowd-funding.
Looking ahead, the House could vote to pass the bill later this month. While a party-line vote would pass the House, the bill will likely need to pick up a minimum of 60 votes—including support from several Democrats—in order for it to pass in the Senate.
Departing Federal Reserve Governor Offers Final Thoughts
On April 4, outgoing Federal Reserve Governor Daniel K. Tarullo presented his departing thoughts on the Fed’s response to the “worst recession since the Great Depression.” In his speech, Tarullo discussed the Fed’s initial post-crisis regulatory response and how it addressed the “too-big-to-fail” concept—positing that the “quick action in assessing the firms, recapitalizing them where needed, and sharing the results of the stress tests with the public stands as one of the turning points in the crisis.” On the subject of the Dodd-Frank Act, Tarullo noted that “partisan divisions” have prevented necessary substantive enhancements from being made, such as changing various thresholds to narrow the scope of strict prudential requirements and relieve the burdens placed on small community banks, and changing the Volcker Rule to make it less complicated. Tarullo summarized his position by stating that “[e]ight years at the Federal Reserve has only reinforced my belief that strong capital requirements are central to a safe and stable financial system” and that furthermore, “it is crucial that the strong capital regime be maintained, especially as it applies to the most systemically important banks. Neither regulators nor legislators should agree to changes that would effectively weaken that regime, whether directly or indirectly.” Tarullo’s last day at the Fed was April 5.
Fannie, Freddie and FHLBs Ordered to Report Results of Annual Stress Tests
On March 3, FHFA Director Melvin Watt issued orders directing FHFA regulated government-sponsored enterprises (GSEs)—Fannie Mae (Order No. 2017-OR-FNMA-01), Freddie Mac (Order No. 2017-OR-FHLMC-01), and the 11 Federal Home Loan Banks collectively (Order No. 2017-OR-B-01)—to report the results of their stress tests so that the financial regulators may determine whether the GSEs “have the capital necessary to absorb losses as a result of adverse economic conditions.” The orders were issued pursuant to the requirement under the Dodd-Frank Act that covered financial institutions with total consolidated assets of more than $10 billion conduct an annual stress test to determine whether they have sufficient capital to support operations in adverse economic conditions. Accompanying each order was a copy of the “2017 Report Cycle Dodd-Frank Stress Tests Summary Instructions and Guidance.”
On April 14, the FHFA order was officially published in the Federal Register.
Congressmen Send Letter Urging Fed to Delay Rulemaking Until New Vice Chairman is Confirmed
On February 23, several GOP members of the House Financial Services Committee sent a letter to Fed Chair Janet Yellen in response to Chair Yellen’s recent Congressional testimony that the Fed may advance a pending rulemaking “pertain[ing] to the stress tests and what is called the Stress Capital Buffer.” Among other things, the letter urged that, “[a]bsent an emergency, the Federal Reserve should neither propose nor adopt any new rules until the U.S. Senate confirms a [Fed] Vice Chairman for Supervision.” The GOP lawmakers also cautioned that, should the Fed adopt rules prior to the confirmation of the Vice Chairman for Supervision, they intend to “work with [their] colleagues to ensure that Congress scrutinizes the Federal Reserve’s actions—and, if appropriate, overturns them—pursuant to the Congressional Review Act.”
FDIC Issues Revised Scenarios for 2017 Stress Tests
On February 13, the FDIC released revised economic scenarios for use by certain financial institutions with total consolidated assets of more than $10 billion for 2017 stress tests. According to a statement from the agency, the previously released scenarios contained incorrect historical values for the BBB corporate yield in 2016. The Fed and OCC, with whom the FDIC works develop and distribute the scenarios, also issued revised data.
OCC Proposes Final Revisions to Stress Test Information Collection
On February 2, the OCC requested comment on proposed revisions to an existing information collection entitled “Company-Run Annual Stress Test Reporting Template and Documentation for Covered Institutions with Total Consolidated Assets of $50 Billion or More Under the [Dodd-Frank Act].” The agency is also giving notice that it has sent the collection to the OMB for review. This information collection is related to the conduct of annual stress tests that the Dodd-Frank Act requires of certain financial companies, including national banks and federal savings associations. Comments on the current notice must be received by March 6, 2017.
OCC, FDIC, and Fed Release Stress Test Scenarios for 2017
On February 3, the Fed announced the release of the “Supervisory Scenarios” to be used by banks and supervisors for the 2017 Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress test exercises and also issued instructions to firms participating in CCAR. The Fed also published three letters that provide additional information on its stress-testing program. The three letters describe: (i) the Horizontal Capital Review for large, noncomplex companies; (ii) the CCAR qualitative assessment for U.S. intermediate holding companies of foreign banks, which are submitting capital plans for the first time; and (iii) improvements to how the Fed will estimate post-stress capital ratios.
On February 3, the OCC similarly released economic and financial market scenarios for 2017 that are to be used by national banks and federal savings associations (with total consolidated assets of more than $10 billion) in their annual Dodd-Frank Act-mandated stress test. On February 6, the FDIC released its stress test scenarios, working in consultation with the Fed and OCC.
The three sets of supervisory scenarios provide each agency with forward-looking information for use in bank supervision and will assist the agencies in assessing the covered institutions’ risk profile and capital adequacy.
Fed Finalizes Rule Simplifying Stress Testing Process for Regional Banks
On January 30, the Fed issued a finalized version of its rule aimed at simplifying the Fed’s Comprehensive Capital Analysis and Review (CCAR or “stress test”) by exempting all but the largest financial institutions from the qualitative assessment portion of the Fed’s stress test. The changes will apply to the 2017 CCAR cycle, which began on January 1, 2017.
Specifically, the new rule provides that “large and noncomplex firms”—those with total consolidated assets of at least $50 billion but less than $250 billion, and nonbank assets of less than $75 billion (and that are not U.S. global-systemically important banks)—will no longer be subject to the provisions allowing the Fed to object to a bank’s capital adequacy plan based on an evaluation of hypothetical scenarios of severe economic and financial market stress, known as a “qualitative assessment.” Previously, the Board could object to the annual capital plan of any bank subject to stress testing, based on the quantitative or qualitative findings of the exercise. However, the rule also decreases the amount of additional capital exempted banks can distribute to shareholders in connection with a capital plan without seeking prior approval from the Fed, now 0.25 percent of tier 1 capital down from 1 percent.