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Financial Services Law Insights and Observations


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  • Senator Warren pens letter to banking regulators to check on their regulatory commitments following 2023 bank failures

    On March 10, Senator Warren (D-MA) released a letter to Federal Reserve Vice Chair Michael Barr, FDIC Chairman Martin Gruenberg, and Acting Comptroller of the Currency Michael J. Hsu (the bank regulators) seeking information on any progress with their commitments to strengthen bank regulatory standards following the 2023 banking issues. Warren urged the bank regulators to reinstate the rules for banks with assets between $100 and $250 billion, including liquidity requirements and capital stress tests, that were rolled-back with the 2018 enactment of the “Economic Growth, Regulatory Relief, and Consumer Protection Act” (EGRRCPA). She concluded her letter by posing several questions, including asking what efforts the bank regulators are taking to strengthen rules, when these rules are expected to be announced or implemented, how many banks will be subject to these rules, if the implementation process would include a comment period, and if lobbying by large banks against the Basel III capital rule has weakened the bank regulators’ resolve to strengthen rules for banks with more than $100 billion in assets. Sen. Warren has asked for a response by March 25.

    Bank Regulatory Basel FDIC OCC Federal Reserve EGRRCPA Dodd-Frank

  • Fed Chairman Powell testifies before House Financial Services Committee on Basel III “Endgame,” commercial real estate, and banking capital

    Federal Issues

    On March 6, the House Financial Services Committee held its semi-annual hearing on the Federal Reserve’s Monetary Policy Report, and heard testimony from the Federal Reserve Chairman Jerome Powell a day after the Republican committee members sent a letter to the banking regulators urging withdrawal from the Basel III “Endgame” proposal. Powell discussed the Basel III Endgame proposal comments, the commercial real estate market, and capital requirements, among others.

    On the Basel III “Endgame” proposal, Chairman McHenry (R-NC) asked if the Fed was listening to the comments received and what the status of the rulemaking is moving forward. Powell confirmed that the Fed has received substantive comments in mid-January and had put out the Quantitative Impact Study; the Fed is still analyzing the comments and will soon reach a point where the Fed can begin making decisions. Powell signaled to expect “broad and material changes to the proposal” while expressing confidence that the final proposal will receive support from the Fed and the public.

    Congressman Barr (R-KY), who also questioned the Basel III “Endgame” proposal, asked whether a re-proposal that implemented Basel III in a “capital neutral way” could be achieved without jeopardizing financial stability; Powell responded with “hypothetically, yes.” Then, pointing to a report that found 97 percent of comment letters either opposed or expressed concerns about the proposal, Powell stated “it’s unlike anything I’ve seen.” On technical matters, Barr raised the concern that subjecting different size banks to a one-size-fits-all standard would concentrate the industry, increase risks, and decrease competition. Powell indicated he shared that concern.

    Congressman Himes (D-CT) inquired about the commercial real estate market, specifically if the rapid decline in vacancy rates was a manageable risk. Powell indicated that the risks are manageable but stressed that “[t]here will be some losses by banks” and that the Fed is actively in touch with these banks, mostly small- and medium-sized banks with higher concentrations in this market. Congressman Lynch (D-MA) inquired about the 2023 banking issues and if they were caused in part by the “instantaneous” withdrawals of money from the banks as a proverbial bank run. Powell confirmed that the Fed is working on liquidity rules to change this.

    Congressman Loudermilk (R-GA) inquired about the driving force behind the record-high levels of credit card debt. Powell believed that pure economic growth was the cause, and the number has just scaled up; alternatively, it was because of the stimulus spending from the pandemic. Loudermilk then posed a hypothetical: if there was a rule on restricting lending from banks, if that rule would drive businesses and consumers towards “alternative forms of credit”; Powell said it would, and that would present nonbank lenders with more business. Moreover, Congressman Loudermilk had Powell commit to at most an analysis of how capital proposals affect small business credit access and small-dollar lending before finalizing any proposals.

    Federal Issues House Financial Services Committee Basel

  • House Financial Services Committee urges banking regulators to reconsider aspects of Basel III “Endgame” proposal

    Federal Issues

    On March 5, the Chairman of the House Financial Services Committee, Patrick McHenry (NC-10), along with all Republican members released a letter to Federal Reserve Chairman Jerome Powell, Acting Comptroller of the Currency Michael Hsu, and FDIC Chairman Martin Gruenberg recommending they each withdraw from the Basel III “Endgame” proposal and identify better objectives with justifications. The Republican members indicated that the proposal received an “unprecedented number of comment letters,” with more than 97 percent receiving a call for withdrawal, re-proposal, or general concern with the proposal’s elements. Further, the letter pointed out that the agency chairs themselves recognized there was an issue, as shown by the agencies’ comment period extension by more than 45 days. While the members noted a strong desire to change the capital rules for financial institutions, they also expressed frustration with the lack of transparency regarding the whole process: “There has been little clarity . . . with Congress or the American people as to when or how the agencies will release the information collected from the banks or seek comment[.]” The Committee’s letter concluded by stating how the proposal is flawed and called for greater clarity on how agencies plan to account for public comments.

    Federal Issues House Financial Services Committee Bank Regulatory Congressional Inquiry Basel

  • Fed’s Bowman speaks on current trends in banking regulation

    On February 27, Michelle Bowman, a member of the Federal Reserve Board of Governors, gave a speech reflecting on the state of the broader U.S. economy and banking regulation in Tampa, Florida. Bowman highlighted the need for the Fed to focus on “efficiency in how we deliver on our safety and soundness goals.” On capital reform, Bowman noted that since the closure of the comment period for the Basel III “Endgame” reforms, the federal banking agencies have been reviewing the feedback and identifying areas of concern: she hopes that the agencies will take this opportunity to revise the proposal in a way that addresses the concerns raised by the public. After voicing her non-support for the recently adopted Community Reinvestment Act (CRA) final rule, Bowman shared that while the new rule provided some positive changes, the changes are still “unnecessarily complex, overly prescriptive,” and have greater costs than benefits.  Bowman highlighted that the final rule treats a wide range of community banks with more than $2 billion in assets as “large banks, and would have resulted in a “nearly tenfold increase in banks with a ‘Need to Improve’ CRA rating” if applied to the period from 2018 to 2020. On Regulation II and debit card interchange fees, Bowman noted that the comment period has been extended until May 12, adding that the proposed permanent decrease in debit card interchange fees will have “consequences for banks of all sizes.” Bowman ended with discussion on bank mergers, climate change, and liquidity.

    Bank Regulatory Federal Reserve Federal Issues CRA Discount Window Basel

  • House Democrats urge agencies to finalize Basel III Endgame rule

    Federal Issues

    On February 16, the Ranking Member for the House Committee on Financial Services, Maxine Waters (D-CA), and 41 other House Democrats sent a letter to the FDIC, Fed, and OCC regarding the Basel III Endgame and the proposed rule which would impose higher capital requirements. The letter urged the agencies to finalize the rule, highlighting the purpose of capital requirements “to shield banks from unexpected losses, preventing their failure, while serving as a source of funding that banks use…” The letter commended the agencies for providing the public with almost six months to comment and argued the endgame rule’s impact on access to credit is low. The letter also noted that the expected funding impact on a large bank’s average lending portfolio is expected to increase by just 0.03 percent, which it describes as “insignificant” compared to Fed interest rate increases. The letter specifically urged the heads of the agencies to finalize the rules this year “to ensure we have a banking system that will promote stable economic growth.”

    Federal Issues U.S. House Basel Capital Requirements OCC FDIC Federal Reserve

  • Yellen testifies on FSOC Annual Report, key areas of focus

    Federal Issues

    On February 8, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing titled “The Financial Stability Oversight Council Annual Report to Congress” with testimony provided by U.S. Treasury Secretary Janet Yellen. Secretary Yellen discussed progress, and continued focus, related to five topics addressed in FSOC’s 2023 Annual Report (covered by InfoBytes here): capital risks posed by nonbank financial institutions; climate-related financial stability risks; cybersecurity risks; monitoring artificial intelligence (AI) use in financial services; and digital asset oversight. In response to questioning from Senator Cortez Masto (D-NV), Yellen discussed how FSOC highlighted that about 70 percent of single-family mortgages were originated by nonbank mortgage originators during the first half of 2023. When Secretary Yellen was asked if the shift from banks to nonbanks in the mortgage space poses a financial stability risk “due to non-banks’ lack of access to deposits,” she responded that FSOC is “very focused” on the issue since non-banks are reliant on short-term financing. In addition, Yellen spoke about AI and learning its impact on vulnerabilities and risk, as well as the Basel III proposal, urging regulators to “finalize these rules as quickly as possible.”

    Federal Issues FSOC Department of Treasury U.S. Senate Basel Mortgage Lenders

  • House Committee calls for new quantitative analysis from Basel III “Endgame” original proposal

    Federal Issues

    On January 31, the House Financial Services Committee issued a press release after holding its hearing on “Federal Banking Proposals Under the Biden Administration,” which invited two leaders from trade organizations, a lawyer, and a business school professor. The Committee’s main takeaway was that the Notice of Proposed Rulemaking from July 2023, as released by the OCC, Federal Reserve, and FDIC, provides “little quantitative analysis” of the potential economic impacts (covered by InfoBytes, here). This Notice initially opened the comment period for the Basel III “Endgame” meant to revise the capital requirements for large banking organizations.   

    The Committee took the position, through bipartisan agreement, that the Biden Administration “must withdraw” its Basel III “Endgame” implementing proposal and replace it with one that offers a sound and objective economic analysis that is not skewed by politics but supported by data. The Committee supports its position that the Notice provides a “paltry” economic and regulatory analysis by noting that it devotes only 17 out of 1087 pages to the analysis. The press release cited comments from various congressional members, some of whom raised concerns about the proposal’s potential impact on homebuyers and mortgage lending, and the proposal’s potential to disincentivize financing for renewable energy projects. Finally, the Committee linked several members’ comment letters over the past few months.  

    Federal Issues Basel FDIC OCC Federal Reserve Capital Requirements House Financial Services Committee

  • Fed’s Barr speaks at fireside chat, underscores the importance of public comment

    On January 9, Fed Vice Chair of Supervision Michael S. Barr delivered remarks at an event held by Women in Housing and Finance, during which he discussed consumer credit, bank supervision, DEI issues, capital issues, bank regulation and more. Barr began by addressing current risks that the Fed is focused on mitigating, which included efforts surrounding the Community Reinvestment Act final rule and the Basel III Endgame proposal. The Fed, he said, has been receiving many comments on the proposal, which will help ensure the “balance” is right on the final capital rule. There is one more week before the comment period closes, he added.

    Barr also discussed the second quantitative impact study the Fed is conducting to ensure accuracy and help shape the final version of the Basel III proposal. He noted that the Fed conducted the first study a “few years ago” to inform the first proposal. He mentioned that the Fed is collecting information and will be publishing their aggregated analysis for public comment.  Barr also discussed comments considering whether the Fed should adjust for historical losses based on particular firms, or if there should be standardized accountability for all risk.

    In response to questions from the moderator, Barr opined that the capital rules in the Basel III proposal would have a modest impact on the affordability and accessibility of mortgage credit and consumer credit. He conceded that the proposal’s impact would create higher costs, but that the impacts on consumers would be “very very small.” Barr also invited commenters to inform the Fed about the impacts. On international competition, Barr also noted that the higher capital standards would not detrimentally impact the U.S. banking system.

    When asked about the Fed’s Bank Term Funding Program, made available by the Fed, FDIC, and Treasury last spring, Barr said banks and credit unions are still leveraging the program today. He explained that the “program was really designed in that emergency situation … to make sure that banks[,] and creditors of banks[,] and depositors [in] banks understand that banks have the liquidity they need.”

    Bank Regulatory Federal Issues Federal Reserve CRA Basel Capital Requirements Bank Supervision

  • FDIC Director McKernan suggests phasing ‘underdeveloped’ parts of Basel III

    On December 12, a member of the FDIC Board of Directors, Jonathan McKernan, expressed concerns about its Endgame proposal’s reliance on Basel Committee decisions. In his speech at a conference on trading book capital, he highlighted the lack of explanation behind design choices, leaving banking regulators unable to justify or comprehend certain reform aspects. The board member added that the absence of rationale hindered public feedback and raised doubts about the reform’s legitimacy.

    McKernan suggested an approach to defer less developed areas of the reforms while implementing uncontested aspects—acknowledging the proposal’s goal to address weaknesses in the trading book framework and citing concerns about specific design decisions. McKernan notes certain design decisions like the profit-and-loss attribution test and non-modellable risk factors. McKernan explained that the PLA attribution test assesses the alignment between a bank’s risk management and front office models. McKernan said that for both designs, there is very little public information on the Basel Committee’s threshold formulation and that they are based on simulated data, which is viewed as a preliminary estimate still under development. Finally, McKernan supported enhancing the regulatory capital framework but stressed the need to validate the rationale behind key design decisions in the Basel reforms. 

    Bank Regulatory FDIC Basel Bank Supervision Basel Committee

  • Fed Governor Michelle Bowman gives speech discussing banking regulatory reforms and concerns

    On November 9, Federal Reserve Governor Michelle W. Bowman delivered a speech on the economy and prioritization of bank supervision and regulation. Governor Bowman highlighted recent developments in banking regulatory framework reform. Governor Bowman began by highlighting the proposed reforms to capital requirements for banks with more than $100 billion in assets. She mentioned the central concern raised is the potential inadequacy of the quantitative and analytical foundations of these reforms. Governor Bowman questioned whether Basel III reforms effectively address regulatory deficiencies and emphasized the need for a thorough understanding of both the benefits and costs of implementing such changes. Governor Bowman discussed the actions taken by the agencies, including an extended comment period and efforts to gather more information on the proposal's potential impact. Several areas are identified as necessary to address, such as redundancy in the capital framework, calibration of the Market Risk Capital Rule, the inefficiency of two standardized capital stacks, and the punitive treatment of fee income. Governor Bowman also highlighted the missed opportunity to review leverage ratio requirements, which could have implications for market functioning in times of stress.

    Shifting the focus to the CRA, Governor Bowman acknowledged the importance of improving access to credit, especially in low- and moderate-income (LMI) communities. However, the Governor mentioned concerns raised about the new final rule implementing the CRA. She explained some criticism for it being unnecessarily complex, overly prescriptive, and disproportionately burdensome for banks, especially community banks. It applies the same regulatory expectations to small and large banks, failing to recognize the differences among banks in terms of size, risk, and business models, she added. Governor Bowman’s remarks underscore the need for a balanced, data-driven, and risk-focused approach to regulatory reforms. 

    Bank Regulatory CRA Basel Bank Supervision


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