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From Banking and Finance Law Daily, June 13, 2017

Treasury Department releases first report on regulatory reform

By John M. Pachkowski, J.D.

The Treasury Department has released its first report in connection with the mandate set forth in Executive Order 13772 that it review financial regulations to assess the impact these regulations have on seven Core Principles.

Core principles. The Core Principles enunciated under Executive Order 13772 are:

  1. empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
  2. prevent taxpayer-funded bailouts;
  3. foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
  4. enable American companies to be competitive with foreign firms in domestic and foreign markets;
  5. advance American interests in international financial regulatory negotiations and meetings;
  6. make regulation efficient, effective, and appropriately tailored; and
  7. restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

Extensive consultation. The report, entitled "A Financial System That Creates Economic Opportunities: Banks and Credit Unions," is the result of extensive consultation "with a wide range of stakeholders, including trade groups, financial services firms, consumer and other advocacy groups, academics, experts, financial markets utilities, rating agencies, investors and investment strategists, and others with relevant knowledge."

Scope. Touching on the scope of the current report, the Treasury Department noted the breadth of the financial system and the unique regulatory regime governing each segment, it found it necessary to divide its review of the financial system into a series of reports. Subsequent reports in connection with the Executive Order 13772 review will be issued over the coming months and will focus on markets, liquidity, central clearing, financial products, asset management, insurance, and innovation, among other key areas.

Findings and recommendations. The report’s findings and recommendations addressed changes brought about with the enactment of the Dodd-Frank Act and identified significant areas for reform in order to conform to the Core Principles.

Among other things, the report called for a number of actions to be taken by the regulators or Congress. For example, the report said that a "sensible rebalancing of regulatory principles . . . can better align the financial system to serve consumers and businesses in order to support their economic objectives and drive economic growth."

Liquid markets. The report also calls for conforming the regulatory environment to promote liquid and vibrant markets. To accomplish this, the report notes that the Volcker Rule "requires substantial amendment," with the Treasury Department noting that it "supports in principle the Volcker Rule’s limitations on proprietary trading and does not recommend its repeal." Recommended changes to the Volcker Rule include: simplifying the definition of proprietary trading and allowing banks to more easily hedge their risks and conduct market-making activities; revising the compliance program requirements to decrease regulatory burden; modifying the covered funds provisions to assist in the formation of venture and other capital; and exclude bank with less than $10 billion.

Regulatory impact and burden. The report also called it "critical that Congress and the regulatory agencies undertake a holistic analysis of the cumulative impact of the regulatory environment. The report targeted the Community Reinvestment Act as one particular statute that needs to be modernized.

Preventing bailouts. To achieve the Core Principle of prevent taxpayer-funded bailouts, the report recommends right-sizing financial regulation and removing unnecessary regulatory duplication and overlap. This could be accomplished by providing: explicit, appropriately risk-sensitive capital standards; supervised stress-testing appropriately tailored based on banking organizations’ complexity; and actionable living wills for the largest systemically-important banks.

CFPB. The report also calls for a "significant restructuring" of the Consumer Financial Protection Bureau. These measures include: making the Director of the CFPB removable at will by the President or, alternatively, restructuring the bureau; funding the CFPB through the annual appropriations process; and adopting reforms to ensure that regulated entities have adequate notice of CFPB interpretations of law before subjecting them to enforcement actions; and curbing abuses in investigations and enforcement actions.

Other recommendations included increasing the asset thresholds for the Dodd-Frank Act stress tests and Dodd-Frank’s enhanced prudential supervision provisions.

Commenting on the report’s release, Treasury Secretary Steven Mnuchin noted, "Properly structuring regulation of the U.S. financial system is critical to achieve the Administration’s goal of sustained economic growth and to create opportunities for all Americans to benefit from a stronger economy." He added, "We are focused on encouraging a market environment where consumers have more choices, access to capital and safe loan products—while ensuring taxpayer-funded bailouts are truly a thing of the past."

Reaction. Reaction to the report fell along ideological lines. Industry groups and organizations advocating limited regulation supported the report’s findings and recommendations; while individuals and groups advocating better regulation of the financial industry were strongly opposed the report.

An important step. Rob Nichols, president and CEO of the American Bankers Association, called the report "an important step to refine financial regulations to ensure that they are supporting—not inhibiting—economic expansion." He added, "We’re encouraged that the report contains many recommendations for regulatory reform long endorsed by ABA. These include relaxing obstacles that deny qualified Americans access to mortgages, as well as changes to the Volcker Rule to address the unnecessary constraints it imposes on markets and its unwarranted extension to community banks. The report also calls for important adjustments to regulations surrounding liquidity and stress testing, as well as exempting community banks from Basel III."

In a statement, Consumer Bankers Association president and CEO Richard Hunt, remarked that the report was "an important first step in recognizing how a duplicative and onerous regulatory environment harms banks, the economy, and, more importantly, consumers." Hunt added, "It is imperative to right-size regulation to better promote the strengths of the banking industry, which contribute to economic growth, access to credit, and consumer choice." He concluded that the report "offers pragmatic solutions in line with today’s economic needs."

Financial Services Roundtable CEO Pawlenty also called the report an "important step towards modernizing America’s financial regulatory system so both economic growth and consumer protection are advanced." He added that the report discussed several FSR member priorities.

Comprehensive review is due. Kenneth E. Bentsen Jr., president and CEO of the Securities Industry and Financial Markets Association commended the Treasury Department for "conducting a thorough review of our financial regulatory system." He added, "Clear market rules and prudent capital standards can provide investor confidence and financial stability necessary for robust markets, capital formation and economic growth. But redundant and conflicting rules, or measures that unnecessarily outweigh stability over investment can result in inefficient regulation and stifle our growth potential. Given the multitude of regulatory initiatives over the last decade alone, notwithstanding the decades prior, the time for a comprehensive review is due and we look forward to reviewing the Treasury’s report."

Robust economic recovery. Independent Community Bankers of America welcomed the Treasury Department’s report. ICBA President and CEO Camden R. Fine said, "Following the recent community banker meetings at the White House and Treasury Department and amid ongoing efforts by Congress to address community bank overregulation, we have an opportunity to advance substantial reforms that will increase community-based lending and promote a more robust economic recovery."

When greed goes unchecked. Senator Sherrod Brown (D-Ohio), the Ranking Member Senate Banking Committee, noted that the Treasury Department consulted with banking industry groups at a ratio of 17-to-1 over consumer groups when formulating the report. He added, "When Wall Street greed goes unchecked, American taxpayers and working families pay the price. Too many hardworking Americans still haven’t fully recovered from the financial crisis, and Washington should be focused on protecting them by holding Wall Street accountable, not doing its bidding."

An attack. Representative Maxine Waters (D-Calif), the Ranking Member of the House Financial Services Committee, called the report "an attack on protections for consumers, investors and retirees." She added, "Make no mistake, the Treasury Department is proposing to take apart Wall Street Reform just like the Wrong Choice Act—they are just trying to make it sound nicer. But there is nothing nice, reasonable, or thoughtful about this proposal. The Trump Administration is saying loud and clear that they would rather gamble with our financial security than prevent Wall Street from taking advantage of hardworking families."

Eviscerate CFPB. Lisa Donner, executive director of Americans for Financial Reform said, "[the] Treasury proposal advances ideas that have been pushed by industry lobbyists since Dodd-Frank was passed," Donner said. "We need more effective regulation and enforcement, not rollbacks driven by Wall Street and predatory lenders." Simmonds Marshall, AFR’s policy counsel, added, "The Trump administration’s proposal would eviscerate the Consumer Financial Protection Bureau by ending its regular supervisory examinations of banks, mortgage companies, and payday lenders, and scaling back its power to stop banks and other financial firms from lying to their customers."

No real solutions. Yana Miles, a Senior Legislative Counsel at the Center for Responsible Lending, said, "The Treasury Department’s report offers no real solutions to make consumer protection a top priority. It recommends politicizing and weakening the Consumer Financial Protection Bureau and contradicts the Administration’s campaign promise of protecting Main Street from Wall Street abuse." She added, "If this Administration has not learned from the mistakes that caused the 2008 economic crisis, they are doomed to repeat them. Lest we forget, lax oversight allowed Wall Street to back extremely reckless loans whose failure snowballed into a financial crisis. Millions of Americans lost their homes and jobs, and U.S. households lost trillions of dollars. The Treasury’s comments and recommendations is a warning sign of a return to those dark days."

Companies: American Bankers Association; Americans for Financial Reform; Center for Responsible Lending; Consumer Bankers Association; Financial Services Roundtable; Independent Community Bankers of America; Securities Industry and Financial Markets Association

MainStory: TopStory BankHolding BankingFinance BankingOperations CapitalBaselAccords CFPB CommunityDevelopment DoddFrankAct FedTracker FinancialStability Mortgages PrudentialRegulation TrumpAdministrationNews VolckerRule

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