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 Last year started with a great deal of optimism in the banking industry regarding regulatory reform. This was in large part due to the Republican Party gaining control of the White House and retaining control of both houses of Congress.  The party of smaller government and laissez faire economics vowed a host of legislative and policy changes. President Trump even promised “a very major haircut on Dodd-Frank.”

With his eighth executive order, the president laid out the “core principles” for his administrations regulatory policies in regards to the financial industry. The key focus being to increase the overall efficacy of regulations by eliminating or reducing disjointed, overlapping, and duplicated regulatory efforts across multiple agencies (FDIC, OCC, SEC, FINRA, CFPB, OCC, etc.). The overarching belief being a reduction in complexity and burdensome over regulation will result in better overall compliance, reduced risk, and tremendous cost savings.

Although the executive order was signed February 2, the administration failed to make headway in appointing key positions in its regulatory team until July when President Trump nominated Randall Quarles for a vacant seat on the Federal Reserve Board of Governors. In a world where “personnel is policy”, it is no wonder 2017 was a relatively quiet year from a policy change perspective, when most of the year was spent with vacancies in so many key regulatory positions. Many of those vacancies have now been filled and 2018 is expected to see far more significant changes not only to the implementation of Dodd – Frank, but also in legislative reform.

Also in 2017, Republicans in the House of Representatives moved quickly and passed the Financial CHOICE Act (H.R. 10) in June. Passage of this legislation would have resulted in replacement of large sections of Dodd-Frank. Resulting in something more like an Extreme Makeover than the “haircut” promised by the president. The CHOICE Act provided extensive “off ramp” options for financial institutions to avoid increased regulatory scrutiny by meeting more stringent equity-capital ratios. It also would have repealed the Volcker Rule completely, narrowed the scope and authority of the CFPB, repurposed the FSOC, and allowed larger financial institutions to use the bankruptcy process rather than being forced through the “orderly liquidation” process dictated by Dodd-Frank Title II.

The Republican win in the House was short lived, however, as the CHOICE act was deemed “dead on arrival” in the Senate. Senate Democrats desperate to protect their Dodd-Frank quickly closed ranks, and Senate Republicans did not want to risk tax reform legislation by using the budget reconciliation procedure to pass the bill. However, now that the tax reform fight has concluded, the Senate Banking Committee has developed a bi-partisan reform bill called the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155). If the CHOICE Act was an “Extreme Makeover”, this bill would be “just a trim.”

Rather than wholesale changes to Dodd-Frank that the CHOICE Act would have implemented, S. 2155 is designed to reduce its cumbersome requirements particularly for “community banks” with $10 billion in assets or less. Considering approximately 97% of U.S. Commercial banks fall under that threshold, the majority of U.S. banks could receive relief from the Volcker Rule, Ability-to-Repay/QM rules, HMDA Requirements and SAFE Licensing rules under this bill. This is achieved by including a narrower “regulatory off ramp” than designed in the CHOICE Act and making targeted changes aimed at smaller institutions. In addition S. 2155 would reduce the costly reporting burden for banks with less than $5 billion in assets. However, it would make no change to the CFPB.

Thanks to bipartisan support, this version of the bill has passed in 2018. It represents significant, if not ground breaking, regulatory reform that strikes a balance that helps smaller banks be more competitive while retaining more stringent regulatory oversight on larger banks that could be considered “too big to fail.”

The Mad Banker