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Federal Reserve Board issues proposed joint revisions to Volcker rule
On May 30, the Federal Reserve Board (Board) announced proposed revisions designed to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds (the Volcker rule). The proposal, subject to public comment for 60 days after publication in the Federal Register, was developed in coordination with the OCC, FDIC, SEC, and CFTC, and would modify regulations finalized in December 2013 to reduce compliance costs for banks. Two information collections were issued along with the proposal: Information Schedules and Quantitative Measurements Daily Schedule.
According to a Board memo, the proposed amendments would tailor Volcker rule requirements to better align with a bank’s level of trading activity and risks. The proposal would establish the following three categories based on trading activity: (i) “significant trading assets and liabilities,” which would consist of banks with gross trading assets and liabilities of at least $10 billion, and require a comprehensive compliance program tailored to reflect the Volcker rule’s requirements; (ii) “moderate trading assets and liabilities,” which would include banks with gross trading assets and liabilities of at least $1 billion but less than $10 billion, and impose reduced compliance obligations; and (iii) “limited trading assets and liabilities,” which would include banks with less than $1 billion in gross trading assets and liabilities, and subject them to the lowest level of regulatory compliance.
In addition, the proposal would, among other changes:
- provide more clarity by revising the definition of “trading account” to be an account used to buy or sell financial instruments recorded at fair value under commonly used accounting definitions;
- clarify that banks whose trades do not exceed appropriately developed internal risk limits are engaged in permissible market-making-related activity;
- streamline the criteria that applies when a bank relies on the hedging exemption from the proprietary trading prohibition, and remove a requirement that a trade “demonstrably reduces or otherwise significantly mitigates” a specific risk;
- ease the documentation requirement banks face when demonstrating trades are hedges, and eliminate requirements that a bank with only moderate or limited trading activity must develop “a separate internal compliance program for risk-mitigation hedging”;
- eliminate the 60-day rebuttable presumption for trades;
- expand the scope of the “liquidity management exclusion” in the Volcker rule to allow banks to use foreign exchange forwards, foreign exchange swaps, and physically settled cross-currency swaps as a part of liquidity management activities;
- limit the impact of the Volcker rule on foreign banks’ activity outside of the U.S.; and
- simplify the type of trading activity information that banks will be required to provide to the agencies.
Federal Reserve Board Chair Jerome Powell noted that after nearly five years of experience applying the Volcker rule, the proposed rule is a way to “allow firms to conduct appropriate activities without undue burden, and without sacrificing safety and soundness.”
Federal Reserve Board Governor Lael Brainard also commented that “[r]ather than requiring banking institutions to undertake specific quantitative analyses prescribed by the regulators, the proposed revisions would require banking institutions to establish internal risk limits to achieve the principle of not exceeding the reasonably expected near-term demands of customers, subject to supervisory review.”
Federal Reserve Board Vice Chair of Supervision Randal Quarles stated that while the regulatory relief bill signed into law on May 24 exempts banks with less than $10 billion in total assets from the Volcker rule (see previous InfoBytes coverage here), the “proposed rule, however, would recognize that small asset size is not the only indicator of reduced proprietary trading risk.” Furthermore, the proposed rule is a “best first effort at simplifying and tailoring the Volcker rule” and does not represent the “completion of [the Board’s] work.”
Federal Reserve meeting to consider proposed overhaul of Volcker Rule set for May 30
On May 23, the Federal Reserve Board issued a notice announcing it will meet on May 30 to consider a proposal to modify the Volcker Rule. Section 13 of the Bank Holding Company Act currently restricts banks from engaging in proprietary trading and restricts their ownership of certain funds. As previously discussed in InfoBytes, last month the House passed the “Volcker Rule Regulatory Harmonization Act,” which, among other things, would provide clear exemptions for banking entities with $10 billion or less in consolidated assets or those comprised of five percent or less of trading assets and liabilities. A similar exemption is also included in the bipartisan Senate financial regulatory reform bill, S.2155, which was signed by President Trump on May 24. (See InfoBytes coverage on S.2155 here.)
Trump signs legislation enacting bipartisan regulatory relief bill
On May 24, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) (the bill) — which modifies provisions of the Dodd-Frank Act and eases certain regulations on certain smaller banks and credit unions. Upon signing, the White House released a statement quoting the president, “[c]ommunity banks are the backbone of small business in America. We are going to preserve our community banks.”
The House, on May 22, passed the bipartisan regulatory reform bill by a vote of 258-159. The bill was crafted by Senate Banking, Housing, and Urban Affairs Committee Chairman Mike Crapo, R-Idaho and passed by the Senate in March. The House passed the bill without any changes to the Senate version, even though House Financial Services Chairman, Jeb Hensarling, originally pushed for additional reform provisions to be included. Specifically, the bill does not include certain provisions that were part of Hensarling’s Financial CHOICE Act, such as (i) a complete repeal of the Volker Rule; (ii) subjecting the CFPB to the Congressional appropriations process and restructure the agency with a bipartisan commission; and (iii) reducing the Financial Stability Oversight Council’s (FSOC) authority to designate nonbank financial institutions as Systemically Important Financial Institutions (SIFIs).
In response to the bill’s passage, the OCC’s Comptroller of Currency, Joseph Otting, issued a statement supporting the regulatory changes and congratulating the House, “[t]his bill restores an important balance to the business of banking by providing meaningful reductions of regulatory burden for community and regional institutions while safeguarding the financial system and protecting consumers.” Additionally, acting Director of the CFPB, Mick Mulvaney, applauded Congress, noting that the reforms to mortgage lending were “long overdue” and called the bill “the most significant financial reform legislation in recent history.”
As previously covered by InfoBytes, the highlights of the bill include:
- Improving consumer access to mortgage credit. The bill’s provisions state, among other things, that: (i) banks with less than $10 billion in assets are exempt from ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) appraisals will not be required for certain transactions valued at less than $400,000 in rural areas; (iii) banks and credit unions that originate fewer than 500 open-end and 500 closed-end mortgages are exempt from HMDA’s expanded data disclosures (the provision would not apply to nonbanks and would not exempt institutions from HMDA reporting altogether); (iv) amendments to the S.A.F.E. Mortgage Licensing Act will provide registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines; and (v) the CFPB must clarify how TRID applies to mortgage assumption transactions and construction-to-permanent home loans, as well as outline certain liabilities related to model disclosure use.
- Regulatory relief for certain institutions. Among other things, the bill simplifies capital calculations and exempts community banks from Section 13 of the Bank Holding Company Act if they have less than $10 billion in total consolidated assets. The bill also states that banks with less than $10 billion in assets, and total trading assets and liabilities not exceeding more than five percent of their total assets, are exempt from Volcker Rule restrictions on trading with their own capital.
- Protections for consumers. Included in the bill are protections for veterans and active-duty military personnel such as: (i) permanently extending from nine months to one year the protection that shields military personnel from foreclosure proceedings after they leave active military service; and (ii) adding a requirement that credit reporting agencies provide free credit monitoring services and credit freezes to active-duty military personnel. The bill also addresses the creation of an identity theft protection database. Additionally, the bill instructs the CFPB to draft federal rules for the underwriting of Property Assessed Clean Energy loans (PACE loans), which would be subject to the TILA ability-to-repay requirement.
- Changes for bank holding companies. Among other things, the bill raises the threshold for automatic designation as a SIFI from $50 billion in assets to $250 billion. The bill also subjects banks with $100 billion to $250 billion in total consolidated assets to periodic stress tests and exempts from stress test requirements entirely banks with under $100 billion in assets. Additionally, certain banks would be allowed to exclude assets they hold in custody for others—provided the assets are held at a central bank—when computing the amount such banks must hold in reserves.
- Protections for student borrowers. The bill’s provisions include measures to prevent creditors from declaring an automatic default or accelerating the debt against a borrower on the sole basis of bankruptcy or cosigner death, and would require the removal of private student loans on credit reports after a default if the borrower completes a loan rehabilitation program and brings payments current.
Each provision of the bill will take effect at various intervals from the date of enactment up to 18 months after.
Quarles testifies before House Financial Services Committee
On April 17, Vice Chairman for Supervision of the Federal Reserve Board, Randal Quarles, testified at a hearing with the House Financial Services Committee entitled “Semi-Annual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System.” Quarles’ prepared testimony covered (i) the current condition of U.S. bank institutions; (ii) the Fed’s supervisory and regulatory agenda; and (iii) the Fed’s engagement with foreign regulators. During the hearing, Quarles emphasized transparency and simplicity, specifically highlighting the Fed’s recent proposed changes to the capital rules for large banks (previously covered by InfoBytes here). With regard to the global systemically important banks (GSIB) surcharge, Quarles responded to committee member concerns that the surcharge calculation may be seen as a penalty based on a growing economy and acknowledged that the Fed will look into the calculation with respect to those concerns. However, Quarles also emphasized that, “it is generally accepted that [the calculation] has resulted in improvement in the resolvability of the firms.” With regard to the Volker Rule, Quarles stated it is “unarguable” that the rule is detrimental to capital markets, and while the rule cannot be repealed by the Board because of statutory limitations, “there is a lot that [the Fed] can do to increase the certainty of application, to reduce the burden of application.” As previously covered by InfoBytes, the House passed a bill granting the Federal Reserve exclusive authority to implement the Volker Rule (currently the Fed, the OCC, the FDIC, the SEC, and the CFTC share rulemaking authority under the Rule). Quarles also discussed the Treasury Department’s recommendations (previously covered by InfoBytes here) to regulators regarding suggestions to modernize the Community Reinvestment Act (CRA), calling the CRA “a little formulaic and ossified,” commending Treasury’s efforts to review the CRA, and stating that regulators should “think about ways to apply [the CRA] more effectively.”
House passes bipartisan bill granting Federal Reserve exclusive authority to implement Volcker Rule
On April 13, the House passed H.R. 4790, the “Volcker Rule Regulatory Harmonization Act,” by a vote of 300-104. The bipartisan bill designates the Federal Reserve Board (Fed) as the exclusive regulatory authority to implement and amend rules under Section 13(b) of the Bank Holding Company Act. (Currently the Fed, the OCC, the FDIC, the SEC, and the CFTC share rulemaking authority under the rule.) H.R. 4790 also provides clear exemptions for banking entities with $10 billion or less in consolidated assets or those comprised of five percent or less of trading assets and liabilities. A similar exemption is included in the bipartisan Senate financial regulatory reform bill, S.2155, which passed the Senate in March (previously covered by InfoBytes here). According to a press release issued by the House Financial Services Committee, while H.R. 4790 does not repeal the Volcker Rule—which restricts banking entities from engaging in proprietary trading or entering into certain relationships with hedge and private equity funds—it does create a streamlined, efficient framework to provide increased regulatory clarity for entities required to comply with the rule.
Senate passes bipartisan financial regulatory reform bill
On March 14, by a vote of 67-31, the Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) (the bill)—a bipartisan regulatory reform bill crafted by Senate Banking, Housing, and Urban Affairs Committee Chairman Mike Crapo, R-Idaho—that would repeal or modify provisions of Dodd-Frank and ease regulations on all but the biggest banks. (See previous InfoBytes coverage here.) The bill’s highlights include:
- Improving consumer access to mortgage credit. The bill’s provisions state, among other things, that: (i) banks with less than $10 billion in assets are exempt from ability-to-repay requirements for certain qualified residential mortgage loans; (ii) appraisals will not be required for certain transactions valued at less than $400,000 in rural areas; (iii) banks and credit unions that originate fewer than 500 open-end and 500 closed-end mortgages are exempt from HMDA’s expanded data disclosures (the provision would not apply to nonbanks and would not exempt institutions from HMDA reporting altogether); (iv) amendments to the S.A.F.E. Mortgage Licensing Act will provide registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines; and (v) the CFPB must clarify how TRID applies to mortgage assumption transactions and construction-to-permanent home loans, as well as outline certain liabilities related to model disclosure use.
- Regulatory relief for certain institutions. Among other things, the bill simplifies capital calculations and exempts community banks from Section 13 of the Bank Holding Company Act if they have less than $10 billion in total consolidated assets. The bill also states that banks with less than $10 billion in assets, and total trading assets and liabilities not exceeding more than five percent of their total assets, are exempt from Volcker Rule restrictions on trading with their own capital.
- Protections for consumers. Included in the bill are protections for veterans and active-duty military personnel such as: (i) permanently extending the protection that shields military personnel from foreclosure proceedings after they leave active military service from nine months to one year; and (ii) adding a requirement that credit reporting agencies provide free credit monitoring services and credit freezes to active-duty military personnel. The bill also addresses general consumer protection options such as expanded credit freezes and the creation of an identity theft protection database. Additionally, the bill instructs the CFPB to draft federal rules for the underwriting of Property Assessed Clean Energy loans (PACE loans), which would be subject to TILA consumer protections.
- Changes for bank holding companies. Among other things, the bill raises the threshold for automatic designation as a systemically important financial institution from $50 billion in assets to $250 billion. The bill also subjects banks with $100 billion to $250 billion in total consolidated assets to periodic stress tests and exempts from stress test requirements entirely banks with under $100 billion in assets. Additionally, certain banks would be allowed to exclude assets they hold in custody for others—provided the assets are held at a central bank—when computing the amount such banks must hold in reserves.
- Protections for student borrowers. The bill’s provisions include measures to prevent creditors from declaring an automatic default or accelerating the debt against a borrower on the sole basis of bankruptcy or cosigner death, and would require the removal of private student loans on credit reports after a default if the borrower completes a loan rehabilitation program and brings payments current.
The bill now advances to the House where both Democrats and Republicans think it is unlikely to pass in its current form.
Federal Reserve vice chairman evaluates post-crisis regulations
On January 19, Federal Reserve Vice Chairman for Supervision Randal Quarles spoke at the American Bar Association Banking Law Committee Annual Meeting to discuss his initial observations on the post-crisis regulation regime and provide a status update on the Fed’s key areas of focus for improving the “efficiency, transparency, and simplicity of regulation.” Quarles emphasized that there are a variety of means to improve efficiency, such as (i) addressing unintended adverse consequences of a regulation, or (ii) calibrating a regulation “more precisely to the risks in need of mitigation.” Transparency around rulemaking encourages a variety of perspectives, and simplifying regulations “promotes public understanding of regulation, promotes meaningful compliance by the industry with regulation, and reduces unexpected negative synergies among regulations,” he added.
According to Quarles, “small bank capital simplification, burden reduction in resolution planning, enhancements to stress testing, leverage ratio recalibration, and Volcker rule simplification” are common ground areas for improvement, efforts have progressed, and regulations have been proposed for changes, including extending the resolution planning cycle to reduce the reporting burden. Quarles also noted that the Fed expects to release a proposal on leverage ratio recalibration in the near future, and has started working with five banking agencies on a proposal to streamline the Volcker rule.
Another area of focus Quarles highlighted is the Fed’s plan to revisit the “advanced approaches” thresholds used to identify internationally active banks, including risk-based capital requirements as well as the supplementary leverage ratio. Quarles further noted that the current $250 billion-asset or $10 billion in on-balance-sheet foreign exposures thresholds were formulated more than a decade ago “and have not been refined since then.” Additionally, Quarles announced plans to work with his Fed colleagues to simplify the framework for loss absorbency requirements. According to Quarles, candidates for simplification include (i) eliminating the advanced approaches risk-based capital requirements; (ii) eliminating one or more stress testing ratios; and (iii) modifying the total loss-absorbing capacity requirements. The framework for making determinations of control under the Bank Holding Company Act—while not a post-crisis regulation—could also be improved to be less “burdensome and time-consuming,” Quarles added.
Finally, as previously covered in InfoBytes, Quarles commented on the Fed’s requests for comments issued last December on three proposals designed to increase stress testing transparency while also testing the resiliency of large, complex banks. “I believe that the disclosure we have provided does not go far enough to provide visibility into the supervisory models that often deliver a firm's binding capital constraint,” Quarles noted.
OCC, Federal Reserve Solicit Public Comments on Volcker Rule
On August 2, the OCC announced it is seeking public comments on ways to improve regulations implementing the Volcker Rule, however the agency stressed it is not seeking comment on changes to the underlying statute. The draft notice outlines issues with the rule, which bans banks from engaging in proprietary trading and restricts their ownership of certain funds, explaining that there is “broad recognition that the final rule [implementing the Volcker Rule] should be improved both in design and in application.” Referring to the Treasury Department’s June 2017 report, which identified problems with the design of the final rule and offered recommendations for revision, the OCC’s notice asked for suggestions on how to improve implementation with the understanding that any revisions would require a joint undertaking by the OCC, Board of Governors of the Federal Reserve System, the FDIC, and consultation with the SEC and the CFTC. Specifically, the notice seeks comments in the following four areas: (i) scope of entities subject to the final rule; (ii) proprietary trading prohibitions; (iii) covered fund prohibitions; and (iv) requirements for compliance program and metrics reporting.
Comments must be received within 45 days from publication in the Federal Register.
Separately, on August 2, the Board of Governors of the Federal Reserve System (Fed) issued a notice seeking comment on whether to extend for three years the Reporting, Recordkeeping, and Disclosure Requirements Associated with Proprietary Trading and Certain Interests in and Relationships with Covered Funds (Regulation VV). Regulation VV imposes information reporting requirements on certain banks engaged in significant trading activities, to ensure compliance with the Volcker Rule. Among other things, the Fed invited comment on whether the proposed collection of information is necessary and has practical utility, and ways to enhance the quality, utility, and clarity of the collected information, while minimizing the burden on respondents. In its notice, the Fed stated that the information collection “is required in order for covered entities to obtain the benefit of engaging in certain types of proprietary trading or investing in, sponsoring, or having certain relationships with a hedge fund or private equity fund, under the restrictions set forth in [the Volcker Rule].”
Comments must be received by October 2, 2017.
Regulators Coordinate Review of Volcker Rule Application to Foreign Funds
On July 21, five U.S. financial regulators announced that they would not take action against foreign banks for qualifying foreign excluded funds, subject to certain conditions, under the Volcker Rule for a period of one year as they review the treatment of these types of funds under current implementing regulations. The regulators, which include the Federal Reserve Board, FDIC, OCC, SEC, and Commodity Futures Trading Commission, issued a joint statement to address concerns raised as to whether certain foreign excluded funds may fall within the definition of “banking entity” under the Bank Holding Company Act and therefore be subject to the Volcker Rule.
“A number of foreign banking entities, foreign government officials, and other market participants have expressed concern about the possible unintended consequences and extraterritorial impact of the Volcker Rule and implementing regulations for certain foreign funds,” according to the joint statement. The regulators noted that the review will allow time to consider the appropriate course of action to address these concerns, including whether congressional action may be necessary.In addition, the regulators stressed that the joint statement “does not otherwise modify the rules implementing section 619 [of the Dodd-Frank Act] and is limited to certain foreign excluded funds that may be subject to the Volcker Rule and implementing regulations due to their relationships with or investments by foreign banking entities.”
Treasury Announces FSOC Executive Session on July 28
On July 21, the Treasury Department announced that on Friday, July 28, Secretary Steven T. Mnuchin will preside over an executive session of the Financial Stability Oversight Council (FSOC). According to a Treasury press release, the preliminary agenda includes:
- a discussion about Volcker Rule recommendations presented in the Treasury’s June 2017 report, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions”;
- an update on annual reevaluation requirements for designating nonbank financial companies; and
- a discussion regarding pending litigation brought against FSOC.
Consistent with FSOC’s transparency policy, the meeting may be made available via live webcast and can be viewed after it occurs. Meeting minutes for the most recent FSOC meetings are generally approved at the next meeting and posted online soon afterwards.
Meeting minutes for past meetings are available here.
Readouts for past meetings are available here.