July 2017 closed with an expected deluge of regulatory rhetoric which showed, at long last, where the Trump administration is slowly starting to mold existing rules to its liking.
Near the end of the month, Treasury Secretary Steven Mnuchin testified before the House Financial Services Committee, delivering the annual report of his agency’s activities for the first time.
The grilling he received from Committee members, as expected, frequently wandered away from ideas regarding regulatory reform to questions of the Trump Administrations’ financial ties, Russian sanctions, and, of course, the attempted repeal of the Affordable Care Act.
Mnuchin, despite numerous testy exchanges, managed to put a personal touch on regulatory reforms the Treasury Department has committed to.
He agreed with Chairman Jeb Hensarling (R-Texas) that he “very much deplores” what is happening to community banks and credit unions, putting tailored regulations at the top of his list of priorities.
“We are very focused on making sure community and regional banks grow,” Mnuchin said. “They account for 50 percent of the assets in the American financial markets. We want to make sure there is robust lending, particularly in community banks. They are not able to lend because they are over-burdened by regulatory issues.”
Turning to the Volcker rule—a Dodd-Frank Act prohibition on proprietary trading by bank holding companies—Mnuchin also promised action. “The biggest problem with the rule is its complexity and regulatory overlap,” he said. “We need to make sure banks understand how the regulation works. Recently, I was at a G-20 meeting and we had economists that came and talked to us. One of them said that every trading desk needs a psychiatrist and lawyer to determine how to apply the rule.”
“Contrary to Mr. Quarles’s predictions in 2006, the economy was not ‘strong,’ the financial sector was not ‘healthy,’ and our future was not ‘bright.’ The banks were not, in fact, as he said at the time, ‘well capitalized.’ And as a result, taxpayers paid billions to bail those banks out.”
Sen. Sherrod Brown (D-Ohio)
Later, Mnuchin reiterated earlier promises that, as head of the Financial Stability Oversight Council (FSOC), the multi-agency authority on curbing systemic risk, he will fight to raise the asset threshold for categorizing systemically important financial institutions from $50 billion to at least $250 billion, perhaps even as high as $300 billion.
Mnuchin added that “simple, un-complex banks” should be held to even higher asset thresholds before being considered systemically important.
Senate Banking Committee. An additional look into the philosophical underpinnings of incoming agency leaders came at a nomination hearing convened by the Senate Banking Committee on July 27.
Joseph Otting was nominated to be comptroller of the Currency. Randal Quarles was nominated by President Trump to the Board of Governors of the Federal Reserve System and its first vice chair for supervision.
Sen. Sherrod Brown (D-Ohio) fired away. Quarles, he pointed out, served as the Treasury Department’s undersecretary for domestic finance in the years leading up to the 2008 financial crisis. It was his job to coordinate oversight of the financial industry.
“However,many of his statements leading up to the crisis lead me to wonder whether he was asleep at the switch or willfully turning a blind eye to Wall Street abuses,” Brown said. “Contrary to Mr. Quarles’s predictions in 2006, the economy was not ‘strong,’ the financial sector was not ‘healthy,’ and our future was not ‘bright.’ The banks were not, in fact, as he said at the time, ‘well capitalized.’ And as a result, taxpayers paid billions to bail those banks out.”
VOLCKER RULE RELIEF
The following is from the Federal Reserve’s “Procedures for a Banking Entity to Request an Extension of the One-Year Seeding Period for a Covered Fund.”
This guidance applies to all banking entities, including those banking entities with $10 billion or less in consolidated assets, that are subject to section 13 of the Bank Holding Company Act (also known as the Volcker rule), regardless of the banking entities’ primary financial regulatory agency.
Requirements for submitting sequests
In filing a request for an extension of the seeding period, a banking entity must provide the reasons for filing the application, including information that addresses each of the relevant factors contained in 12 CFR 248.12(e). The banking entity also must explain its plan for reducing the permitted investment in each covered fund through redemption, sale, dilution or other methods, to the per-fund limitation by the end of the extended seeding period.
Additionally, a banking entity should represent whether or not it meets all of the applicable requirements of section 13(d)(1)(G) of the BHC Act and 12 CFR 248.11 with respect to permitted organizing and offering of a covered fund.
Procedures for filing an extension request
A banking entity should submit its request for an extension of the seeding period in writing to the Applications Unit of the Federal Reserve Bank in the district where the top-tier banking entity is headquartered.
The request should be submitted at least 90 days prior to the expiration of the applicable time period.
The request should include the name of the banking entity requesting the extension, cite the section of the rule under which it is seeking an extension, and identify its primary financial regulatory agency. In the case of a banking entity that is primarily supervised by another agency, the banking entity should provide a copy of the extension request and all related correspondence related to the request to the relevant agency.
The Federal Reserve will consult with that agency before acting on an extension request as required under the implementing rules.
In addition to the information required to be submitted pursuant to the implementing rules for seeding period extension requests, a banking entity should provide the name, phone number, and email address of the entity's point of contact to whom Board and Reserve Bank staff may submit all inquiries.
Source: Federal Reserve
Quarles, in his testimony, endorsed tailored regulations that take into account size and risk profile. “We should look very carefully at tailoring capital regulation and other types of regulation to the particular character of the institutions,” he said.
“Regulatory policies enacted since the financial crisis have improved the safety and soundness of the financial system,” he added. “But as with any complex undertaking, after the first wave of reform, and with the benefit of experience and reflection, some refinements will undoubtedly be in order.”
Refinements, at least where the Volcker rule is concerned, are already underway.
On the week of July 23, a non-public meeting was held where it was announced that easing the burden of the Volcker rule was among the topics of discussion, as well as common complaints about the rule—namely its complexity and potential negative effect on liquidity at financial institutions.
Mnuchin, who chairs theFSOC, has made his desire to modify the rule very clear. But adding to that momentum were remarks made by Federal Reserve Board Chairwoman Janet Yellen, also an FSOC member. She has also expressed little to no opposition for scaling back the rule.
Federal Reserve Governor Jerome Powell, although not an FSOC member, has a similar view. “The Federal Reserve is reassessing whether the Volcker rule implementing regulation most efficiently achieves its policy objectives, and we look forward to working with the other four Volcker rule agencies to find ways to improve that regulation,” he said recently. “In our view, there is room for eliminating or relaxing aspects of the implementing regulation in ways that do not undermine the Volcker rule’s main policy goals.”
While we wait to see what, if anything, the FSOC will decide about the Volcker rule, some of the desired reforms are already underway.
Federal Reserve Board. On July 24, the Federal Reserve Board announced guidelines for banking entities seeking an extension to conform certain “seeding” investments in hedge funds or private equity funds to requirements of Volcker rule.
Seeding refers to the period during which a banking entity provides a new fund with initial equity to permit the fund to attract investors.
The Dodd-Frank Act permits the board, upon an application by a banking entity, to provide up to an additional two years to conform seeding investments in covered funds to the requirements of the statute if it finds the extension would be consistent with safety and soundness and in the public interest.
According to the guidelines adopted by the board, firms seeking a seeding period extension should submit information including the reasons for the extension and an explanation of the entity’s plan to conform the investment to the requirements of the Volcker rule.
The federal regulatory agencies overseeing the Volcker rule have also announced that they are coordinating their respective reviews of the treatment of foreign funds.
These are investment funds organized and offered outside of the United States that are excluded from the definition of “covered fund” under implementing regulations.
Section 619 of the Dodd-Frank Act, and the Rule’s implementing regulations, generally do not apply to investments in, or sponsorship of, these foreign excluded funds by a foreign banking entity.
Complexities in the statute and the implementing regulations, however, may result in certain foreign excluded funds becoming subject to the Volcker rule because of governance arrangements with or investments by a foreign bank. As a result, a number of foreign banking entities, foreign government officials, and other market participants have expressed concern about unintended consequences and extraterritorial impact.
“The staff of the agencies are considering ways in which the implementing regulations may be amended, or other appropriate action may be taken,” the announcement says. “It may also be the case that congressional action is necessary to fully address the issue.”
To aid full consideration, the regulators announced that they would not take action under rules for qualifying foreign excluded funds, subject to certain conditions, for a period of one year.
The five agencies that implement and oversee the Volcker rule are the Federal Reserve Board, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Securities and Exchange Commission.