On April 13th, 2018, the House of Representatives took the first step in repealing the Volcker Rule, which places heavy restrictions on the types of investing banks can take part in, with the passing of H.R. 4790 or the Volcker Rule Harmonization Act. In addition, Senate lawmakers introduced a proposal called the S. 2155 or the Economic Growth, Regulatory Relief, and Consumer Protection Act to raise the current $50 billion asset threshold to $250 billion to be categorized as a systemically important financial institution, also known as SIFI, allowing some of the larger community and regional banks more flexibility to innovate and expand.
Following the 2008 financial crisis, a threshold of $50 billion was set that subjected banks above that level to tougher capital and liquidity requirements. In addition, a $10 billion asset threshold was set that required banks above that level to conduct stress tests. Based on the data provided by the Federal Reserve as of June 30th, 2017, if the proposal goes through, this revision will bring the amount of SIFI banks down from 38 to somewhere between 10 to 15.
This proposal also faces a lot of opposition with opponents pointing out that raising the asset threshold to $250 billion would have excluded Countrywide, National City, and GMAC, all of which led to the federal government providing billions of dollars in capital assistance, asset guarantees, debt guarantees, and/or tax benefits to save the banking industry during the 2008 financial crisis.
With so much uncertainty and potential changes, what is the best way for mid-sized banks to navigate the complex regulatory environment? At BaseCap Analytics, we believe that mid-sized banks should aim to take a balanced course of action to address their compliance, risk management, and regulatory needs. The approach should involve proper execution planning in the event of legislative changes, without overinvesting in long-term, costly enterprise solutions.
One of the most significant challenges financial institutions face is the lack of new technology and the inability to update IT infrastructure to meet their regulatory needs. When it comes to regulatory reporting, banks often face technology challenges such as system limitations, data integrity, and data availability. These challenges exist because of the large amount of data sources used by banks that need to be aggregated for the reporting process, strict requirements and deadlines demanded by regulators, and multiple report formats that vary from one regulator to another. Due to these challenges, banks often look externally for regtech solutions, leading to the growth of regtech startups in the recent years.
Banks are regularly required to collect data and to process them in different formats based on the requirements of the specific regulator, which includes, but is not limited to, the Federal Reserve, SEC, FDIC, FINRA, CFPB, and state banking authorities. In addition, the regulatory environment is dynamic, and banks must be able to quickly deal with the introduction of new or changing rules. Therefore, banks need to streamline their process in gathering information, performing analysis, reconciling and auditing, and generating accurate and flexible reports to meet regulatory demands.
According to McKinsey, 10-15% of a financial institution’s total workforce is dedicated to governance, risk management, and compliance in 2017. Instead of using their resources and manpower to perform manual adjustments and reconciliations to their data, banks should instead focus on methods for automation and spend more time on performing analytics and on the review process. These are critical in assessing the accuracy and completeness of data prior to being sent out to regulators. Analytics that could be performed include trend analysis, variance analysis, and ratio analysis.
Here is where regtech startups like BaseCap Analytics come in. We provide specialized expertise on reducing manual intervention and creating automated processes, providing process documentations, and providing analytics that will ensure the accuracy of information reported to regulators via our consulting services and software solutions. Since there is no one size fits all or universal solution that will tackle every regulatory need, we are dedicated towards providing dynamic services and solutions to address our clients’ specific needs.
As we reach 2018, it is time to reflect upon the 2017 CCAR results with an eye towards the 2018 CCAR process.
In January of 2017, the FRB issued a final rule which exempted certain BHCs with between $50 billion and $250 billion (mostly regional banks) from the qualitative CCAR requirements. On June 28, 2017, the Federal Reserve Board (“FRB”) released CCAR results for the 34 Bank Holding Companies (“BHCs”) with more than $50 billion in assets. For the third year in a row, all 34 BHCs passed on quantitative grounds. 2017 was also the first year for the CCAR qualitative portion. Of the 34 BHCs, the FRB published results from only 13 BHCs. All 13 BHCs publicly passed with one BHC receiving a conditional nonobjection with requirements to address weaknesses as identified during the process.
Since the release of the 2017 results, there has been much speculation on the future of CCAR particularly in light of Executive Order 13772: “Core Principles for Regulating the United States Financial System.” While the Executive Order broadly announced a desire to make regulatory reporting processes more effective, a survey of publications by the FRB and the Treasury in the latter half of 2017 does not indicate changes to CCAR reporting standards for 2018.
One of the possible directions for CCAR changes is in the process, not standards of the CCAR process. On September 27, 2017, the FRB published proposed rules to simplify regulatory capital rules. However, it is important to note that this is addressed to banking organizations not subject to advanced approaches.
Another possible direction is to promote transparency in the CCAR process and risk models being utilized by the FRB. In a publication released on December 7, 2017, the FRB issued proposals to increase transparency of CCAR stress testing. Specifically, more information on the models used by the FRB to estimate hypothetical losses in CCAR stress testing would be released.
In another publication released on December 7, multiple U.S. banking agencies (the FRB, the Dept. of Treasury, the FDIC and the OCC) stated their joint support for the finalized and reformed Basel III agreement on banking capital standards. Since 2010, the Basel III agreement has served as guidance on the minimum standards for banking regulatory capital.
In summary, while Executive Order 13772 expressed the Administration’s goal to streamline regulatory reporting processes, subsequent publications have not indicated changes in CCAR standards as pertains to BHCs that are subject to advanced approaches. It will be interesting to see whether the FRB will make more risk-based categories to the existing population of BHCs subject to CCAR requirements and whether these categories will ultimately be used to reduce reporting requirements.