On May 22nd, 2018, Congress approved the first major Dodd-Frank rollback to relax federal oversight for banks with less than $250 billion in assets. This revision brings the number of banks categorized as systemically important (SIFI) and subject to stricter federal oversight from 38 to be 10 or less. This change frees many mid-sized banks from tougher capital and liquidity requirements and from conducting stress tests. This provides community and regional banks with more flexibility to innovate and grow, and therefore, will spur more small business loans and consumer loans in the United States.
The bill was passed with bipartisan effort, with the House voting 258-159 to approve the regulatory rollback. Financial institutions have been performing extremely well prior to the rollback, with a report from the Federal Deposit Insurance Corporation (FDIC) stating that the combined net income of American commercial banks and savings institutions reached $56 billion in the first quarter of 2018, representing a 27.5% growth year over year.
In addition, the Federal Reserve announced on May 30th, 2018 a proposal to revise the Volcker Rule, which bans proprietary trading and prohibits banks from taking large stakes in hedge funds and private equity firms. The Federal Reserve, the SEC, the FDIC, the OCC, and the CFTC are in the process of approving the proposal to simplify the Volcker Rule so that banks have less difficulty knowing how to comply and so that it can be adequately enforced. Proprietary trading remains illegal, but the biggest proposed change is that banks will no longer have to specifically prove that each of their trades are used to hedge against specific risks and is not just a speculative bet. The proposal also applies different compliance standards based on trading assets size, with over $10 billion as “significant”, between $1 billion and $10 billion as “moderate” and under $1 billion as “limited.”
However, regulators are indicating that they will require big banks to self-regulate by creating new internal controls. Some have proposed to have the CEO of banks to personally attest to future claims that their institutions are adhering to the restriction on speculative betting. Self-regulation will present a different set of challenges for banks because processes and controls will be less standardized throughout the industry.
BaseCap Analytics and other regtech startups will need to play a key and central role in guiding financial institutions towards self-regulation. Our expertise in creating a balanced approach allows us to guide and support the risk committee and internal audit with their frameworks for risk tolerance and risk limits to ensure that they have adequate controls throughout the organization.