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The Treasury Released a Bank Regulation Proposal: It Supplements Dodd-Frank Reform Efforts

ArmchairPolitiicianDoddFrank, June 16, 2017, by Brad Peery, WWW.ArmchairPolitician.US, ArmchairPolitician.US@gmail.com

The House has passed a Dodd-Frank reform bill. That was the first of three pillars for bank reform completion. The second event was the Treasury Department issuing its prescription for banking sector regulatory reform. It may be some time before the Senate, the third element, addresses the Dodd-Frank issue. Dodd-Frank is very technical and complex.

The Treasury Report, can be summarized as follows:
· Improving regulatory efficiency and effectiveness by critically evaluating mandates and regulatory fragmentation, overlap, and duplication across regulatory agencies;
· Aligning the financial system to help support the U.S. economy;
· Reducing regulatory burden by decreasing unnecessary complexity;
· Tailoring the regulatory approach based on size and complexity of regulated firms and requiring greater regulatory cooperation and coordination among financial regulators; and
· Aligning regulations to support market liquidity, investment, and lending in the U.S. economy.

The Treasury recommendations are outlined below.

Addressing the U.S. Regulatory Structure
Both Congress and the financial regulatory agencies have roles to play in reducing overlap and increasing coordination within the U.S. financial regulatory framework.
Treasury recommends that Congress take action to reduce fragmentation, overlap, and duplication in the U.S. regulatory structure. This could include consolidating regulators with similar missions and more clearly defining regulatory mandates.

Refining Capital, Liquidity, and Leverage Standards
Treasury offers a number of recommendations aimed at both decreasing the burden of statutory stress testing and improving its effectiveness by tailoring the stress-testing requirements based on the size and complexity of banks. For the statutory, company-led annual Dodd-Frank Act stress test (DFAST), Treasury recommends raising the dollar threshold of participation to $50 billion from the current threshold of $10 billion in total assets.

Providing Credit to Fund Consumers and Businesses to Drive Economic Growth
Treasury has identified numerous regulatory factors that are unnecessarily limiting the flow of credit to consumers and businesses and thereby constraining economic growth and vitality. Some of these regulatory factors also unnecessarily restrict the range of choices and options for borrowers, particularly consumers, through undue restrictions on banks’ ability to design and deliver responsible lending products.

Improving Market Liquidity
The cumulative effect of a number of bank regulations implementing Dodd-Frank may be limiting market liquidity. Maintaining strong, vibrant markets at all times, particularly during periods of market stress, is necessary to support economic growth, avoid systemic risk, and therefore minimize the risk of a taxpayer-funded bailout.

Allowing Community Banks and Credit Unions to Thrive
In order to promote the orderly operation and expansion of the community banking and credit union sector, Treasury recommends that the overall regulatory burden be significantly adjusted. This is appropriate in light of the complexity and lack of systemic risk of such financial institutions. The capital regime for community banks having total assets less than $10 billion should be simplified, which can be achieved by providing for an exemption from the U.S. Basel III risk-based capital regime and, if required, an exemption from Dodd-Frank’s Collins Amendment.

Advancing American Interests and Global Competitiveness
Treasury recommends increased transparency and accountability in international financial regulatory standard-setting bodies. Improved inter-agency coordination should be adopted to ensure the best harmonization of U.S. participation in applicable international forums. International regulatory standards should only be implemented through consideration of their alignment with domestic objectives and should be carefully and appropriately tailored to meet the needs of the U.S. financial services industry and the American people.

Improving the Regulatory Engagement Model
In conducting its review of the depository sector and the regulatory engagement model, Treasury has identified areas for review and further evaluation to improve the effectiveness of regulation. The role of the boards of directors (Boards) of banking organizations can be improved to enhance accountability by appropriately defining the Board’s role and responsibilities for regulatory oversight and governance. A greater degree of inter-agency cooperation and coordination pertaining to regulatory actions and consent orders should be encouraged, in order to improve the transparency and timely resolution of such actions.

Enhancing Use of Regulatory Cost-Benefit Analysis
While Congress has imposed discrete cost-benefit analysis requirements on independent financial regulatory agencies – including the CFTC, SEC, FDIC, Federal Reserve, OCC, and CFPB – these agencies have long been exempt from Executive Order 12866. As a result, the financial regulators have not adopted uniform and consistent methods to analyze costs and benefits, and their cost-benefit analyses have sometimes lacked analytical rigor. Federal financial regulatory agencies should follow the principles of transparency and public accountability by conducting rigorous cost-benefit analyses and making greater use of notices of proposed rulemakings to solicit public comment.

Encouraging Foreign Investment in the U.S. Banking System
Treasury considers foreign investment in the U.S. banking system to be an aid to diversifying the risk of the financial system and propelling economic growth. Among other reasons, such investment and related connection back to the home jurisdiction of these banks can frequently enhance a bridge of further foreign corporate investment in the United States. The application of U.S. enhanced prudential standards to foreign banking organizations (FBOs) should be based on their U.S. risk profile, using the same revised threshold as is used for the application of the enhanced prudential standards to U.S. bank holding companies, rather than on global consolidated assets.

ArmchairPolitician.US Opinion:
Dodd-Frank’s objectives of reducing the risks being undertaken by large banks is a good objective that has forced large banks to reexamine the risks they undertake. However, it has been heavy-handed, increasing substantially the costs of complying with the Act, particularly for small banks. It’s revision is sorely needed. The Financial CHOICE Act was passed by the House. However, The Financial CHOICE Act’s outcome is uncertain, because of the question of when and if the Senate might act. It is being hailed as a Trump victory because of it passing the House. Whether it becomes a true victory remains to be seen. The Treasury Department report supplements this effort and provides non-legislative means of reforming bank regulation.
See:
ArmchairPolitiicianDoddFrank, June 11, 2017, by Brad Peery, WWW.ArmchairPolitician.US, ArmchairPolitician.US@gmail.com
House Passes Dodd-Frank Rewrite: Will The Senate Follow Suit?

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