Crapo Reaches Bi-Partisan Deal on Regulatory Relief

Senate Banking Committee Chairman Mike Crapo has reached agreement with several moderate Democrats to amend the Dodd-Frank Act and provide regulatory relief to financial institutions, the Idaho Republican announced Monday, according to an American Banker article.

While the financial services industry has been encouraging a regulatory relief package for years, the bill is more modest than many expected. However, it is a bill capable of passing the Senate - Republicans need eight Democrats for the measure to clear the Senate floor and Monday’s announcement makes it clear that they have at least nine. 

SFIG appreciates the bipartisan work undertaken to move the reform process forward, but we believe that this proposal is a missed opportunity for specific, targeted, and activity-based reforms and is one that could have competitive implications for marketplace participants. While SFIG is supportive of reforms such as recalibration of liquidity and capital regulations specific to securitization and scope and definitional changes to the Volcker Rule, our members do not support legislation that arbitrarily changes the regulatory compliance regime for banks based on balance sheet size thresholds. A section-by-section summary of the proposal created by the Senate Banking Committee can be found here.

SFIG submitted its proposal for regulatory reform to the Senate Banking Committee in April 2017, and remains committed to those recommendations. We continue to work with policymakers as this process continues to encourage those targeted reforms for the benefit of the industry.

Below is a summary of securitization-related topics in the deal.

Housing

The deal provides financial institutions relief from a number of mortgage regulations, including restrictions for mortgages that are kept on a bank’s balance sheet or made by financial institutions with less than $10 billion in assets. The bill would deem those mortgages as "qualified mortgages" under Dodd-Frank, which would allow banks and credit unions to expand the types of mortgages they offer.

The bill would also remove the three-day way period required for new integrated mortgage disclosures if a creditor extends to a consumer a second offer with a better interest rate.

Liquidity and Leverage Adjustments

The announced deal tweaks the liquidity and leverage rules, by directing regulators to treat qualifying investment-grade, liquid and readily marketable municipal securities as liquid assets under the liquidity coverage ratio rule.

It would also specify that funds of a custodial bank that are deposited with the Fed should not be taken into account when calculating the supplementary leverage ratio.

Volcker Rule

The bill would exempt banks with less than $10 billion in assets from the Volcker Rule, which prevents banks from proprietary trading with customer deposits. If a bank's total trading assets and liabilities are less than 5 percent of its total assets, they would also be exempt from the rule.

Capital Simplification

The bill would establish a community bank leverage ratio between 8 percent and 10 percent. Banks and credit unions with less than $10 billion of assets that meet the ratio would be considered in compliance with capital and leverage requirements.

This is a potentially significant provision that would simplify the Basel III capital regime for smaller institutions. Under the Crapo deal, small banks, most of which already hold that much capital, would benefit.

Raising the SIFI threshold

A big part of the relief deal is that it seeks to quintuple the systemic threshold for banks to $250 billion. Banks with assets of $50 billion to $100 billion would be immediately exempt from enhanced standards after the bill is signed. Bank holding companies with assets of $100 billion to $250 billion would be exempt 18 months after enactment.

The bill says that the Federal Reserve would still be allowed to conduct periodic stress tests for banks above $100 billion and have the authority to apply or suspend enhanced standards.

Overall, it would reduce the number of institutions automatically subject to enhanced standards to roughly 12.

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