Crapo Bill Only a Drop in Bucket for Deregulation

The bipartisan “regulatory relief” bill that was adopted by Congress and signed by President Donald Trump earlier this year is a positive development for the banking industry, and it continues a string of good news for banking (and, by extension, the economy at large) since the passage of the Dodd-Frank Act. Banking is highly regulated, and it should be, because most banks’ balance sheets are funded with federally insured deposits to the tune of 90 percent.

The Economic Growth, Regulatory Relief and Consumer Protection Act is not all that the industry had hoped for in a regulatory relief bill, but it is not a complete giveaway to the big banks as some suggested. For the really big banks in this country, the bill does not change much at all.

One of the best things about the legislation is the House and Senate came together to pass a bill that makes sense. On the other hand, the bill seems to further engrain buckets of banks based on asset sizes that have no meaningful support. So, we should get used to the notion that a bank with assets over $10 billion is somehow a “large” bank and that banks with over $250 billion in assets are “systemically important.”

At a high level, the substantive provisions of the new law are relatively brief, when compared to the expanse of Dodd-Frank. Arguably, the mortgage-related provisions of Dodd-Frank did more harm than good because plenty of smaller lenders got out of the housing finance business rather than risk the penalties of noncompliance.

The recent legislation provides that banks with assets of $10 billion or less can avoid some of the more cumbersome qualified mortgage rules under Dodd-Frank, provided that the loans are originated by the bank and kept in the bank’s loan portfolio. Banks that made fewer than 500 mortgage loans in each of the last two years will be exempt from Dodd-Frank’s expanded reporting under the Home Mortgage Disclosure Act as long as the bank has a satisfactory or better Community Reinvestment Act rating.

The new legislation also directs the federal banking agencies to adopt a “Community Bank Leverage Ratio” that will exempt most banks with assets of less than $10 billion from the risk-based capital rules of Basel III. This safe harbor capital requirement is to be not less than 8 percent and not more than 10 percent, and it is going to require an interagency rule-making process, which can take many months to accomplish. So don’t throw away your Basel III models just yet. Most of these so-called small banks will also be exempt from the Volcker Rule, but that too is going to require promulgating rules. It is just going to take time for to reach consensus on what the regulations should say.

A couple of provisions of the new law beneficial to smaller banking organizations should be implemented fairly quickly and without much controversy. The threshold for a “small” bank holding company for purposes of the Fed’s policy statement on the capital and leverage requirements for such entities has been raised from $1 billion to $3 billion. This means bank holding companies with less than $3 billion of total assets will not be subject to capital requirements on a consolidated basis, and allows those holding companies to borrow money at the holding company level and inject it into their subsidiary banks as equity capital. In addition, the exam cycle for well-managed and well-capitalized banks with assets of $3 billion or less has been extended to 18 months. These two provisions could amount to meaningful relief for the banking organizations that can avail themselves of the flexibility afforded by the new law.

For those of us who appreciate the important role that a properly functioning banking system plays in the U.S., our elected officials deserve credit for making changes to Dodd-Frank. But we should not lose sight of the fact that the new law is merely a drop in the bucket of work to be done around bank regulation in the U.S.