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.
While the prospects for Congressional passage of a financial deregulation bill in 2017 are uncertain, that doesn’t mean bankers can’t look forward to a possible future loosening of the regulatory restrictions they’ve operated under since passage seven years ago of the Dodd-Frank Act.
Editor’s note: The House passed the CHOICE Act Thursday 233-186 but it isn’t expected to earn enough votes in the Senate to become law.
A majority of bankers believe that Republican presidential candidate Donald Trump will have a more positive impact on the nation’s economy than Democratic nominee Hillary Clinton if he’s elected to the Oval Office on November 8, although many professional economists disagree. And he’s probably got their vote, too, according to Bank Director’s 2017 Bank M&A Survey, sponsored by Crowe Horwath LLP. However, fewer say they support Trump, compared to bankers who said they’d vote for Mitt Romney in 2012.
It has been nearly a year since the Volcker Rule was supposed to go into effect and there is still no agency rule to implement the Volcker Rule, which was passed as part of the Dodd-Frank Act. Regulators have shown few signals that a final implementing rule should be expected in 2013. 
It’s been two years since the Dodd-Frank Act was passed, and regulators have published 8,800 pages of regulations ironing out the details of the law. Many rules still have not been written, leaving huge portions of the Act in limbo. This article takes a look at the status of major pieces of the legislation with an eye towards the impact on commercial banks and the banking system.
The Volcker rule is unlikely to achieve its intended goal because it is so difficult to distinguish proprietary trading from hedging and market-making. Banks are already limited by the types of instruments and securities they can trade in for their own account by Section 16 of the Glass-Steagall Act, which remains in effect as Section 24(7) of the National Bank Act. The most likely effect is that systemic risk may increase as market liquidity decreases, as banks and their affiliates maintain smaller securities inventories, consistent with the Volcker rule proposals. This could widen securities’ bid/ask price spreads, and make the markets less efficient. This will also have an adverse effect on smaller financial institutions which depend upon larger banks and their trading desks for their investment securities purchases and sales.
Rules are destined to be broken. Like so many well-intentioned laws and regulations, the Volcker rule might end up doing exactly the opposite of what is intended—that is, increasing the risk profiles of large banks, through hedging and other transactions with higher risks than old-fashioned proprietary trading activities. Can you identify any proprietary trading investments that have caused losses in the same ballpark as JPMorgan’s recently acknowledged losses or the hedge fund Long-Term Capital Management’s losses back in 1998? These losses illustrate that the financial marketplace can be a tough taskmaster when seemingly well-thought-out investment strategies, by some very smart traders, run into the ever-changing real world marketplace. No one has a lock on what will work best in the future financial marketplace, but savvy, conservative bankers with competent advisors usually do all right in the long-run.
I am generally skeptical of the Volcker rule’s purported benefits to bank safety and soundness. I think appropriate capital, leverage, and liquidity requirements—when combined with a robust risk management framework and culture inside each institution—will do far more to lower the risk profile of large banks. Moreover, the Volcker rule in its current form only compounds the problem by requiring regulators and market participants to make, in some cases, spurious distinctions between and among proprietary trading, market making and hedging. 
Certainly the Volcker rule will restrain bank proprietary activities, and any reduction of activities reduces risk profiles to a degree. However, after a point, protection turns to paralysis. Years after Dodd-Frank, there still has been no evidence that proprietary trading contributed to the financial crisis, and the rules could put U.S. banks at a competitive disadvantage, particularly with respect to their worldwide operations.
It is too early to determine the ultimate scope of the Volcker rule. Regardless of the ultimate shape of the Volcker rule, the real key is whether financial institutions can set appropriate risk tolerances, monitor adherence and stay within them. The leaders of the bank regulatory agencies recently were questioned by the Senate Banking Committee in the aftermath of the JPMorgan Chase & Co. $2 billion-plus trading losses. The regulators were unanimous that risk neither should be nor could be removed from banking. The focus on hyper- technical rules, such as those promulgated in draft form to enforce the Volcker rule, rather than on risk management principles and practices, is misplaced.
By completely taking away proprietary trading and investment in and sponsorship of private equity, hedge and other similar private funds, the Volcker rule inappropriately concentrates investment and other risk in other activities and asset classes, all of which have run into calamities in the past. For example, subprime lending is not barred by the Volcker rule. We will not be well-served in the long run by having the largest and most sophisticated U.S. financial institutions become one or two-trick ponies. That said, the Volcker rule is upon us and, in the absence of final regulations, we are spending lots of time with clients developing conformance plans with our divining rods.
Much has been made of the trading mishap at JPMorgan Chase & Co.’s London office, resulting in current estimates of a $3 billion loss to the company or more. But what is at stake here is not so much JPMorgan’s financial health, which doesn’t appear in question, but future regulation of the financial sector.