By Ted Howard
The regulatory landscape continues to evolve more than a decade after the financial crisis.
Ben Weiner, a partner at Sullivan & Cromwell, updated the members of NeuGroup’s Bank Treasurers’ Peer Group (BTPG) on the status of several bank regulations, including recent comments from Fed Vice Chairman Randal Quarles that are setting the stage for how some of these rules will evolve.
Mr. Weiner updated the BTPG members during the group’s Q3 conference call, noting that he also had spoken to this group at their annual meeting earlier in the year in New York.
“We’re a decade past the financial crisis and coming up on the 10-year anniversary of the enactment of the Dodd-Frank Act, and the bank regulatory landscape continues to evolve,” Mr. Weiner said, adding that he expects the evolution to continue “for some time.” In addition, he said, observers are “gearing up for a relatively active fall on the capital and liquidity front.”
Mr. Weiner said the vice chairman’s comments from Germany reflected the Fed’s continuing efforts to simplify banking regulation. He also noted that the remarks indicated that banks are more resilient today than they were before the financial crisis and that there is a continued policy focus on countercyclicality, which is the idea that banks should set aside more capital when the economy is strong (i.e., in danger of overheating) and be able to draw on the capital that’s been set aside when the economy is weak. Mr. Weiner added that Mr. Quarles’ comments previewed specific proposals and underscored broader themes relating to the evolving bank regulatory landscape.
- The banking sector could see potential revisions to the April 2018 Fed proposal on the stress capital buffer. According to Mr. Weiner, “This is a significant because it shows how things are constantly evolving and adapting and is itself further evolution of a proposal that’s not yet been finalized.” He said Mr. Quarles began his remarks by noting that there is “always room for improvement no matter how long you’ve been in the business.” Mr. Weiner expects this to be an ongoing theme in terms of policy initiatives and the Fed’s continued pursuit of “effectiveness, simplicity, transparency and efficiency in regulation.”
- Mr. Weiner said the topic of the vice chairman’s comments related to a core issue in the bank capital framework—the regulation of capital distributions—and are also important because they reflect broader evolution in the regulation of capital distributions for banking organizations of all sizes.
– For non-CCAR bank holding companies, “There was a significant change with the simplifications proposal that was recently finalized,” Mr. Weiner said, describing the elimination of the stand-alone, generally applicable prior approval requirement for common stock repurchases in the capital rules.
– The finalization of the stress capital buffer proposal will significantly change the framework for capital distributions for all participating banks. And for a subset of them—the “Category IV” banks under the tailoring proposals—the Fed has signaled that it will revise its capital planning and stress testing rules to address how “the periodicity of supervisory stress test has changed” for them and also to provide them with more flexibility in how they perform capital planning.
Beyond regulations related to capital distribution, there’s a lot going on just generally, Mr. Weiner said. These include:
- CECL. It’s going to be profoundly important when it goes into effect for bank operating performance, financial reporting and spot (or point-in-time) capital requirements. Also, the challenge of incorporating CECL into stress testing is going to be an issue that the industry and the Fed will be dealing with for many years, particularly since the Fed has already said that it is not planning to incorporate reforms to stress testing “until the 2022 cycle at the earliest.” This is also the time frame for when supervisory findings on CECL and stress testing are expected to be provided through the CCAR qualitative review.
- Trading book review. The Basel Market Risk Capital Standard, which is referred to as a fundamental review of the trading book, is on the horizon, Mr. Weiner said. He said this issue was on the regulatory agendas published by the OCC and the FDIC this past spring, indicating that the release of a proposal to revise market risk capital requirements is a priority of the banking agencies.
- Basel IV. There’s the more comprehensive implementation of what’s commonly referred to by industry participants as Basel IV, which are the standards that the Basel committee released in December 2017, and this again presents complex questions that relate to many different aspects of the bank capital framework, including the future role and relevance of the advanced approaches (that is, the internal ratings-based approach for credit risk), how the standardized approach for operational risk will factor into the overall capital and stress testing framework, and which banking entities will be subject to the revised Basel standards.
- Share repurchases. Mr. Weiner also discussed what has changed for non-CCAR bank holding companies in terms of the overall requirements for share repurchases. He said the reg requirements relating to share purchases developed over time and the framework “as it exists now has duplicative, overlapping and inconsistent requirements.” For a long time, there’s been a rule that requires bank holding companies to provide notice and gain prior approval for repurchases in some circumstances if they would make aggregate repurchases net of any issuances that exceed 10% of their net worth. In 2009, the Fed released SR letter 09-4, which established a supervisory expectation that bank holding companies would consult with supervisory staff and seek a non-objection before repurchases in some cases. The Basel III capital rules introduced graduated constraints through the “capital conservation buffer,” as well as a stand-alone requirement that banking entities obtain prior approval for any repurchase of common stock. The stand-alone prior approval requirement, which was eliminated in the simplifications rule-making, had presented significant practical difficulties for non-CCAR bank holding companies, especially when they sought to conduct repurchases promptly in response to market conditions.
- Tailoring. The Fed and other banking agencies have proposed tailoring the application of capital and liquidity requirements, as well as enhanced prudential standards, to large domestic banking organizations and the US operations of foreign banking organizations. Agency principals have signaled that the goal is to finalize the proposals this fall, by the 18-month anniversary of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act.
With so much going on in bank regulatory area, Mr. Weiner’s comments and observations are quite relevant not only to bank treasurers, but also to corporate treasurers who rely on their banking group for a wide variety of products and services.