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 Summary of Recommendations for Regulatory Reform

2017 Report Cover

Press Release


Fact Sheet 

Treasury’s review of the regulatory framework for the depository sector has identified significant areas for reform in order to conform to the Core Principles. The review has identified a wide range of changes that could meaningfully simplify and reduce regulatory costs and burdens, while maintaining high standards of safety and soundness and ensuring the accountability of the financial system to the American public.
Treasury’s recommendations relating to the reform of the banking sector regulatory framework, as set forth within this 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.
Treasury’s recommendations to the President are focused on identifying laws, regulations, and other government policies that inhibit regulation of the financial system according to the Core Principles. In developing the recommendations, several common themes have emerged. First, there is a need for enhanced policy coordination among federal financial regulatory agencies. Second, supervisory and enforcement policies and practices should be better coordinated for purposes of promoting both safety and soundness and financial stability. Increased coordination on the part of the regulators will identify problem areas and help financial regulators prioritize enforcement actions. Third, financial laws, regulations, and supervisory practices must be harmonized and modernized for consistency.
A list of all of Treasury’s recommendations within this report is set forth as Appendix B, including the recommended action, method of implementation (Congressional and/or regulatory action), and which Core Principles are addressed.
Following is a summary of the recommendations set forth in the report.
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. Increased accountability for all regulators can be achieved through oversight by an appointed board or commission or, in the case of a director-led agency, appropriate control and oversight by the Executive Branch, including the right of removal at will by the President.
Treasury recommends that Congress expand FSOC’s authority to play a larger role in the coordination and direction of regulatory and supervisory policies. This can include giving it the authority to appoint a lead regulator on any issue on which multiple agencies may have conflicting and overlapping regulatory jurisdiction.
Treasury recommends that Congress reform the structure and mission of the Office of Financial Research to improve its effectiveness and to ensure greater accountability. Treasury recommends that the OFR become a functional part of Treasury, with its Director appointed by the Secretary, without a fixed term and subject to removal at will, and that the budget of OFR come under the control of the Treasury appropriation and budget process.
Finally, the agencies should work together to increase coordination of supervision and examination activities. The agencies should also consider coordinating enforcement actions such that only one regulator leads enforcement related to a single incident or set of facts.
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. Treasury also supports giving the banking regulators the flexibility to implement a threshold for mandatory stress-testing that is tailored to business model, balance sheet, and organizational complexity such that institutions with assets greater than $50 billion could be exempt from stress-testing requirements.
Treasury recommends eliminating the mid-year DFAST cycle and reducing the number of supervisory scenarios from three to two – the baseline and severely adverse scenario. For the company-run stress tests, banks should be permitted to determine the appropriate number of models that are required to develop sufficient output results, based on the complexity of the banking organization and the nature of its assets.
Treasury recommends that Congress amend the $50 billion threshold under Section 165 of Dodd-Frank for the application of enhanced prudential standards to more appropriately tailor these standards to the risk profile of bank holding companies. The Federal Reserve should also revise the threshold for application of Comprehensive Capital Analysis and Review (CCAR) to match the revised threshold for application of the enhanced prudential standards. The CCAR process should be adjusted to a two-year cycle, which will not compromise quality in that stress-testing results are forecast over a nine quarter cycle. Provision could be made for off-cycle submission if a revised capital plan is required due to extraordinary events or in the case of financial distress.
Treasury supports an off-ramp exemption for DFAST, CCAR, and certain other prudential standards for any bank that elects to maintain a sufficiently high level of capital, such as the 10% leverage ratio proposed by H.R. 10, the Financial CHOICE Act of 2017.
In order to provide for more transparent and accountable regulatory processes, the Federal Reserve should subject its stress-testing and capital planning review frameworks to public notice and comment. Treasury makes further recommendations concerning the CCAR process and the process of setting economic assumptions and modelling parameters, in both the quantitative and qualitative assessments, that may result in estimates of excessive capital requirements in the severely adverse scenario.
The CCAR qualitative assessment is too subjective and non-transparent, and hence should be eliminated as a sole objection to a capital plan. The qualitative assessment should be adjusted for all banking organizations to conform to the horizontal capital review (as the Federal Reserve has already done for non-complex banking groups with assets less than $250 billion, to decrease the regulatory burden).
Additionally, further emphasis should be given to the use of standardized approaches over advanced approaches for risk-weighting assets to simplify the capital regime. Also, a more transparent, rules-based approach should be used in the calculation of operational risk capital.
The scope of application of the liquidity coverage ratio (LCR) should be considerably narrowed to include only internationally active banks. The single-counterparty credit limit (SCCL) also should only apply to banks that are subject to the revised threshold for the application of the enhanced prudential standards. The degree of conservatism in the cash flow calculations methodologies and other aspects of the LCR process should be adjusted, including greater reliance on a banking organization’s historical experience.
Treasury recommends delaying the domestic implementation of the Net Stable Funding Ratio (NSFR) and Fundamental Review of the Trading Book (FRTB) rules until they can be appropriately calibrated and assessed. Both of these standards represent additional regulatory burden and would introduce potentially unnecessary capital and liquidity requirements on top of existing capital and liquidity requirements. U.S. regulators should also rationalize and improve the risk-based capital regime over time through, for example, reducing redundant calculation approaches and improving risk sensitivity in the measurement of derivative and securities lending exposures.
Treasury recommends that the potential impact of the FASB Current Expected Credit Losses (CECL) standard on banks’ capital levels be carefully reviewed by U.S. prudential regulators with a view towards harmonizing the application of the standard with regulators’ supervisory efforts.
Treasury recommends that the living will process be made a two year cycle rather than the current annual process, which is not required by Dodd-Frank. Treasury also recommends that the threshold for participation in the living will process be revised to match the revised threshold for application of the enhanced prudential standards. This change would only include those banks that have a sufficient level of complexity as to justify the living will requirement. Other changes Treasury recommends include improving the quality and transparency of guidance and promoting better regulatory harmonization and timely response following submission of living wills.
Treasury recommends that living wills guidance be subject to notice and comment before becoming final. While the Federal Reserve and the FDIC have increased their coordination and responsiveness to companies seeking guidance on the preparation of their living wills, ongoing discrepancies in guidance remain. Treasury recommends that section 165(d) of Dodd-Frank be amended to remove the FDIC from the living wills process. The Federal Reserve should be required to complete its review and give feedback to firms on their living wills within six months.
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.
Treasury’s recommendations for revising capital and liquidity regulatory regimes are aimed at increasing banks’ lending capacity while maintaining safety and soundness standards. Treasury recommends recalibrating capital requirements that place an undue burden on individual loan asset classes, particularly for mid-sized and community financial institutions.
A significant restructuring in the authority and execution of regulatory responsibilities by the CFPB is necessary. The CFPB was created to pursue an important mission, but its unaccountable structure and unduly broad regulatory powers have led to predictable regulatory abuses and excesses. The CFPB’s approach to rulemaking and enforcement has hindered consumer access to credit, limited innovation, and imposed unduly high compliance burdens, particularly on small institutions. Treasury’s recommendations include: making the Director of the CFPB removable at will by the President or, alternatively, restructuring the CFPB as an independent multi-member commission or board; funding the CFPB through the annual appropriations process; adopting reforms to ensure that regulated entities have adequate notice of CFPB interpretations of law before subjecting them to enforcement actions; and curbing abuses in investigations and enforcement actions.
The regulatory environment should protect consumers’ interests and allow banks adequate leeway to exercise reasonably constructed consumer lending regimes, giving consumers the broadest array of choices, supported by appropriately designed and implemented compliance regimes. The regulatory environment should also promote financial inclusion, bringing more consumers into the banking system and out of less regulated markets.
Treasury has reviewed and made recommendations to improve, and reduce the costs of, lending flows from the banking system across a range of product types, including residential mortgages, leveraged lending, and small business lending. A significant amount of regulatory overlap of activities-based regulation exists across consumer and commercial lending that should be addressed through inter-agency review and coordination. This overlap puts a particularly high burden on mid-sized and community banking organizations.
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 aligned with the Core Principles and is necessary to support economic growth, avoid systemic risk, and therefore minimize the risk of a taxpayer-funded bailout.
Consideration of adjustments to the Supplementary Leverage Ratio (SLR) and enhanced Supplementary Leverage Ratio (eSLR) is important to address unfavorable impacts these requirements may have on market liquidity and low-risk assets. Specifically, adjustments should be made to the calibration of the eSLR buffer and the leverage exposure calculation. Exceptions from the denominator of total exposure should include: (1) cash on deposit with central banks; (2) U.S. Treasury securities; and (3) initial margin for centrally cleared derivatives.
Treasury recommends significant changes to the Volcker Rule, including changes to the statute, regulations and supervision. Undue compliance burdens must be eliminated in order to eliminate unnecessary impact on market liquidity. Treasury supports in principle the Volcker Rule’s limitations on proprietary trading and does not recommend its repeal.
Banks with $10 billion or less in assets should not be subject to the Volcker Rule. Treasury also recommends that the proprietary trading restrictions of the rule not apply to banks with greater than $10 billion in assets unless they exceed a threshold amount of trading assets and liabilities. In addition, Treasury has identified various ways of reducing the complexity of the Volcker Rule to decrease regulatory compliance burdens. Treasury advocates simplifying the definition of proprietary trading and allowing banks to more easily hedge their risks and conduct market-making activities. Treasury’s recommendations respond to the concern that undue constraints on market making present risks to market liquidity, particularly during times of stress. Treasury also recommends changes to the compliance program requirements of the rule in order to decrease regulatory burden.
Similarly, the covered funds provisions of the rule require modification to decrease unnecessary burdens, including by refining the definition of a covered fund. This change can greatly assist in the formation of venture and other capital that is critical to fund economic growth opportunities. Finally, given the fragmentation of responsibility for implementing the Volcker Rule across five agencies, these agencies should ensure that their guidance and enforcement of the rule is consistent and coordinated.
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. This change could address the treatment of select asset classes that are integral to banking models, such as mortgage servicing assets and certain types of commercial real estate loans. In addition, Treasury recommends raising the Small Bank Holding Company Policy Statement asset threshold from $1 billion to $2 billion.
Treasury recommends that regulators undertake additional efforts to streamline regulatory supervisory burden and reporting requirements for all community financial institutions, including the scale of Call Reports (i.e., each bank’s consolidated reports of condition and income).[1] Regulators should undertake a critical review of their coordination procedures and consider forming a consolidated examination force. Further, greater accountability and clarity should be incorporated into the examination procedures and data collection requirements.
Treasury recommends changes to the CFPB’s ATR/QM rule and raising the total asset threshold for making Small Creditor QM loans from the current $2 billion to a higher asset threshold of between $5 and $10 billion to accommodate loans made and retained by a larger set of community financial institutions.
For credit unions, Treasury recommends raising the scope of application for stress-testing requirements for federally-insured credit unions to $50 billion in assets (from $10 billion in assets currently). The final rule requiring credit unions with assets greater than $100 million to satisfy a risk-weighted capital framework should also be repealed. Instead, credit unions of all sizes should have a simple leverage test, with consideration as to whether the current capital requirement should be revised in order to promote greater equality with equivalent commercial bank capital requirements.
As with banks, credit unions should be granted relief from the current level, design, and lack of notice and transparency of the supervision and examination processes. Examination should be more tailored and cost efficient to avoid burdensome and unnecessary procedures. This would require coordination between NCUA, CFPB, and state regulators. Procedures that are redundant between regulators should be streamlined.
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.
Treasury recommends additional study of the recalibration of standards for capital and liquidity that have been imposed on U.S. G-SIBs. These regulations add significant complexity to capital and liquidity requirements and may have adverse economic consequences that can be addressed without impacting safety and soundness. The elements of U.S. regulations that should be reevaluated include: the U.S. G-SIB surcharge, the mandatory minimum debt ratio included in the Federal Reserve’s total loss absorbing capacity (TLAC) and minimum debt rule, and the calibration of the eSLR.
Treasury generally supports efforts to finalize remaining elements of the international reforms at the Basel Committee including establishing a global risk-based capital floor in order to promote a more level playing field for U.S. firms and to strengthen the capital adequacy of global banks, especially non-U.S. institutions that, in some cases, have significantly lower capital requirements.
Treasury recommends that banking agencies carefully consider the implications for U.S. credit intermediation and systemic risk from the implementation in the United States of a revised standardized approach for credit risk under the Basel III capital framework. U.S. regulators should provide clarity on how the U.S.-specific adoption of any new Basel standards will affect capital requirements and risk-weighted asset calculations for U.S. firms.
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.
Boards of banking organizations provide oversight that is critical to the successful and sound operation of these enterprises. The failure of Board governance and oversight of banking organizations was a major contributor to the financial crisis. The ability to attract and retain high-quality talent on Boards, as well as consistent principles that promote discipline and accountability, are important components of a successful governance model for banking organizations.
Treasury has identified several areas in which regulators’ expectations of Boards should be reformed. Regulatory expectations of Boards suffer from a number of limitations, including the following: they may, in some instances, crowd out critical functions that Boards and Board Committees should play; blur the responsibilities between the Board and management; and impose a “one-size-fits-all” approach, which places a particular burden on mid-sized and community financial institutions.
Boards should be held to the highest standards when developing and implementing comprehensive regulatory compliance procedures and should in turn hold management to the same standards. This would, of course, involve Boards engaging with regulators and reviewing significant regulatory actions and complaints. At the same time, Treasury recommends an inter-agency review of the collective requirements imposed on Boards in order to reassess and better tailor these aggregate expectations and restore balance in the relationship between regulators, Boards, and bank management.
Treasury endorses rigorous regulatory procedures and accountability in the regulation of depository institutions. However, some rebalancing of the volume of regulatory actions based on materiality and the nature of required remediation may be warranted. A modified regulatory approach could restore more accountability on the part of Boards and management teams. This modified approach might focus more on regulatory coordination, along with supervisory guidance and recommendations, in lieu of overly prescriptive actions requiring specific remediation, such as matters requiring immediate attention. Regulators and banking organizations should develop an improved approach to addressing and clearing regulatory actions in order to limit the sustained and unnecessary restriction of banking activities and services provided to customers.
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 (discussed below). 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. In particular, Treasury recommends that financial regulatory agencies perform and make available for public comment a cost-benefit analysis with respect to at least all “economically significant” proposed regulations, as such term is used in Executive Order 12866. Such analysis should be included in the administrative record of the final rule.
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.
Treasury supports the continuation of the Federal Reserve’s intermediate holding company (IHC) regime to promote consolidated prudential supervision over FBOs’ U.S. banking and non-banking activities (including investment banking and securities dealing) and the application of the TLAC rule to improve the resolvability of G-SIBs. However, changes to the current framework should be considered to encourage foreign banks to increase investment in U.S. financial markets and provide credit to the U.S. economy.
Consistent with the thresholds recommended for U.S. BHCs, Treasury recommends that the threshold for IHCs to comply with U.S. CCAR be raised from the current $50 billion level to match the revised threshold for the application of enhanced prudential standards, subject to the ability of the Federal Reserve to impose these requirements on smaller IHCs in cases where the potential risks posed by the firm justify the additional requirements.
Treasury recommends that the Federal Reserve review the recalibration of the internal TLAC requirement. In assessing the appropriate calibration, the Federal Reserve should consider the foreign parent’s ability to provide capital and liquidity resources to the U.S. IHC, provided arrangements are made with home country supervisors for deploying unallocated TLAC from the parent, among other factors.
Other IHC regulatory standards, such as living wills and liquidity, should also be recalibrated. In considering such a recalibration, greater emphasis should be given to the degree to which home country regulations are comparable to the regulations applied to similar U.S. BHCs. Where regulations are sufficiently comparable, FBOs should be allowed to meet certain U.S. requirements through compliance with home country regimes.

[1]          .   To access call reports see FFIEC, Central Data Repository’s Public Data Distribution, available at
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Last Updated :11/15/2017 5:13 PM