The election of Donald Trump brought renewed focus on the bank regulatory regime. Congressional efforts to rewrite financial regulation by passing the Financial CHOICE Act have stalled. However, regulatory agencies retain the power to advance a deregulatory agenda through new rules and guidance.
While one may be cautions to peel back the hard fought reforms implemented after the 2008 crisis, there is room for a review of regulatory efficacy. By way of example, on December 21st, 2017, the Federal Reserve announced an interagency decision to increase the Shared National Credit reporting threshold to account for inflation and changes in average loan size. Reporting thresholds had not been raised since 1977. While minimally reducing the total loan amount reported, the change brought regulatory relief for many banks.
On January 19th, 2018, Randal K. Quarles—Federal Reserve Governor and the Vice Chairman for Supervision—gave a speech describing current efforts to revise post-crisis regulation. Governor Quarles identified three high-level goals for regulation: efficiency, transparency, and simplicity. He then targeted regulatory tailoring, loss absorbency protections, and determinations of control under the Bank Holding Company Act (BHCA) as areas of possible improvement. Interagency coordination, a major industry complaint, was conspicuously absent. Furthermore, Governor Quarles did not mention the massive amount of bank data collected by the Federal Reserve to support its regulatory efforts. In addition to the goals identified by Quarles, reform should be coordinated and data-driven. This article will examine regulatory tailoring and control definitions to demonstrate how reform would benefit from interagency coordination and data analytics.Tailoring
The Federal Reserve supervises a wide range of institutions from large wall street firms to community banks in small towns. To account for differences in the complexity and risk of those institutions, the Federal Reserve tailors its supervisory practices.
A $50 billon asset thresholds and Global Systemically Important Bank (G-SIB) designation serve as two triggers for additional regulation. First, banks with $50 billion in assets face heightened supervision. While the Dodd Frank Act set this asset threshold, the act authorized the Federal Reserve to adjust it. The threshold triggers enhanced prudential standards including risk-based capital requirements, leverage limits, and liquidity standards. As a result, the Federal Reserve retains authority to readjusts the threshold for post-crisis regulations such as the Liquidity Coverage Ratio (LCR). Second, G-SIBs face additional requirements. The Bank of International Settlement selects G-SIBs based on a scored assessment. While forty-four U.S. bank holding companiesexceed the $50 billion threshold as-of September 30, 2017, only eight U.S. bank holding companies received G-SIB designation.
Many of the existing regulations already provide significant tailoring. For example, the LCR applies different standards to firms with $250 billion in assets or $10 billion in foreign exposure than to firms with $50 billion in assets. Governor Quarles took issue with the divergence between the LCR thresholds and the determination used to select Global Systemically Important Banks (G-SIBs). As a result of the divergence, large non-G-SIB banks, such as PNC or Capital One, must maintain the full LCR even though the firms have not been designated as G-SIBs.
While increasing the regulatory thresholds would reduce burden, the Federal Reserve should carefully weigh the potential increase in risk which would result from the change. Because the Federal Reserve has implemented extensive data collections to monitor its supervisory standards, the agency is well positioned to conduct a cost-benefit analysis of current supervisory thresholds. For example, the data collection which supplements LCR supervision contains hundreds of data fields which result from an estimated 220 hours of bank work per response. Since the data is not publicly available, only the Federal Reserve can take advantage of the data to conduct a detailed cost-benefit analysis of current tailoring.Control
Governor Quarles also suggested that the Federal Reserve reevaluate the BHCA control test. The control test determines whether an investor’s stake in a bank is such that the investor has taken on the role of a bank holding company. Since the law limits the activities in which bank holding companies may engage, investors want to be certain that their investments will not constitute control. 12 U.S.C. § 1841(a) sets out the basic parameters for determining control. In general, the statute provides that control exists when an investor either directly or indirectly (1) controls twenty-five percent of voting shares (2) controls a majority of the directors, or (3) exercises a controlling influence on the bank’s management or policies. The Federal Reserve has released regulations and a 2008 policy statement interpreting these provisions.
In reforming the BHCA control requirements, the Federal Reserve should remain mindful of the Change in Bank Control Act (CIBC) which imposes burdens on entities seeking to increase their control over banks. The FDIC, OCC, and Federal Reserve each administer CIBC. Past concerns about interagency inconsistencies in defining control in part led the FDIC to issue a rule in 2015 to better align the definition of control under CIBC and BHCA. Because the meaning of control implicates the other banking regulators, the Federal Reserve should coordinate new guidance with the FDIC and OCC.Conclusion
The Federal Reserve is in the process of reexamining its existing regulations. Governor Quarles’s goals of efficiency, transparency, and simplicity are worthwhile, but the Federal Reserve should also aspire to make data-driven decisions that are coordinated with the other bank regulators. While these two additional objectives may prolong the process of regulatory reform, the promise of rational bank regulation is well worth an initial delay.
 12 U.S.C. § 5365.
 12 C.F.R. § 225.31; 12 C.F.R. § 225.143.
 12 U.S.C. § 1817(j).