On October 6, 2017, the Treasury Department issued the second of four reports produced at the request of the Trump administration, and that laid out guidelines detailing how to streamline and reform the U.S. regulatory system for capital markets.1 The Treasury report addressed a wide swath of capital markets developments, from equities and Treasury’s to corporate bonds and derivatives.2 It recommends a number of measures to encourage companies to seek public listings, promote access to capital and give investors a wider choice in investment opportunities, and is likely to be welcomed by banks, brokers, small business and crowd funding platforms.3 The report steers clear of proposing legislative changes that would have to be passed by Congress, and instead focuses on adjustments that could be made by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), both of which are led by Trump appointees.4

 

What this means

The Treasury Department’s recommendations to the President are focused on identifying laws, regulations, and other government policies that inhibit the efficient working of the financial system, and have identified significant areas for reform in order to conform to the Core Principals Executive Order.5 “By streamlining the regulatory system, we can make the U.S. capital markets a true source of economic growth which will harness American ingenuity and allow small businesses to grow,”6 Treasury Secretary Steven Mnuchin said in a statement. Several common themes emerged in developing the recommendations:7

 

1. Addressing the U.S. Regulatory Structure

The Congress and the financial regulatory agencies have roles to play in increasing coordination and lessening overlap within the financial regulatory framework. Treasury recommends an expansion of the role of the Financial Stability Oversight Council (FSOC) in coordinating regulatory agencies, and in the direction of regulatory and supervisory policies.

 

 2. Refining Capital, Liquidity, and Leverage Standards

Treasury recommends a number of changes for decreasing the statutory stress testing burden, and improving its effectiveness by basing the requirements on the size and complexity of financial institutions. This includes:

  • Raising the dollar threshold of Dodd-Frank Act Stress Tests (DFAST) to $50 billion from $10 billion.
  • Eliminating the mid-year DFAST cycle.
  • Amending the $50 billion threshold under Section 165 of Dodd-Frank for the application of enhanced prudential standards. As well, tailor these standards to the         risk profile of bank holding companies, and revise the Comprehensive Capital Analysis Review (CCAR) application in line with these thresholds.
  • Exemptions for DFAST and CCAR for any bank that maintains a sufficiently high level of capital, such as the 10% Leverage ratio proposed in the Financial Choice Act.
  • Eliminate the CCAR qualitative assessment.
  • A more transparent, rules based approach should be used in calculating operational risk capital.
  • Narrow the scope of the Liquidity Coverage Ratio (LCR) to include only internationally active banks.
  • The Single-Counterparty Credit Limit (SCCL) should only apply to banks that are subject to the revised threshold for the application of enhanced prudential standards.
  • Delay implementation of Net Stable Funding Ratio (NSFR) and Fundamental Review of the Trading Book (FRTB) until they can be appropriately assessed.
  • Revise the Living Will process to a two year, rather than an annual cycle, and should only apply to banks that are subject to the revised threshold for the application   of enhanced prudential standards. Dodd-Frank 165 should be amended to remove the Federal Deposit Insurance Corporation (FDIC) from the Living Wills process,     making the Federal Reserve solely responsible.

 

3. Providing Credit to Fund Consumers and Businesses to Drive Economic Growth

A number of regulatory factors were identified which are limiting the flow of credit to consumers and businesses. Treasury has recommended a restructuring of the Consumer Financial Protection Bureau (CFPB) as its approach to rulemaking has hindered consumer access to credit, and imposed unduly high compliance burdens on small institutions. These recommendations would improve and reduce the costs of lending flows across residential mortgage and small business lending.

 

4. Improving Market Liquidity

According to the Treasury, consideration be given to adjustments to the Supplementary Leverage Ratio (SLR) to address unfavorable impact on market liquidity, and to exempt banks with $10 billion or less in assets from the Volcker Rule. Also recommended is a simplification of the Volcker Rule and its definition of proprietary trading, in order to allow banks to more easily hedge risk and conduct market making activities.

 

5. Allowing Community Banks and Credit Unions to Thrive

The regulatory burden on community banks and credit unions is overly onerous and should be significantly adjusted to reflect the lack of systemic risk associated to these institutions. For credit unions, Treasury recommends raising the dollar threshold for stress testing requirements to $50 billion from $10 billion.

 

6. Advancing American Interests and Global Competitiveness

Improved inter-agency coordination should be adopted, and international regulatory standards should be implemented through consideration of their alignment with domestic objectives. U.S. regulators should provide clarity on how the U.S. specific adoption of any Basel III standards will affect capital requirements for U.S. financial institutions.

 

7. Improving the Regulatory Engagement Model

The role of Boards at financial institutions should be improved to enhance accountability by appropriately defining the Board’s roles and responsibilities for regulatory oversight and governance. Treasury recommends an inter-agency review of the collective requirements imposed on Boards to better assess expectations in the relationships between regulators, Boards, and bank management.

 

8. Enhancing Use of Regulatory Cost-Benefit Analysis

The regulatory agencies, including the CFTC, SEC, FDIC, Federal Reserve, Office of the Comptroller of the Currency (OCC) and CFPB have not adopted uniform and consistent methods to analyze costs and benefits. Treasury recommends that the financial regulatory agencies perform and make available for public comment a cost-benefit analysis for all “economically significant proposed regulations,” as described in Trump Executive Order 12866 “Reducing Regulations and Controlling Regulatory Costs.”

 

9. Encouraging Foreign Investment in the U.S. Banking System

The application of U.S. enhanced prudential standards should be applied to Foreign Banking Organizations (FBOs) based on their U.S. risk profile, and the same revised threshold should be used as for U.S. Bank Holding Companies. The Treasury supports the Intermediate Holding Company (IHC) to promote Federal Reserve supervision over FBOs, but changes to the current regime should be considered to encourage foreign banks to increase investment in the U.S. financial markets.

Treasury recommends recalibration of the Total Loss-absorbing Capacity (TLAC) requirement, in addition to Living Wills and liquidity requirements, and greater emphasis should be given to the equivalency of home country regulations with comparable U.S. regulations.

 

 

Conclusion

The first Treasury report, released in June, sought to promote lending by easing Dodd-Frank regulations, and is expected to face opposition in Congress. This second report issued a broad range of fixes aimed at easing the regulatory burden on stock, bond and derivatives markets, and the majority can be put into place by the federal regulatory agencies, who were consulted on the report.8 Jay Clayton, Chairman of the SEC, said in a statement that the Treasury report was “a thoughtful and clear analysis of a range of market issues…We look forward to working alongside other financial regulators and Congress as we pursue our three-part mission to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation,” he said.9 Christopher Giancarlo, Chairman of the CFTC, echoed Clayton’s sentiments, saying the Treasury recommendations would “foster financially sound markets in a way that encourages broad-based economic growth.”10

 

While banks, brokers and small businesses have welcomed the report, many of the requirements have been criticized by public advocacy groups concerned that they may reduce investor protections, and allow banks to engage in risky trading behavior once again.11

 

References

  1. Treasury recommends looser financial market controls to encourage growth,” CNBC, October 6, 2017. Access at: https://www.cnbc.com/2017/10/06/treasury-recommends-looser-financial-market-controls-to-encourage-growth.html
  2. Ibid
  3. “U.S. Treasury outlines sweeping reform of capital markets,” Reuters, October 6, 2017. Access at: http://www.reuters.com/article/us-usa-treasury-regulations/u-s-treasury-outlines-sweeping-reform-of-capital-markets-idUSKBN1CB1RD
  4. Ibid
  5. “Summary of Recommendations for Regulatory Reform,” U.S. Department of the Treasury. Access at: https://www.treasury.gov/press-center/news/Pages/Summary-of-Recommendations-for-Regulatory-Reform.aspx
  6. “U.S. Treasury outlines sweeping reform of capital markets,” Reuters, October 6, 2017. Access at: http://www.reuters.com/article/us-usa-treasury-regulations/u-s-treasury-outlines-sweeping-reform-of-capital-markets-idUSKBN1CB1RD
  7. “Summary of Recommendations for Regulatory Reform,” U.S. Department of the Treasury. Access at: https://www.treasury.gov/press-center/news/Pages/Summary-of-Recommendations-for-Regulatory-Reform.aspx
  8. “U.S. Treasury outlines sweeping reform of capital markets,” Reuters, October 6, 2017. Access at: http://www.reuters.com/article/us-usa-treasury-regulations/u-s-treasury-outlines-sweeping-reform-of-capital-markets-idUSKBN1CB1RD
  9. “Treasury Report Calls for Sweeping Changes to Financial Rules,” The New York Times, October 6, 2017. Access at: https://www.nytimes.com/2017/10/06/business/treasury-financial-rules-dodd-frank.html?WT.mc_id=SmartBriefs-Newsletter&WT.mc_ev=click&ad-keywords=smartbriefsnl
  10. Ibid
  11. “U.S. Treasury outlines sweeping reform of capital markets,” Reuters, October 6, 2017. Access at: http://www.reuters.com/article/us-usa-treasury-regulations/u-s-treasury-outlines-sweeping-reform-of-capital-markets-idUSKBN1CB1RD

 

Newsletter Author: Samantha Regan, Venetia Woo, Mairi Bryan

Newsletter Contact Person: Mairi Bryan

 

Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation.

 

 

Disclaimer

This blog is intended for general informational purposes only, does not take into account the reader’s specific circumstances, may not reflect the most current developments, and is not intended to provide advice on specific circumstances. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this blog and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional.

 

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