More Bank Scrutiny, Sharper Consumer Finance Focus Expected from New Congress

November 14, 2018

According to Bloomberg and other media reports, big banks like Wells Fargo can expect to see more stringent oversight and possibly greater penalties for wrongdoing in the wake of the mid-term election results and under the incoming majority Democratic House of Representatives. Congresswoman Maxine Waters is expected to head the House Financial Services Committee beginning January 1, and Waters is expected to focus on holding firms accountable for consumer abuses and scrutinizing financial industry watchdogs installed by President Trump. Republican Michael Crapo is expected to continue to lead the Senate Financial Services Committee. The Trump Presidency has ushered in an era of deregulation in the financial services industry that is likely to continue mainly because of even deeper divisions between the House and Senate. According to a report in the Wall Street Journal, the SEC is widely expected to progress with its Best Interests regulation and bank regulators are slated to continue revamping the Volcker Rule, rewriting rules on bank stress tests, capital and liquidity requirements and lending to low-income consumers.

Meanwhile, the Federal Reserve Board last month proposed reduced compliance requirements for smaller and mid-size banking institutions while maintaining more stringent risks for others the Fed says pose greater systemic risk. The proposal, the Fed said, “would more closely match the regulations for large banking organizations with their risk profiles.” The Fed’s framework establishes four categories of standards for large banking organizations--those with more than $100 billion in total consolidated assets. The changes would significantly reduce regulatory compliance requirements for firms in the lowest risk category, modestly reduce requirements for firms in the next lowest risk category, and largely keep existing requirements in place for the largest and most complex firms in the highest risk categories. Firms would be sorted into categories based on several factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. The Fed’s proposal raises concern that capital will be removed from the markets and increase the risk of another taxpayer bailout if the economy falters, Bloomberg reported. The new rules, according to the Bloomberg report, could remove $8 billion in overall capital from the industry. Meanwhile, the major banking agencies are seeking public comment on a proposal to update their standards for how firms measure counterparty credit risk posed by derivative contracts under the agencies’ regulatory capital rules. The proposed changes are designed to better reflect the current derivatives market and incorporate risks observed during the 2007-2008 financial crisis, the agencies say.