WASHINGTON — As policymakers and industry observers began to digest the 150-page regulatory reform report released by the Treasury Department late Monday, attention quickly turned to what items on the wish list are most likely to actually be adopted.
While many of the legislative proposals in the Treasury blueprint are similar to a House relief bill passed last week, they face an uphill battle in the Senate. But the Treasury plan includes a slew of items that don’t require Congress to act, and appear feasible in the short term.
“We can get a lot of it done working with the regulators, working through FSOC and other areas,” Treasury Secretary Steven Mnuchin said Tuesday during a Fox Business interview. “We are very focused on what we can do by executive action and what we can do with the regulators. We think we can unlock a big part of the community banking system and regional banks [with] these reforms.”
Craig Phillips, a senior member of Mnuchin’s staff, echoed that point while speaking to a Clearing House and Sifma conference the same day, saying that the majority of the recommendations in the report are actually regulatory changes rather than legislative fixes.
“Roughly speaking, it is probably a 2-1 ratio of with a heavy focus on things that are regulators working with the executive branch that can change today without statutory action,” Phillips said. “There are a lot of things on the report that can be addressed absent statutory changes.”
The emphasis on regulatory policy shifts is likely the administration’s best bet for advancing concrete policies, since leading Democrats have already closed ranks in opposition to the Treasury report — particularly its legislative priorities.
“Democrats aren't buying the Trump-Mnuchin financial deregulation plan,” Sen. Elizabeth Warren, D-Mass., said in a press release Monday.
Following is a guide to which priorities within the proposal that are likely to become a reality.
Among the easiest changes for regulators to make are concerning mortgage rules, particularly the Consumer Financial Protection Bureau’s qualified mortgage regulation.
Broadly speaking, the plan calls for dialing back mortgage regulations, arguing that they have “unnecessarily tightened the credit box” and increased the cost of origination and servicing activities. Specifically, the administration is seeking changes to simplify the Consumer Financial Protection Bureau’s qualified mortgage rule, including increasing allowable points and fees and expanding the number of institutions eligible to make Small Creditor QM loans.
Under existing CFPB regulations, institutions with less than $2 billion of assets that make fewer than 2,000 first-lien originations can automatically make qualified mortgages as long as they are retained on portfolio for at least three years. Under Treasury’s plan, institutions with as much as $10 billion of assets could automatically issue QM loans as long as they kept them on portfolio for a similar period of time.
Moreover, the administration wants to phase out the so-called QM Patch that allows any loan eligible for purchase by Fannie Mae and Freddie Mac to be considered QM. The report argues it creates an “unfair advantage” for the government-sponsored enterprises and suggests a review that aligns QM requirements with GSE eligibility requirements to eliminate the need for the patch.
The administration is also seeking to clarify new mortgage disclosures that went into effect two years ago and a delay in new reporting requirements under the Home Mortgage Disclosure Act. Additionally, the administration wants a moratorium on additional rulemakings with regard to mortgage servicing.
Industry representatives praised these suggestions and predicted they would be adopted relatively soon.
“Those are all very doable,” said Wayne Abernathy, executive vice president for financial institutions policy and regulatory affairs at the American Bankers Association. “Those are things that the regulators are already starting to look at. I think the Treasury report acts as a catalyst to get those things done.”
Cam Fine, the president of the Independent Community Bankers of America, agreed.
“Nearly all of the residential mortgage lending recommendations can be done within the agencies and without congressional action,” he said.
Richard Hunt, the head of the Consumer Bankers Association, said "all the mortgage rule changes would be significant." He specifically cited the delay on HMDA reporting as well as the simplification of QM rules and moratorium on additional mortgage servicing regulations.
To be sure, the changes would require the CFPB to go along. But some said the bureau's director, Richard Cordray, may be amenable to changes like this, as opposed to more far-reaching recommendations in the Treasury report.
“These are ones that Cordray would need to cooperate, but there’s a strong incentive for him to do that to demonstrate a record of trying to provide some relief for community banks,” said Abernathy. “And show that he’s pro-growth, too, and allow him to be tougher on rules that are more important to him.”
Even if Cordray doesn’t want to go along with such changes, they could be made when a Trump administration appointee is running the bureau.
Many of the Treasury report’s call for changes to stress tests could also be adopted. To some degree, there is a sense that the Federal Reserve, which has broad discretion to set prudential standards for banks under its purview, is already making alterations to stress tests and other regs.
Fed Gov. Jerome Powell, who chairs the central bank’s supervisory committee, said earlier this month that he envisions some changes to the stress testing regime, including greater transparency in the disclosure of the Fed’s stress testing models and reconsidering “how we think about the qualitative requirement.”
The Treasury report would go still further, eliminating the qualitative test as a basis for objection entirely and requiring Fed models and scenarios to undergo public notice and comment — effectively making them fully disclosed, a move that the banking industry has favored but that the Fed has thus far resisted.
Abernathy said many of the changes could be made.
“There would be an appetite to do many of those things with regard to CCAR and DFAST,” he said, including revealing more about the models. “The Fed would recognize that there’s growing consensus that they need to open up the process.”
But Marcus Stanley, policy director for Americans for Financial Reform, said that if the Treasury were to get the changes it wants in the Fed’s stress testing regime, it would reduce the exercise to the level of the stress tests for the government-sponsored enterprises that were conducted before the crisis, which he said amounted to an “industry veto” over the results.
Capital and liquidity rules
The industry is also optimistic about the possibility of reform to capital and liquidity rules. For example, the Treasury report said that small banks should be explicitly exempted from Basel III rules.
“There’s a growing recognition that a lot of details of Basel III don’t have anything to do with community banks,” said Abernathy.
Many of the current capital and liquidity rules reflect international agreements — notably the Basel III accords — to which the U.S. is a party and of which the Trump administration has been largely skeptical. But those agreements can be renegotiated, and the Treasury report said those agreements “should be revisited.”
But even without a broad renegotiation on the international stage, U.S. regulators could reduce the so-called gold-plating of the Basel rules, which banks have criticized extensively. The Fed’s capital surcharge rule, Total Loss Absorbing Capacity and enhanced Supplementary Leverage Ratio rules in particular appear to have come under the Treasury’s microscope.
Stanley said the report seems to reflect a desire by the administration to bring the international capital standards more in line with the baseline minimum standards set by the Basel accords — that is, more in line with European banks. But those banks are not nearly as well capitalized and are at greater risk of needing a government bailout, he said.
“There’s kind of a desire to take the U.S. standards down to the European standards,” Stanley said. “I look at the European banking system, that’s really not a model I want to follow.”
Regulators could also adjust the way banks calculate their holdings for the purpose of the Supplemental Leverage Ratio to account for ultraliquid assets like cash and Treasuries — holdings that are required by a separate rule, the Liquidity Coverage Ratio. The report also calls for the definition of high-quality liquid assets to be broadened to include high-quality municipal bonds, a move that many lawmakers have favored and that the Fed implemented last year, but that other regulators have been less enthusiastic about the move.
Dennis Kelleher, president of the public advocacy group Better Markets, said these aspects of the report — the capital, liquidity and supervisory changes — are the most critical for the overall safety and soundness of the financial system.
“The areas where reduced regulation would put the American people at the greatest risk are capital, liquidity, stress tests, derivatives, living wills,” Kelleher said. “Those are the core pillars that, if undermined, would put everything at much greater risk.”
Industry representatives also cited a slew of other ideas in the Treasury report that they viewed as achievable. Those included:
- A call to simplify the rules for new banks to enter the system, including the application process for deposit insurance. This should be “adopted as soon as possible,” Fine said.
- A suggestion that accounting standards concerning Credit Expected Credit Loss models be harmonized with existing capital requirements. Currently, reserves set aside for accounting do not count as capital. But that could change. “You could come up with some kind of portion that you’d recognize as also being capital,” Abernathy said.
- A call for several changes to the Volcker Rule. Industry representatives are hopeful that Congress may agree to exempt institutions with less than $10 billion of assets from the rule that bans proprietary trading. But even if that doesn’t happen, Treasury could help push the regulators to simplify existing definitions within the rule to make compliance easier.
The report represented a big win for the banking industry, which saw many of its suggestions adopted by Treasury. But some advocates warned that the financial system may be made less safe if those suggestions are followed, and there is little to temper those proposals except the judgment of the independent regulators themselves.
“This tracks very closely with the lobbying requests by the big banks themselves, and I think it will predict what they try to do,” Stanley said, adding that those priorities are likely to be implemented “unless they get resistance from the regulators, like the Fed, the FDIC, the OCC — unless those people stand up on principle and say this is irresponsible or risky. Which it is.”
Ian McKendry contributed to this article.