After a period of regulatory overload, the banking industry has received some relatively good news in recent years when it comes to regulatory relief.
“Dodd–Frank was expected when it was enacted in the wake of the financial crisis,” says Paul Hickman, president and CEO of the Arizona Bankers Association, “but it was an over-reaction.”
The Dodd–Frank Wall Street Reform and Consumer Protection Act is a federal law that overhauled financial regulation in the aftermath of the recessions of 2007–2008. It was a sweeping overhaul of the United States financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression. Some critics argued that the law had a negative impact on economic growth and smaller community banks. Many Republicans called for the partial or total repeal of the law.
“The banking industry got some regulatory relief from Senate Bill 2155, which is actually 10 times the size of Dodd-Frank,” Hickman says.
Senate Bill 2155 — also known as the Economic Growth, Regulatory Relief and Consumer Protection Act — was signed into federal law by President Donald Trump on May 24, 2018. The bill eases regulations imposed by Dodd-Frank by raising the threshold to $250 billion from $50 billion under which banks are deemed too important to the financial system to fail. The bill also eliminated the Volcker Rule — which prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds — for small banks with less than $10 billion in assets.
Relief in hand
And that’s not the only relief the banking industry has received recently:
• The Government Accountability Office found that the Federal Reserve and other regulators had influence over the behavior of banks in a way that is subject to congressional oversight. At least in theory, the agency’s decision will make it easier for Congress to relax regulations that were imposed after the 2008 financial crisis. The GAO’s opinion marked the latest victory in a campaign by Republicans and the Trump administration to ease constraints on banks. With a new law and a series of changes to capital requirements and trading restrictions, they have already made substantial progress.
• The Federal Reserve recently adjusted key bank regulations put in place after the financial crisis — imposing regulations so they are more closely to bank size and reducing the necessary level of cash and government bond stockpiles at all but the largest banks. Affected banks will also be allowed to submit “living wills” — documents detailing how a bank would wind itself down in the event of failure — less frequently. Banks with $250 billion to $700 billion in total assets will now have to submit a resolution plan every three years, alternating between full and partial filings. They are currently required to submit a full report annually.
But Hickman says there is still work to do in terms of easing the regulatory burden.
“The Bank Secrecy Act (BSA) — also known as the Anti-Money Laundering (AML) law — has not been reformed since the 1970s,” Hickman says. “The act requires financial institutions to file reports for deposits that exceed $10,000 and report suspicious activity that may signify money laundering, tax evasion, or other criminal activities. We would like to see that threshold raised from $10,000 to $65,000. But we would be happy to see it raised to at least $35,000.”
As an alternative or complement potential changes to the BSA, Hickman would like to see a program for cash-intensive businesses that would operate similarly to a “TSA Fast Lane” when it comes to banking, making it easier for those businesses to work with banks, while lowering the amount of paperwork for banks.
“One of the biggest pieces of legislation that we are cautiously optimistic will soon become law and have a major impact on the banking industry is the SAFE Act, which was recently passed by Congress,” Hickman says.
The Secure And Fair Enforcement (SAFE) Banking Act aims to ensure that state-authorized and regulated cannabis businesses are not forced to operate with cash only. Under the proposed law, financial institutions would be provided with a federally approved safe harbor to serve not only retail cannabis stores, but the vendors and service providers that serve those stores — plumbers, carpenters, cleaning companies, etc.
“What the law would do is tell banking agencies that if cannabis is legal under state law, it cannot penalize the bank for doing business with cannabis companies,” Hickman says. “Right now, federal laws and regulations are a roadblock to banks in Arizona doing business with a multi-billion-dollar industry. Right now, banks cannot take deposits from cannabis businesses without strict scrutiny and the risk of those accounts being closed. The SAFE Act would end that problem.”
While the SAFE Act is generally applauded by the banking industry, experts say it needs to be precise when and if it is enacted.
“The SAFE Act could be a blessing or a curse,” says Candace Wiest, president and CEO of West Valley National Bank. “It should not be so vague that it assists people who have no business banking cannabis customers. And it should be so clear that the regulatory agencies know exactly how to supervise the banks that are qualified to offer this business line.”
If the bill wins approval by the U.S. Senate, then President Trump, it will become law.
With regulatory relief on the horizon and optimism in the banking industry, here’s what other industry leaders would like to see in regards to legislative help in the coming year:
• Jack Barry, chairman and CEO, Enterprise Bank and Trust – Arizona Region: “There are still aspects of the Dodd-Frank legislation that was hurriedly put into place after the 2008-2010 downturn that has created unintended consequences. Although there were clearly abuses that occurred in the financial markets pre-downturn, the corrective measures undertaken within the consumer mortgage industry and regulatory reporting requirements has placed an undue burden on the banks and has caused some unnecessary restrictions in credit offerings. The voluminous and often redundant mortgage disclosure and qualifying rules have made it difficult at times to provide efficient delivery of mortgage loan products. Also, the level of regulatory oversight since Dodd-Frank has substantially increased costs associated with excessive reviews and submissions of information to the respective agencies.”
• Don Garner, CEO, Alliance Bank of Arizona: “We hope that any legislation, reform or regulatory relief implemented in 2020 affecting the banking industry will help financial institutions bring a broader array of lending capability to customers. This would allow Arizona’s businesses to continue driving the state’s economic momentum forward through expansion and reinvestment.”
• Heather Higginbottom, president, JPMorgan Chase PolicyCenter: “JPMorgan Chase is advancing a public policy agenda through the new JPMorgan Chase PolicyCenter that reduces barriers to employment for people with criminal backgrounds. Businesses must play a critical role in advocating for policies that unlock economic opportunity for more people in underserved communities. By working with political, business and community leaders, we will help advance public policy solutions that drive inclusive growth at all levels of government.”
• Dave Howell, regional director for Arizona government relations, Wells Fargo: “Wells Fargo supports efforts at the Consumer Financial Protection Bureau to revise the qualified mortgage regulatory framework to ensure continued, equal access to mortgage credit for consumers and to minimize any market disruption.”
• Patrick Strieck, head of retail banking for the Arizona Region, BMO Harris Bank NA: “BMO is hopeful that there will be meaningful changes to the current federal anti-money laundering regime in 2020. The current system is outdated and inhibits our ability to efficiently serve our customers. Proposed legislation in both the House and Senate would enhance our ability to identify bad acts and monitor for potential AML violations, while at the same time increasing the efficiency of the overall framework allowing us to reallocate valuable time and resources that is better spent serving our customers.”
• Wiest: “A down cycle usually leads to asset quality issues. When that happens, Congress tends to ride in and shoot the survivors. They will cry for more rules, more regulations, etc. And in the past, the rules did not distinguish between $50-billion banks and $500-million banks. Any new regulations should be reviewed to make sure it is relevant to the community banks. Community banks serve rural areas and small businesses. We make SBA and USDA loans so people can grow their businesses. During the last recession, we learned that small businesses are critical to the American economy. One-size-fits-all regulations hamper the community banks’ ability to serve the small businesses in this country.”