Finance is, appropriately, a highly regulated industry. Unfortunately, political and ideological forces shaped much of the regulatory agenda over the years, and thousands of unintended consequences occurred.
The new administration brought with it the storms of change, and a somewhat euphoric reaction by many banks and other institutions impacted by the commitment to reduce regulatory burden and complexity. At the same time, safety and soundness remain non-negotiable foundational elements to our regulatory infrastructure, as well as other aspects such as consumer protection, economic development and others.
In recent conversations with bankers and regulators, some themes emerged that I”d like to share with you. They are fact-based, but nevertheless speculative. The pace of change in Washington is unprecedented, as well all know.
1. Rollback of regulatory overreach. This is a theme that runs through the labyrinth of the country’s regulatory infrastructure, and our industry’s regulators heard the message. While positive, the devil is, as always, in the details. Examiners-In-Charge throughout the country will determine how far they pull back the overreach, and how interpretations of regulations get translated into examinations on the ground.
2. The goal is to free up bank capital that can be plowed back into the economy, invested in local development and create a stronger, growth-oriented economy.
3. Consideration to moderating regulations that essentially precluded certain sectors from availing themselves of bank services (e.g. money-service businesses; marijuana banking). This exclusion, I believe, was an unintended consequence of Know Your Customer requirements, which continued to expand beyond bank customers to vendor customers etc. My impression is that we will get some relief in this space.
4. Greater openness to leveling the playing field with the non-banks, something which we all interpret differently. Banks believe this means additional regulatory oversight on non-banks, and non-banks believe this will give them greater access to. The banking system. Whose interpretation is correct? Time will tell.
5. Regulatory agency consolidation. The CFPB has already been emasculated, and other agencies might be painted with the same brush. The FDIC, for example, has a dual function: providing deposit insurance, and also regulating banks through an examination process. I’m hearing talk of folding the FDIC into another agency, say the OCC, thereby eliminating redundancies in staffing and examination processes.
6. 1071 and 1033 (data gathering a-la HMDA and Open Banking a-la Europe) are either off the table or in a holding pattern.
7. Reduction. Of staff in all agencies.
8. BSA/AML remains a critical regulation. Do not expect relief in this area, regardless to the regulator providing supervision. A recent example is the failure of the TD/Horizon acquisition that occurred ostensibly because of TD’s insufficient BSA performance.
9. The sweeping early retirement offered to the regulatory agencies has attracted primarily people who are close to retirement. This will have implications to the examination workforce experience, capabilities, knowledge etc.
10. M&A activity will be welcomed going forward. In fact, the main agencies weren’t opposed to M&A in the past, but bank failure to show the appropriate risk management structure for the combined entity caused many proposed deals to languish and eventually fall through.
11. Related to #10 – heightened expectations for growing organizations regarding their risk management and compliance programs make it advisable for acquisitive or high organic growth banks to start planning for the next level of regulatory scrutiny well before they reach that level. For example, a $40B bank should start planning for fitting its ERM framework to the $50B bank requirements.
12. Regulators are concerned with bankers’ ability to accurately rate loans on the credit spectrum, particularly with respect to commercial real estate. It’s good business as well as good regulatory move to ensure that your loan credit ratings are appropriate across the board.
Uncertainty is our greatest obstacle, and, despite the information above, it is rampant these days.