Notice & Comment

Significant Rollback of Dodd-Frank Signed Into Law

On May 24, 2018, President Trump signed into law “Economic Growth, Regulatory Relief, and Consumer Protection Act,” to date the most significant rollback of the financial regulatory framework set up by the Dodd-Frank Wall Street Reform and Consumer Protection Act (enacted in 2010). The bill had previously passed the Senate in March and the House in May with the support of Republicans and some moderate Democrats.

The most significant beneficiaries of the law are expected to be bank holding companies (BHCs) with assets between $50 billion and $250 billion and small banks (or their holding companies) with assets less than $10 billion. Under the Dodd-Frank Act (Section 165), the Federal Reserve Board is required to apply enhanced prudential standards to nonbank financial institutions designed as systemically important by the Financial Stability Oversight Council and to BHCs with assets over $50 billion. Thus, BHCs with assets over $50 billion, regardless of their complexity, have been subject to the Federal Reserve’s enhanced prudential standards, including heightened liquidity requirement, stress testing, and resolution plan (living will) requirement.

The recently enacted law (Section 401) now raises that $50 billion threshold to $250 billion, exempting all but the largest banks in the country. BHCs with assets between $50 billion and $100 billion (e.g., Comerica, Zions) will be exempt immediately, while BHCs with assets between $100 billion and $250 billion (e.g., BB&T, SunTrust, Fifth Third) will be exempt after eighteen months (although the Federal Reserve can exempt them at an earlier date). This exemption will decrease compliance costs for BHCs with assets between $50 billion and $250 billion and, as a corollary, remove a disincentive for BHCs falling below $50 billion threshold to cross above that line, whether organically or through mergers.

It is worth noting, however, that BHCs over $50 billion are not entirely free from regulatory scrutiny. First, and most importantly, the law does not expressly exempt them from the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR), although the Federal Reserve may later choose to exempt them. Second, the Federal Reserve Board, at its discretion, may impose enhanced prudential standards to BHCs with assets over $100 billion. Third, the Federal Reserve must conduct periodic supervisory stress tests on BHCs with assets over $100 billion.

Another major beneficiary of the law is expected to be banks with assets less than $10 billion. First, as long as they maintain leverage ratio of at least eight to ten percent (the exact threshold to be set by the appropriate federal banking regulator), they will be deemed to have met all applicable capital and leverage requirements (Section 201). Thus, these banks can choose between satisfying the eight to ten percent leverage ratio as the simplified option or the existing capital and leverage requirement framework. Second, banks with less than $10 billion in assets will be exempt from the Volcker Rule (Section 203).

In addition to lessening the regulatory burden for banks with assets less than $10 billion and between $50 billion and $250 billion, the law also contains a number of other deregulatory provisions, including:

  • Reduction in the number of stress test scenarios from three to two (removing “adverse” scenario) (Section 401);
  • Disregarding funds deposited with a central bank in calculating a custodial bank’s supplemental leverage ratio (SLR) (Section 402);
  • Mandating that regulators treat investment grade, liquid, and readily-marketable municipal bonds as level 2B high-quality liquid asset in their liquidity coverage ratio (LCR) regulations (Section 403);
  • Presumption that certain mortgages originated by banks with less than $10 billion in assets satisfy the “ability-to-repay” requirement under the Truth in Lending Act (Section 101); and
  • Exemption from Home Mortgage Disclosure Act’s public disclosure requirement for insured depository institutions and credit unions that originate fewer than 500 closed-end mortgage loans or 500 open-end line of credit (Section 104).

In considering this rollback, House Republicans had initially pushed for a more expansive deregulatory bill but had settled on the Senate’s more moderate version, as further deregulatory measures would have broken the delicate alliance between Republicans and moderate Democrats in the Senate. Given this push in the House, it remains to be seen whether the recent Dodd-Frank rollback will open the floodgates for further deregulatory legislation.