Banking Regulators Recommend Volcker Reassessment and Other Reforms

In a hearing on “Regulation and Economic Growth” held by the Senate Committee on Banking, Housing, and Urban Affairs, bank regulators testified on the current banking environment and outlined principles, recommendations, and objectives to promote future efficiency.

Board of Governors of the Federal Reserve System (“FRB”) Governor Jerome Powell focused on regulatory developments including (i) capital requirements for banks, including common equity tier 1 capital requirements and an additional surcharge for global systematically important banks, (ii) mandatory stress testing for large banks, (iii) the liquid coverage ratio requirement, and (iv) resolvability planning obligations. He testified that the FRB will explore the measures aimed at reducing regulatory burdens including a reassessment of Volcker Rule requirements that do not directly relate to its main policy goals, and an examination of the leverage ratio to ensure that it is properly calibrated to prevent market distortions. Mr. Powell also stated that the FRB is not in favor of reducing risk-based capital requirements, as recommended by a recent Treasury report.

Acting Comptroller of the Currency Keith A. Noreika also advocated for a fresh look at the Volcker Rule, and argued that a better approach may be to entirely exempt community banks from the rule’s requirements. Additionally, he expressed support for considering “off-ramp” provisions for institutions that clearly do not present risks that the Volcker Rule was implemented to mitigate. Mr. Noreika echoed Treasury suggestions for raising stress test thresholds, and asserted a commitment to streamlining reporting requirements for smaller banks.

FDIC Chair Martin Gruenberg explained that a recent review (conducted pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996) has resulted in several interagency actions aimed at reducing reporting requirements, simplifying certain capital rules, and moving towards a more individualized approach to bank examinations. Mr. Gruenberg argued against Treasury report recommendations to (i) remove the FDIC from the living wills process, and (ii) remove central bank deposits, Treasury securities, and initial margin on derivatives from the denominator of the supplementary leverage ratio and enhanced supplementary leverage ratio.