Federal Reserve Official Defends Regulatory Decisions
Four government regulators met with the Senate Banking Committee on Tuesday to answer questions about the implementation of the regulatory relief bill – the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) – which was signed into law last May. A popular discussion during the hearing was the Federal Reserve’s plans for systemically important financial institutions (SIFI).
In addition to the Federal Reserve, three other financial regulators attended the hearing, including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration (the testimony for all four regulators can be found here).
The EGRRCPA reflected the biggest change to bank rules since Dodd-Frank. One provision raised the asset threshold from $50 billion to $250 billion for banks to be automatically labeled “systemically important financial institutions” (SIFI), which comes with strict oversight standards. However, a compromise between Republicans and Democrats led to a provision that gives the Federal Reserve the freedom to apply stricter standards to banks with assets between $100 billion and $250 billion.
There has been growing concern among Republican Senators that the Federal Reserve has failed to loosen the standards on banks in the middle tier. On Friday, 30 Republicans signed a letter to the Federal Reserve Board arguing for looser regulations, “Due to the fact that there have been no past or present findings of systemic risk, we strongly believe that the Fed should take quick action to completely remove these firms, both domestic and international, from all SIFI-associated regulations.”
On the other side, progressive groups are worried that the Federal Reserve will deregulate too quickly. “If the Fed does not act, however, these large banks will be deregulated to the detriment of U.S. financial stability,” says a letter by American Progress to the chairman and ranking member of the Senate Banking Committee. “The Fed should prevent this imprudent deregulation and use its authority to reapply these vital safeguards to each and every bank with between $100 billion and $250 billion in assets.”
Vice President for Supervision Randal Quarles tried to assuage concerns during testimony that “it seems appropriate that tailoring supervision and regulation of large banks should not ignore size, but consider it as one factor among others. Additional factors that capture…larger banks’ complexity and interconnectedness may–together with size–better serve as a basis for tailoring supervision and regulation rather than size alone.”
In the end, it will be up to the officials at the Federal Reserve on how to interpret and implement the provisions within EGRRCPA. It should be noted however that for a major regulatory bill in a highly partisan Congress, EGRRCPA passed by fairly wide margins, 67 yeas vs. 31 nays in the Senate and 258 yays vs. 159 nays in the House.