The Department Of The Treasury Issues Recommendations On The Regulation Of U.S. Depository Institutions



"A Financial System that Creates Economic Opportunities: Banks and Credit Unions," a Report by the Department of the Treasury, identifies potential reforms that would promote the "Core Principles for Regulating the United States Financial System" identified in an executive order issued by President Trump.

Some of the recommendations would require amending or repealing certain provisions of the Dodd-Frank Act. However, the report's remaining suggestions could be implemented via administrative actions. These recommendations, which are the primary focus of this Jones Day White Paper, include a coordination of cybersecurity obligations, adjustments to capital and liquidity requirements, and improvements to the Volcker Rule, to name a few.

While the current political climate makes broad legislative changes to Dodd-Frank problematic, except for smaller institutions, the Federal Reserve, OCC, and the FDIC appear to be receptive to most of the Report's recommendations.

The President issued Executive Order 13772 "Core Principles for Regulating the United States Financial System" ("Core Principles")1 on February 3, 2017. The Core Principles directed the Treasury Secretary to consult with the federal financial regulators2 on the extent to which existing laws, treaties, regulations, guidance, and other government policies promote the Core Principles. A report was required to identify any laws, regulations, guidance, and other government policies that are inconsistent with the Core Principles.

The Department of the Treasury ("Treasury") issued its first report in response to the February 2017 executive order, "A Financial System that Creates Economic Opportunities: Banks and Credit Unions" ("Report"), on June 12, 2017.3 The Treasury states that the recommendations outlined in the Report, which are summarized below, "could meaningfully simplify and reduce regulatory costs and burdens, while maintaining high standards of safety and soundness and ensuring the accountability of the financial system to the American public."4 This Report is the first in a series of reports to be issued in response to this executive order. Three subsequent reports are expected to address capital markets; asset management, insurance, and investment products; and fintech.

On June 21, 2017, Treasury official Craig Phillips stated that the implementation of the Treasury's recommendations falls largely on the bank regulators because many of the recommendations rely on regulatory interpretations of existing rules.5 Federal Reserve Governor Jerome Powell, FDIC Chairman Martin Gruenberg, Acting Comptroller of the Currency Keith Noreika, and NCUA Acting Chairman J. Mark McWatters appeared supportive of the Treasury's recommendations during a June 22, 2017, Senate Banking Committee hearing and are already preparing to review and revise a number of regulations cited in the Report.6 The Report provides further impetus and support for a recalibration that various regulators had been considering in light of their experience. It provides guidance and perspective as new leaders are appointed to the bank regulatory agencies.


The Report identifies numerous reforms that the Treasury believes would promote these Core Principles. The Treasury summarizes its recommendations as:

Improving regulatory efficiency and effectiveness by critically evaluating mandates and regulatory fragmentation, overlap, and duplication across regulatory agencies; Aligning the financial system to help support the U.S. economy; Reducing regulatory burden by decreasing unnecessary complexity; Tailoring the regulatory approach based on size and complexity of regulated firms and requiring greater regulatory cooperation and coordination among financial regulators; and Aligning regulations to support market liquidity, investment, and lending in the U.S. economy. General economic goals include increasing economic growth, meeting credit needs of consumers and business, and maintaining liquid markets. Common themes include a need to modernize financial regulations and to enhance policy coordination among federal bank regulators, including supervisory and enforcement policies.

Although the Report will influence and guide regulatory attitudes and approaches, several of the Report's recommendations will require amendment or repeal of certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") including:

Reducing regulatory and examination overlap and duplication; Raising the minimum asset thresholds required by the Comprehensive Capital Analysis and Review ("CCAR"), Dodd-Frank Act stress testing (collectively, with CCAR, "stress testing") and enhanced prudential standards asset thresholds, eliminating midyear stress testing cycles, and appropriately tailoring the standards governing the stress testing and enhanced prudential standards; Creating a regulatory "off-ramp" for certain well-capitalized banks in which all capital and liquidity requirements, most of the enhanced prudential standards, and the Volcker Rule would not apply if the institution maintained a sufficiently high level of capital (i.e., a 10 percent nonrisk weighted leverage ratio);7 Simplifying community banks' capital requirements by exempting such banks from Basel III capital requirements;8 Raising the asset threshold for the Federal Reserve's Small Bank Holding Company and Savings and Loan Holding Company Policy Statement ("Small Bank Policy Statement") to $2 billion;9 Allowing credit unions to rely on supplemental capital to meet their risk-based capital requirements; Raising the asset threshold for smaller banks eligible for the 18-month exam cycle; Improving the Community Reinvestment Act; Raising the threshold for resolution plans ("living wills"), eliminating the FDIC from the living will process and requiring the Federal Reserve to review and provide feedback on living will submissions within 6 months; Limiting the application of enhanced prudential standards and living will requirements on foreign banking organizations based on their U.S. risk profile and size; Exempting banks with $10 billion or less in assets from the Volcker Rule and exempting banks with more than $10 billion in assets that are not subject to market risk capital rules from the Volcker Rule's proprietary trading rules; Eliminating the "purpose test" from the Volcker Rule's definition of proprietary trading and reevaluating the "reasonably expected near-term demand" ("RENTD" or "Expected Near Term Demand") framework under the Volcker Rule's market-making exception by providing an opt-out if firms' trading mandates ensure market-making activity only and transactions are hedged; Making various statutory changes to focus and simplify the Volcker Rule's covered fund restrictions and creating a regulatory "off-ramp" for well-capitalized banks; Making structural changes to the CFPB by having the director removable at-will by the president, funding the CFPB though the congressional appropriations process, subjecting the CFPB to Office of Management and Budget apportionment and reforming funding mechanisms so that excess funds not paid to victims are remitted to the Treasury; Permitting persons who receive a civil investigative demand ("CID") from the CFPB to file a motion in federal court to modify or set aside the demand, rather than limiting recourse to an appeal to the CFPB director; Limiting access to the CFPB's Consumer Complaint Database to federal and state agencies; Repealing the CFPB's supervisory authority; Repealing or revising the Residential Mortgage Risk Retention Requirement and providing additional protections to investors in private mortgage-backed securities; and Improving small businesses' ability to access credit at reasonable rates. H.R. 10, The Financial CHOICE Act of 2017 ("CHOICE Act") was passed by the U.S. House of Representatives on June 8, 2017. Although not identical to the Report, the CHOICE Act does overlap in certain areas with the Report.10 Many of the Treasury's legislative recommendations and the CHOICE Act appear to lack bipartisan support, and are unlikely to pass the Senate. Bipartisan support appears to exist for changing the regulation of smaller, community financial institutions.

The Report's remaining recommendations can be unilaterally addressed by state and federal regulators and could be implemented timely by administrative action. Such recommendations include the following, which are the focus of this White Paper:

Cybersecurity; Capital and liquidity; Community financial institutions and de novo activity; Improving the regulatory engagement model; Living wills; Foreign banking organizations; Improving the Volcker Rule; The CFPB; Residential mortgage lending; Leveraged lending; and Small business lending. REGULATORY RECOMMENDATIONS


The Report highlights the importance of technology and cybersecurity to the proper functioning of U.S. financial markets and the operations of financial institutions. The Report states that better coordination among state and federal regulators is needed to protect financial institutions from such cybersecurity risks. As part of that effort, state and federal agencies should harmonize and reduce redundant regulations, interpretations, rules, and guidance governing cybersecurity. This could be spearheaded by the Financial and Banking Information Infrastructure Committee, a group of 18 federal agencies and state organizations charged with improving the security and reliability of the financial infrastructure.

Capital and Liquidity

The U.S. banking system collectively holds significantly more capital than it did prior to the financial crisis. Common equity tier one capital has increased by $500 billion since 2009 and common equity tier one capital ratios have more than doubled.11 Moreover, U.S. banks hold 24 percent of their assets in high-quality liquid assets, which is five times higher than precrisis...

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