Thursday, June 29, 2017

Fed urges Recalibration, Not Repeal, of Dodd-Frank Reforms

Outlines Fed's Guiding Principles for Recalibration

Author: David Schwartz J.D. CPA

In Congressional testimony on June 22, 2017, Federal Reserve Governor Jerome H. Powell highlighted the progress that has been made since the financial crisis in improving the resiliency and resolvability of the U.S. banking industry. Having achieved the primary goals of re-regulation, however, Powell believes that the time is ripe "for us to look for ways to reduce unnecessary burden." In his statement, Governor Powell urged the lawmakers on the Senate Committee on Banking, Housing, and Urban Affairs not to roll back Dodd-Frank reforms, but to recalibrate them.


After outlining the relative success of reforms in capital, stress testing, liquidity, and resolution planning, Powell proposed four guiding principles the Fed plans to use in assessing the effectiveness and efficiency of these reforms and guiding their efforts to recalibrate them:


  • protect the core elements of the reforms for our largest banking firms in capital regulation, stress testing, liquidity regulation, and resolvability. 
  • continue to tailor our requirements to the size, risk, and complexity of the firms subject to those requirements.
  • assess whether we can adjust regulation in common-sense ways that will simplify rules and reduce unnecessary regulatory burden without compromising safety and soundness. 
  • strive to provide appropriate transparency to supervised firms and the public regarding our expectations.


Under these guiding principles, Powell announced some specific reforms the Fed plans to champion to reduce the regulatory burden on smaller banks and more narrowly focus Dodd-Frank requirements on the risks posed by larger banking firms. The Fed supports changes in various statutory thresholds like:


  1. exempting small banking organizations from the Volcker Rule;
  2. exempting small banking organizations from the incentive compensation requirements of the Dodd-Frank Act;
  3. increasing the $10 billion Dodd-Frank Act asset threshold for company-run stress tests and risk committee requirements; and
  4. raising the the $50 billion threshold for enhanced prudential standards under section 165 of the Dodd-Frank Act.


In addition to easing burdens on smaller banking organizations, Powell said that the Fed would be reexamining other aspects of Dodd-Frank reforms, not just with respect to their effects on smaller banks, but their application across the board. 


Volcker Rule.  Governor Powell testified that the Fed is looking into whether the regulations implementing the Volcker Rule are the most efficient methods of achieving its policy objective of limiting the risks to the system associated with bank proprietary trading. Powell said that he believes that there is room for "eliminating or relaxing aspects of the implementing regulation that do not directly bear on the Volcker rule’s main policy goals.” The Fed plans to work with Congress to better focus the rule on entities with significant trading books, adjust it for banks with small trading books, and, as noted above, exempt small firms from the rule entirely. He also said that the Fed is looking at ways to streamline or reduce the overall recordkeeping and reporting burdens associated with the rule.


Supplementary Leverage Ratio.  In light of the progress made over the past few years to develop an effective regulatory capital and stress testing frameworks, Powell testified that the Fed will be taking a new look at the Supplementary Leverage Ratio (SLR). While the SLR remains an “important backstop to the risk-based capital framework,” Powell said the Fed needs to recalibrate the leverage ratio and the risk-based capital requirements to mitigate "any perverse incentives and preventing distortions in money markets and other safe asset markets.” He also said that changes to the SLR are necessary to address concerns of custody banks whose business models are disproportionally adversely affected by the leverage ratio. 


Resolution Planning.  The Fed also plans to work with the FDIC to improve the resolution planning process by extending the cycle for living will submissions from annual to once every two years, and focusing every other of these filings on key topics of interest and material changes from the prior full plan submission. Powell said the the Fed would also be looking into ways to limit full plan filing to firms that are large, complex, or have systemically critical operations. This limitation, Powell said, would reduce the submission requirements for a large number of firms due to their relatively small, simple, and domestically focused activities. 


Stress Testing. Powell said the Federal Reserve is committed to increasing the transparency of the stress testing and CCAR processes, and would soon seek public feedback concerning possible forms of enhanced




The full text of Jerome Powell’s testimony is available via: