Financial Regulators have the Chance to Provide Regulatory Relief for Businesses

Bill Hulse
Senior Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce

Published

November 14, 2018

In a divided Congress, there can be doubt about what can be accomplished, but financial regulators are in a strong position to continue enacting pro-growth policies that will keep the economy growing.

Key policymakers that have recommended reforms to the Dodd-Frank Act and Basel capital rules are now in place across the executive branch. Specifically, the regulators overseeing the banking sector – the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) – have clear instructions to tailor prudential requirements so they reflect the risk profile of individual firms.

This week, Randal Quarles, the Federal Reserve’s vice chairman for supervision, will testify before Congress and provide an update on efforts to improve the existing regulatory regime. He’s expected to address a number of initiatives that will improve the efficiency of our capital markets such as tailoring supervision requirements, adjusting some capital requirements, and providing an update for reforms to the Volcker Rule. His testimony will hopefully serve as an opportunity to show the Fed’s commitment to providing small businesses the access to capital they so desperately need.

It’s no secret that small businesses are the backbone of the American economy, and these job creators depend on reliable sources of credit to fund their growth. The U.S. Chamber recently commissioned a study that finds small business lending by banks has declined in the time since strict capital and liquidity requirements were put in place in response to the 2008 financial crisis. Policymakers should be concerned that loans less than $1 million made to small businesses by financial institutions dropped by nearly 50%.

Congress has requested the financial regulators take bold actions to reduce some of the financial regulations that are weighing down small business lending. Senator Mike Crapo (R-ID), the chairman of the Senate Banking Committee, was explicit in his request that the Federal Reserve prioritize reforms to enhanced prudential standards when Governor Quarles last testified before his committee.

In an effort to provide relief to domestic bank holding companies, banking regulators recently announced reforms – such as implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was signed into law earlier this summer. The legislation requires immediate relief from enhanced prudential standards under Section 165 of the Dodd-Frank Act for banking entities with $50-100 billion in assets. It automatically grants relief within 18 months for banking entities with $100-250 billion in assets, and it also encourages tailoring of regulations for banks above this threshold. The U.S Chamber supported this legislation because the regulatory relief will enable community and regional banks to provide the financial resources Main Street needs to grow.

Congress should continue to argue that the law be faithfully executed. This means underscoring the positive in the proposal, such as removing banks with $100-250 billion in assets from unnecessary capital requirements like the Liquidity Coverage Ratio and Net Stable Funding Ratio, and providing some relief to larger regional banks. However, Congress also deserves an explanation for why more was not done to reduce regulatory burdens from stress testing requirements, for example.

Foreign banks also play an important role in contributing to the U.S. economy. Some of these banks operating in the U.S. have been required by the Fed to establish U.S. intermediate holding companies (IHCs) and, consequently, are subjected both to home-country requirements and U.S. requirements.

It is notable that since IHC regulations were implemented, the U.S. broker-dealer assets of the twelve IHCs are down 51% which contributes to a reduction in capital for businesses of all sizes.

The U.S. Chamber sent a letter to banking regulators last week requesting that their review of capital rules take into consideration the access to credit that Main Street needs to prosper. Specifically, it encourages swift reduction in the enhanced prudential standards required of regional banks, including foreign banks operating in the U.S. The Chamber is also calling for reconsideration of the capital surcharge for large financial institutions – this echoes a recent call from members of the Financial Services Committee and Senate Banking Committee.

The work of Governor Quarles and his colleagues at the OCC and FDIC is just beginning. This is an historic opportunity to loosen the stranglehold of financial regulations on small business lending and economic opportunity. Governor Quarles’s testimony will be a measure of a commitment to providing the regulatory relief that main street businesses so desperately need.