On May 24, 2018, the bipartisan banking act S. 2155 (the “Economic Growth, Regulatory Relief, and Consumer Protection Act”) has officially been signed into law. The Act, which marks the most significant changes to the Dodd-Frank Act since its enactment in 2010, was cleared by the House of Representatives on May 22, 2018, by a vote of 258 to 159.
Most notably, the Act would raise the statutory asset thresholds related to the imposition of enhanced prudential standards (EPS) and the Dodd-Frank Act stress tests (DFAST):
Below are several key takeaways with respect to the Act’s potential impact on regulatory thresholds.
Implementation of revised and related thresholds
With the Act officially signed by President Trump, regulators will be required to amend regulations implementing the EPS and DFAST requirements to reflect the new thresholds, a process that will take time. (see the attached slides for a high-level overview of this process, as well as the affected regulations and supervisory guidance).
Just as significantly, regulators could rethink the thresholds they have used for other rules and guidance, many of which dovetail with the Dodd-Frank Act’s view of systemic risk and enhanced supervision and regulation.
For example, the FRB’s capital plan rule establishing the Comprehensive Capital Analysis and Review (CCAR) program, which applies to bank holding companies with more than $50 billion in total assets, is a key example of a rule with an asset threshold aligned with the Dodd-Frank Act. Although this rule was created independently of the DFAST mandate, it complements DFAST in practice.
In conjunction with these potential amendments, the FRB may also consider amending the asset thresholds under its capital planning guidance set forth by Supervision and Regulation (SR) Letters 15-18 and 15-19 to align with the new DFAST thresholds and any changes to CCAR. Even prior to the introduction of this bill and other legislative proposals, the FRB had begun tailoring its guidance and expectations with respect to capital plans for firms according to size and complexity.
In addition to the potential amendments to CCAR, the FRB may reconsider discretionary asset thresholds under EPS-related rules and guidance, such as SR Letters 08-8 and 12-17.
One further example of regulators tailoring their supervisory approach is the increased reliance on examiner judgement about risk management (though examiners will continue to test for compliance with applicable laws and regulations).
Impact on foreign banking organizations (FBOs)
During the Senate floor debate, several Democrats raised concerns that the amendments to the EPS threshold would allow the US operations of the largest FBOs to escape enhanced supervision and regulation.
In response, the Act was amended to provide that the amended EPS and DFAST thresholds do not affect the FRB’s final EPS rule as applied to FBOs with more than $100 billion in total consolidated assets or limit the FRB’s authority to require the establishment of intermediate holding companies (IHCs).
However, the FRB would retain the flexibility to tailor regulations for FBOs and their IHCs. (Currently, the FRB applies EPS to FBOs based on global consolidated assets, and that application would continue absent a policy change from the FRB.)
What you can do now
Banks continue to adjust their US business strategies, business mix, and operating models, looking to achieve long-term sustainability and viability of their operations and broader US strategy. This will be further accelerated by tax reform, regulatory, and legislative developments, including the possible changes to regulations tied to asset thresholds.
Capabilities to nimbly model and forecast business strategy changes to adjust product and client mix in this landscape will remain critical. Organizations may contact Deloitte for structural optimization services designed to support planning, preparation and compliance with these changes.
As further developments occur, Deloitte will issue additional updates as appropriate.
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