US Regulatory (r)evolution Deregulation - Lombard Risk
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The Dodd-Frank Act was signed by President Obama in 2010, in the wake of the 2008 financial crisis.  In February 2017, President Trump signed an executive order requiring the U.S. Treasury to propose regulatory changes and legislation to modify Dodd-Frank.  Meanwhile, the proposed Financial Transparency Act directs eight U.S. financial regulatory agencies to transform their reporting regimes from disconnected documents into standardized, searchable data and the Financial CHOICE Act proposes an “off ramp”.  Furthermore, Trump’s 2 out for 1 in rules replacement promise is starting to be quantified and Fed Vice Chair for Supervision Randal Quarles’s recent statements appear minded to accelerate US regulatory (r)evolution.  Lombard Risk is helping firms turn these changes into opportunity.

The 2010 Dodd-Frank Act created new regulatory bodies and added hundreds of regulations through existing agencies in an effort to maintain financial market stability. U.S. President Donald Trump said that his administration is working on major changes to Dodd-Frank banking regulations that will make it easier for banks to loan money.

There are many changes afoot: in May 2017, Senate Democrats introduced a bill to scrap a law that has become a cornerstones of President Trump’s deregulation agenda. The SCRAP Act ‘Sunset the CRA and Restore American Protections’, would eliminate a Clinton-era measure giving Congress the ability to repeal regulations with a majority vote.  In June 2017 the US house passed Financial CHOICE Act to offer well-managed, well-capitalized financial institutions an “off ramp” from Dodd Frank’s ‘suffocating regulatory complexity’.  Also, the Financial Transparency Act of 2017 aims to amend securities, commodities, and banking laws to make the information reported to financial regulatory agencies electronically searchable and directs the eight major U.S. financial regulatory agencies to adopt consistent data fields and formats for the information that they already collect from the private sector under existing securities, commodities, and banking laws.

On June 12, 2017, the US Treasury released its first in a series of reports to President Donald J. Trump examining the United States’ financial regulatory system and detailing executive actions and regulatory changes that can be immediately undertaken to provide regulatory relief.

Whilst the industry might be satisfied with post-crisis Basel III being an effective framework the US agenda is now questioning the efficiency, transparency and simplicity of the rules, especially in respect of the drag on growth and of the impact of increased friction.  Attention is now being paid to relief for smaller firms, with a rethink about rebalancing of the capital framework especially as set out in the US financial regulators agencies recent report on the Economic Growth and Regulatory Paperwork Reduction Act.  Questions are being raised about the suitability of supervisory tools, the impact of unintended consequences, and especially around calibration of supervisory steerage to the level of risk.  Going forward, thinking appears to be emerging on “tailoring” carefully to the risks, perhaps with reduced reporting cycles for smaller or lower risk firms or other threshold triggers.

This may have a potentially positive impact not just on smaller firms but on mid-tiers that under current rules may be subject to the same or similar requirements as G-SIBS in USA even though they may not pose the same systemic risks.  There may be simplifications especially around advanced models, excessive stress testing flavors and opportunities to streamline total loss-absorbing capacity (TLAC).  There could be a raising of the current $50 billion threshold for ‘EPS’ – enhanced prudential standards, or a tailoring of it by using a possible factors-based threshold.  In addition to small bank capital simplification, burden reduction in resolution planning, enhancements to stress testing, leverage ratio recalibration, and Volcker rule simplification may emerge, so ‘Volcker 2.0’.

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