Implementation of Financial Services Regulatory Reform Legislation: Federal Reserve Official Previews Risk-Based Regulatory Tailoring Agenda

Sullivan & Cromwell LLP - October 9, 2018

On October 2, the Senate Banking Committee held a hearing on the implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), which was enacted earlier this year. The hearing featured testimony by FDIC Chairman Jelena McWilliams, Federal Reserve Board Vice Chairman for Supervision Randy Quarles, National Credit Union Administration Chairman Mark McWatters, and Comptroller of the Currency Joseph Otting.

In his opening statement, Committee Chairman Mike Crapo (R-ID) urged the regulators to implement the new law “expeditiously,” to revise “all regulation and guidance [asset] thresholds” in light of the now “outdated” $50 billion asset threshold (often referred to as the “SIFI” threshold) originally established in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), above which the Federal Reserve is required to apply the “enhanced prudential standards” (“EPS”) in Section 165 of Dodd-Frank to a bank holding company (“BHC”), and to tailor the imposition and application of EPS to “reflect[] actual systemic risk.”

In Vice Chairman Quarles’ testimony, he described the “detail work” the Federal Reserve is conducting to implement the Act and to otherwise tailor the prudential regulation of financial institutions based on risk. One aspect of this work, which he described as one of the Federal Reserve’s “top priorities in the next few months,” is to tailor, on the basis of risk, the supervision and regulation of institutions with $100 billion or more in total assets that are not identified as globally systemically important bank holding companies (“G-SIBs”), with a particular focus on BHCs with between $100 billion and $250 billion in total consolidated assets. His testimony suggests, however, that the Federal Reserve’s risk-based regulatory reform agenda is unlikely to result in much, if any, relief for G-SIBs or large foreign banking organizations with U.S. operations (“FBOs”), at least in the short term.

FDIC Chairman McWilliams, Vice Chairman Quarles, NCUA Chairman McWatters, and Comptroller of the Currency Otting also testified about their agencies’ efforts to implement other modifications made by the Act to the post-crisis regulatory framework.

This Memorandum to Clients focuses on Vice Chairman Quarles’ testimony. We address the other testimony by the Federal banking regulators in a separate Memorandum to Clients that was also published today.