Banks have hope for long-lasting codification of regulators' recent actions so that changes can outlast new administrations in the future.
A bill recently introduced in the House would codify some changes regulators made in 2025 and address key areas that regulatory officials and bankers have been discussing. While regulators in a future administration could potentially undo changes made by the current regulators, a law passed by Congress would be more difficult for a future Congress to reverse.
"It's much harder to undo a law than it is to undo a rule," Michael Iannaccone, founder and president of MDI Investments Inc., an advisory firm, said in an interview.
For example, one part of the bill seeks to remove reputation risk from regulators' supervisory purview, a move the federal banking agencies and the National Credit Union Administration have already embarked on by removing it from exam considerations. The wide-ranging bill, called the "Main Street Capital Access Act," also touches on other key areas on regulators' agenda, such as revamping the merger approval process, simplifying the process for de novo formation and updating asset thresholds.
The proposed legislation (HR 6955) was co-sponsored by House Financial Services Committee Chairman French Hill (R-Ark.) and Subcommittee on Financial Institutions Chair Andy Barr (R-Ky.). A committee vote on the bill has not yet been scheduled.
Merger, de novo applications
The bill is seeking to revamp the merger approval process for banks. Key changes include requiring the agencies to decide on an application within 90 days, with one 30-day extension allowed, and requiring the agencies to review their merger policies every three years. It would also particularly benefit community banks by removing the need for the US Department of Justice competition reviews for deals involving banks with assets under $10 billion.
The banking industry has long argued that merger policies are outdated, and under the prior administration, it was common for deals to pend for over a year. Since taking office in the past year, Trump-appointed bank regulators have vowed to fix the bank merger approval process.
"This development would be welcome as creating a long-term path rather than simply relying on what the regulators are doing, which can change with the new administration," Erin Bryan, partner and chair of Dorsey & Whitney LLP's Consumer Financial Services Group, said in an interview.
If passed in its current form, the bill would streamline the merger approval process, she said.
Aside from smoothing the way for transactions, the bill would also make it easier for new banks to form — another top agenda item for the federal bank regulators. It would do this by reducing the requirements for startup capital by setting up a three-year phase-in for capital requirements, which are often cited as an impediment to forming new banks.
This could enable banks' capital providers to keep their capital deployed in other investments for a longer time and then provide it to the bank when the bank is operating and needs it, said James Stevens, partner and co-leader of Troutman Pepper Locke LLP's Financial Services Industry Group.
Rural depository institutions would get an additional boost if the bill becomes law by lowering their community bank leverage ratio requirement to 7.5%, compared with the usual 9%, for its first three years and a phase-in for the first two of those years.
"It's more difficult to raise capital in the rural markets," Kelly Brown, chairman and CEO of Ampersand Inc., said in an interview. "For these rural de novos, that phase-in is about … giving them enough oxygen to scale without drowning in the mechanics of capital on day one."
Supervisory ratings, exams
The bill also includes several items related to the regulator's goal of reducing supervision and exam burdens for banks. In one notable potential change, well-capitalized, well-managed banks with less than $6 billion in assets would be able to opt into combining different types of regulatory exams, possibly diminishing their compliance burden.
"Any time that you can lengthen the period of time between exams, which was part of this bill, or you can take different types of exams and combine them, so that the disruption happens less frequently or all at the same time, is better," Stevens of Troutman Pepper Locke said in an interview. "For example, community banks will frequently have a safety and soundness exam, and then on a separate schedule, they will have compliance exams."
The bill also seeks to update the CAMELS rating system by creating quantifiable measures for the six components, and either limiting or completely eliminating the "M," management, component. One adviser wondered if significantly reducing or removing the management component would cause more harm or good.
"Certainly, reducing the 'M' in the CAMELS rating system is one thing where it could cut both ways," Bryan said. "On the one hand, maybe it is taking some of the discretion away from examiners to come up with their own requirements or identify concerns that are outside of the statute. But on the other hand, it could potentially limit the ability of regulators to take issues that they're seeing that may be serious issues that don't neatly fall into another category."
Raising asset thresholds
Multiple provisions in the bill would raise or index asset thresholds, such as raising the threshold to qualify for an 18-month exam cycle to $6 billion from $3 billion and raising the Board of Governors of the Federal Reserve System's Small Bank Holding Company and Savings and Loan Holding Company Policy Statement to $25 billion from $3 billion. Another part would index the thresholds for Category II, Category III and Category IV to nominal gross domestic product.
"There has been a sense that those thresholds are inappropriate and not keeping up with the times, and so this is one way to remedy that," Bryan said. "It is a very sizable increase, though. ... The industry is certainly going to welcome having some regulatory relief, but at the same time, the entire industry has an interest in maintaining safety and soundness and the reputation of the industry as a whole. And so I do think we need to hope that in setting these new thresholds that we are not losing the kind of oversight that we want on our financial institutions that could catch major issues as they're emerging."
