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Bank regulators to tackle capital rules, Community Reinvestment Act in 2019

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Bank regulators to tackle capital rules, Community Reinvestment Act in 2019

The Federal Reserve is facing pressure to either reduce or increase capital requirements for large banks in 2019, but it is not clear which direction the regulator will go.

The Fed's choices come as the U.S. economic expansion is due to become the longest on record — a development that some argue calls for the Fed to boost capital cushions at big banks in preparation for a downturn. In January 2019, the Fed will undergo its annual review on whether it needs to activate the countercyclical capital buffer, a new tool with which the regulator can force large banks to hold onto more capital at times of elevated risk.

But activating the so-called CCyB next month "does not seem to be in the cards," said Capital Alpha analyst Ian Katz, who pointed to recent statements from Fed Chairman Jerome Powell and Fed Vice Chairman for Supervision Randal Quarles, who have said risks to the financial system remain moderate. That contrasts with Fed Governor Lael Brainard's view that the Fed should deploy the tool.

On the other end, the Fed has proposed slightly reducing leverage requirements for the eight U.S.-based global systemically important banks, or G-SIBs, which include JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Bank of America Corp.

It also has gotten requests from industry groups and some Republican lawmakers to loosen a related capital surcharge that applies to those U.S.-based G-SIBs.

Powell and Quarles have not ruled out adjusting the G-SIB surcharge, which critics argue is tougher than the international standard and therefore puts U.S.-based banks at a disadvantage. But the pair have also not indicated that they view potential changes to it as a pressing need, and Quarles is already eyeing several other changes affecting capital standards for big banks.

"I don't know that it's top of the agenda in light of the other things that they have going on," said Adam Gilbert, global regulatory leader of PricewaterhouseCoopers' financial services advisory practice.

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A Community Reinvestment Act 'battleground'

Another key item on the Fed's list next year will be a possible overhaul to how bank regulators enforce the Community Reinvestment Act, a decades-old law aimed at ensuring that banks serve low- and moderate-income communities.

The topic "will be one of the principal battlegrounds in the financial services policy arena next year," Compass Point analyst Isaac Boltansky wrote after a post-midterm election hearing in the House, where Democrats warned Quarles against weakening the CRA.

Officials at the Fed, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency agree they should update their current CRA framework, given that the industry has seen substantial changes over the past decade. That includes an increase in mobile banking, along with ATMs that let customers conduct transactions they previously would have needed a bank teller for.

Democrats have worried that potential changes from regulators will encourage banks to cut back on physical branches.

But it is not clear whether the three regulatory agencies are any closer to developing a joint proposal on the issue.

The OCC has taken the lead on potential CRA adjustments, seeking feedback from the public on changes regulators should consider and receiving hundreds of comment letters in response.

Although the FDIC and Fed did not join the comment request, officials at the two agencies have been reviewing the comments and have said their intention is to develop a joint proposal on CRA changes.

"They've said that they want to get on board, but they haven't been so far," Katz said. "I just think there's a lot of work to be done, and this is going to go on for a long time."

Dodd-Frank loose ends

The three agencies have been on the same page on several other proposals, and their work next year will include trying to get those through the finish line.

For example, regulators are expected to work toward simplifying how they enforce the Volcker rule, a provision of the Dodd-Frank Act that bans proprietary trading at banks. Their joint plan got mixed reviews during its public comment period. Liberal-leaning critics said the proposal would give banks too much flexibility, while industry groups praised regulators' intent to simplify the Volcker rule but argued a key part of the proposal would make it even more complex.

Regulators also have a new to-do list from Congress due to a bipartisan package that tweaked several elements of Dodd-Frank.

They took a major step toward trimming that list with a proposal that would overhaul rules for regional banks, though officials will now have to sift through and possibly incorporate feedback on that plan. A related proposal on rules for foreign-owned banks should come in early 2019, Quarles told lawmakers in November.

Congress' changes also required the three banking regulators to develop a community bank leverage ratio for eligible institutions that would exempt banks from the Basel III capital standards if they meet the standard.

The agencies proposed setting the leverage ratio at 9%, picking the middle spot in the 8% to 10% range that Congress had laid out. But industry groups have said officials should instead set the ratio at the lower end of that scale to let more banks take advantage of simpler capital rules.