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Bankers dampen expectations for legislative pullback in regulations

Almost a year after Donald Trump won the U.S. presidential election, those in the banking industry appear to have dialed back their expectations for legislative fixes to the regulatory environment, although many are still holding on for changes at the federal banking regulators.

At an S&P Global Market Intelligence-hosted conference Oct. 12, bankers acknowledged that optimism had built up for tax reform and regulatory relief under the new administration. Citing gridlock in Washington, some said they have not seen Congress prioritize bank regulatory reform among the flurry of other political issues at the moment.

"I can't quite picture a sitting congressman or congresswoman going back to his or her constituency next June and saying, 'Look, you gotta support me again, I know it's true we didn't do anything on affordable care, we didn't do anything on tax reform, we didn't do anything on infrastructure, but boy we got a revision on Dodd-Frank,'" Sullivan & Cromwell LLP Senior Chairman H. Rodgin Cohen said.

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Brian Sterling, co-head of investment banking at Sandler O'Neill & Partners, said he does not see, for example, Congress dissolving the $10 billion supervisory threshold. Sterling said he has advised banks not to assume that the threshold will change, as regulators pressure smaller banks to maintain "best practice" operational concepts that are designed for larger companies. The $10 billion threshold, established by the postcrisis Dodd-Frank financial regulatory framework, requires any bank breaching the line to submit stress tests, face Consumer Financial Protection Bureau regulation, and pay up interchange fees under the Durbin amendment.

At Phoenix-based Western Alliance Bancorp., CFO Dale Gibbons said his company, now with almost $20 billion in total assets, paid about $5 million when it crossed the $10 billion mark. Gibbons said he underestimated the true cost of growing past the regulatory threshold, adding that he didn't expect regulatory costs to grow as much as they did over time.

"Our costs are more than double where they were when we crossed 10 [billion]," Gibbons said.

Although Cohen said there is "some hope" for adjusting both the $10 billion threshold and the $50 billion line for systemically important financial institutions, or SIFIs, he said regulators and the industry have not reached a consensus on the best alternative to regulatory thresholds.

The House Financial Services Committee has nonetheless charged forward on introducing 22 new pieces of legislation proposing financial regulatory tweaks. But Compass Point Analyst Isaac Boltansky wrote that only four of the proposed bills, suggesting minor tweaks like the capital treatment of commercial real estate and some slight relief for custody banks from the supplementary leverage ratio, face "likely" enactment in this Congress. Boltansky said the odds of a change in the $50 billion SIFI threshold are a "toss-up," guessing that the bill has a 60% chance of becoming law in 2018.

But some remain optimistic that regulatory reform could come from personnel changes at the federal banking agencies. Some expressed anticipation for regulatory changes with the appointment of Randal Quarles to the Federal Reserve, but others said the absence of old-guard regulators was having an impact as well.

"Even in informal conversations we've had with Fed staff, there's been a change in outlook and approach and the way they're looking at things since [former Fed Governor Daniel] Tarullo resigned," Sterling said.