House Bill Offers Regulatory Relief to "Traditional Banks"
Commentary by Steven Lofchie
Representative Ed Perlmutter (D-CO) introduced the "Traditional Banking Regulatory Relief Act of 2015" (H.R. 4647) in order to provide relief to "traditional banks" that do not require additional regulatory scrutiny or pose a systemic risk to the economy. The relief is offered based on the level of complexity and volume of activities of a given bank.
Specifically, H.R. 4647 defines a "traditional banking organization" as "any bank holding company, savings and loan holding company, bank, or savings association" that, together with its affiliates: (i) has zero trading assets and liabilities, (ii) does not engage in swaps or security-based swaps other than those that reference interest rates or foreign exchange swaps, and (iii) has a gross notional exposure of swaps and security-based swaps that totals less than $3,000,000,000.
H.R. 4647 would amend Section 18 of the Federal Deposit Insurance Act to require the following:
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federal banking agencies must establish a minimum simple leverage ratio at no less than 10 percent;
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a traditional banking agency that meets this minimum simple leverage ratio may elect to maintain it as that agency's "sole measure of capital adequacy";
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traditional banking agencies that elect to maintain the minimum simple leverage ratio will be exempt from the risk-based capital requirement of Section 38(c)(1)(A) of the Federal Deposit Insurance Act; and
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traditional banking agencies that fail to maintain the minimum simple leverage ratio, as determined by the first quarterly report following their choice to do so, will be exempted from the risk-based capital requirements for a period of 18 months beginning on the date of this determination.
"When Dodd-Frank was enacted five years ago," Representative Perlmutter remarked, "it provided an important regulatory scheme to protect taxpayers and reduce the risk of another financial crisis. But we must recognize the difference between institutions that conduct their activities in a safe and sound manner and those institutions that expand their activities beyond retail and commercial banking."
Commentary
It is good that elected representatives are thinking about giving relief to the overly regulated in the financial system. However, the relief offered in this bill moves us in the wrong direction. Here are a few reasons: (i) offering conditional relief is based on the false premise that traditional banking activities, such as mortgage lending, are inherently safer than other financial activities (when likely the opposite is true), (ii) conditional regulatory relief would make it impossible for firms to enter "non-traditional" businesses in a small way because, for example, even a single "bad" swap will ratchet up their regulatory costs in a completely disproportionate manner, and (iii) offering conditional relief would raise costs for businesses that require so-called nontraditional banking services.