Conference Presentation, Panel, Fireside Chat
Financial Regulation: New Era, New Regulators
Milken InstituteBen White, J. Christopher Giancarlo, Jeb Hensarling, Joo-Yung Lee, Craig Phillips, Michael Piwowar
- The administration anticipates publishing a final report on fintech and the future of the financial system soon, with a plan to modernize the Community Reinvestment Act (CRA) to rationalize compliance burdens while addressing inconsistencies among its three regulators.
- Implementation of recommendations is expected to split between regulatory actions and legislative amendments to Dodd-Frank, with approximately 25 to 30 percent of several hundred recommendations requiring an Act of Congress; the administration views the Senate Banking Bill (CRAPO bill) as a partial starting point that leaves 80 percent of banking assets untouched and supports a separate pathway for additional bipartisan legislation.
- Regulatory reform aims to reduce the economic drag of Dodd-Frank, which is estimated to have reduced GDP growth by at least 50 basis points and increased costs for middle-income mortgage and credit access, by shifting from a focus on quantity to "quality" and "calibration" of rules.
- Specific statutory changes are planned for the Volcker Rule to reduce the number of rule writers to one, a move likely requiring legislative action, and for the SEC to pause Dodd-Frank rulemaking to avoid wasting resources on provisions subject to repeal.
- The SEC intends to facilitate capital formation by potentially raising Regulation A offering limits from $50 million to $75 million to create a "mini-IPO market," exploring the legality of mandatory arbitration provisions to address foreign listing declines, and increasing the asset threshold for "smaller reporting companies" to $250 million to exempt them from Sarbanes-Oxley 404b compliance.
- A limited window of opportunity for these regulatory changes is expected, with warnings that external events or congressional shifts could close the door similarly to how the financial crisis previously halted capital formation agendas.
- The CFTC plans to implement "Swaps Regulation Version 2.0" to resolve global liquidity fragmentation and address second- and third-order issues from the original Dodd-Frank implementation, while moving from a "regulatory fragmentation" approach to one that balances capital on bank balance sheets with capital deployed in markets.
- The administration expects to define a federal versus state regulatory environment for fintech entities utilizing new charter types to encourage innovation, prioritizing U.S. competitiveness against countries like China in payments, lending, and security settlements to potentially reduce credit costs.
- Risk management and oversight expectations include addressing cyber risks, market digitization, and the use of artificial intelligence, while clarifying that "resolving planning, risk-based capital, and stress testing" are gains to be retained while other elements are recalibrated.
- Fitch Ratings expects to monitor the net impact of deregulation on bank credit ratings, noting that outcomes will depend on whether banks aggressively return capital or maintain conservative profiles, as potential negative creditor impacts from capital returns must be weighed against the need to retain capital for crises.
- Cryptocurrency policy expects to apply the Howey Test to Initial Coin Offerings (ICOs), classifying most custom tokens as securities while viewing Bitcoin as a likely commodity, with enforcement actions continuing against unregistered offerings and coordination maintained among the SEC, CFTC, and Treasury.
- The administration views the current regulatory landscape as a transitional phase requiring "tailoring" to distinguish between large institutions and regional/community banks, aiming to stop prudential regulators from intervening in corporate governance and reducing the compliance burden that forces banks to allocate significant resources away from lending.
- Future economic policy expects tax reform to be matched with regulatory reform to achieve sustained 3-plus percent economic growth, arguing that the cumulative "pebbles" of regulation restrict economic flow even when individual rules appear justified.
- Stress testing expectations include making tests an annual public function with transparent scenarios to improve clarity, while raising the asset threshold for CCAR tests to reduce burdens on smaller institutions and correcting management over-reliance on regulator scenarios.
- The administration warns that without these reforms, the "shadow banking" sector will remain bifurcated from the regulated space, and that the current system creates a one-way focus on capital retention that ignores the necessity of liquidity in markets for healthy growth.