After passing the US Senate in March and the US House of Representatives in late May, the partial rollback of Dodd-Frank rules was signed into law by President Trump. This rollback follows years of Republican complaints regarding the financial burden placed on smaller financial institutions, specifically those with assets worth less than $250 million.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by the Obama administration in 2010 as a response to the 2008 financial crisis. The Dodd-Frank Act's numerous provisions were intended to decrease risks in the US financial system through the establishment of several new government agencies such as the Consumer Financial Protection Bureau. A key component of the Dodd-Frank Act, the Volcker Rule, regulates the way banks are able to invest by limiting speculative trading and eliminating proprietary trading.
The bill represents a significant dilution of the Obama-era rules, leaving fewer than 15 big banks in the United States subject to stricter federal oversight. Specifically, the bill raises the threshold under the Dodd-Frank Act for when new capital standards apply to financial institutions from a threshold of $50 billion in assets to $250 billion. Small and medium-sized banks will no longer be required to undergo "stress tests," a measurement that determines their ability to survive a severe economic decline.
The bill also exempts some loan originators, including small lenders, from certain disclosure requirements under the Home Mortgage Disclosure Act, a move that many claim will open the door to discriminatory practices. There is the possibility that the Federal Reserve could impose additional standards that would be applicable to smaller banks, as banks with more than $50 billion in assets are still subject to other rules such as the annual Comprehensive Capital Analysis and Review.
The Federal Reserve also released a plan to "water down" the Volcker Rule, which may be followed by four other regulators. The changes would modify the amount of time banks have to spend proving they are adhering to the Volcker Rule and would give them more freedom to determine if their trading activities are in compliance. The burden of proof would also shift from banks to the regulators for determining whether a trade qualifies under the Volcker Rule. As a trade-off under the proposed rule change, banks would have to enact strict internal controls and compliance programs to ensure they are in conformity with the Volcker Rule, a change that would allow banks to more freely partake in hedging.
Other changes would group banks into categories based on the size of their trading assets and liabilities. Categories range in size from banks with gross trading assets and liabilities of at least $10 billion to those with gross trading assets and liabilities between $1 billion and $10 billion. Banks with the least amount of trading, less than $1 billion of gross trading assets and liabilities, would have the most lenient requirements to fulfill. This change is consistent with Congress's recent move to exempt the smallest banks from having to comply with the Volcker Rule.
Should you have questions regarding the information presented in this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com.