Our Take: financial services regulatory update – July 12, 2024

• What happened? Fed Chair Jerome Powell testified before the Senate Banking Committee and House Financial Services Committee on July 9th and 10th, respectively. Separately, several nominees to agency positions, including Christy Goldsmith Romero to lead the FDIC, testified before the Senate Banking Committee on July 11th.
• What was said? Both hearings covered several similar subjects:
  • Basel III endgame. Powell said the agencies have made "quite a bit of progress" and are close to making a decision on next steps for the proposal. He clarified that he and several other Fed Board members are in favor of a re-proposal but still need to agree with the OCC and FDIC. In the HFSC hearing, he clarified that the Fed is looking at a “partial re-proposal” but declined to provide specifics. Powell suggested that a re-proposal would be issued alongside the Fed’s quantitative impact study with comment periods for both, likely for 60 days. When asked about his prediction on timing for a final rule, he estimated the beginning of next year. Regarding the capital impact of Basel III endgame, he said there is no precise answer on the appropriate level of capital in the banking system but that he is aiming to arrive at a rule that is “comparable” to the Basel III implementation of other large economies.
    Goldsmith-Romero said that “re-proposal is always on the table” for a proposal that receives a high volume of negative comments. She added that she would need to review the changes to the proposal once confirmed and is not in a rush as she wants to get it right and consider unintended consequences.
    
  • Other outstanding rulemakings. Powell confirmed that the Fed is focused on Basel III endgame and will complete the next set of actions on that front before moving onto other priorities, including finalizing the long-term debt proposal and proposing new liquidity requirements as previewed by Vice Chair for Supervision (VCS) Michael Barr.
  • Supervision. When asked about changes to the Fed’s approach to supervision following last year’s bank failures and ensuing criticism of the supervision of those banks, Powell said VCS Barr is leading a “big project” to see where the Fed can make supervision faster and more forceful where appropriate.
  • Supreme Court decision on Chevron deference. Powell was asked to address the recent Supreme Court decision overturning Chevron deference. He said the Fed is still reviewing the impact of the decision but is committed to “reading the letter of the law and following it.” Both Powell and Goldsmith Romero were asked about whether the 2018 regulatory relief law that raised the threshold for enhanced requirements from $50 billion to $250 billion is applicable to future rulemakings out of the Fed and FDIC, including the long-term debt proposal. Both responded affirmatively.
  • Executive compensation. The Fed has not yet joined the other agencies in re-proposing the executive compensation rule required by Dodd-Frank. Powell previously expressed skepticism of the necessity of the rule and clarified this week that he believes Dodd-Frank calls for either rulemaking or guidance, and the Fed published executive compensation guidance in 2010.

Our Take

An end in sight for Basel III endgame? In these hearings, Powell continued his trend of being the most outspoken representative of the three agencies responsible for Basel III endgame. He was definitive in his view that a re-proposal is necessary but it remains unclear whether the OCC and FDIC agree - or whether the FDIC’s answer will need to wait for Christy Goldsmith Romero to be confirmed and have a chance to review the negotiations. She likely has enough support to make it out of the Senate Banking Committee to be confirmed by a full Senate vote despite criticism of her lack of experience in bank supervision, but the legislative calendar could push her arrival to the FDIC into the fall. Powell’s comments on a partial re-proposal indicate that the agencies may directly finalize certain less-controversial elements of the Basel III endgame proposal, such as its extension of the requirement to reflect the impact of unrealized losses on capital through accumulated other comprehensive income (AOCI) to all banks with over $100 billion in assets. Although it now appears likely that a re-proposal will aim to address industry criticism, including by aligning more closely with implementations in other jurisdictions, the fate of a re-proposal will depend on the substance and impact of the changes. If the industry is still highly critical of the formulation, Powell’s estimate of a 60-day comment period and finalization early next year means that the fate of Basel III endgame could be impacted by any potential leadership changes at the agencies following the election. Otherwise, a re-proposal later this year and an unchallenged early 2025 finalization could mean implementation beginning in early 2026.

Other rules in limbo. Powell’s confirmation that Basel III endgame is the Fed’s top rulemaking priority means that the industry will need to wait even longer for answers on the final long-term debt rule and new liquidity requirements. Although the long-term debt proposal was relatively uncontroversial compared to Basel III endgame, the questions on the impact of the Supreme Court decision indicate that there could be challenges to any rulemaking that extends requirements to banks with under $250 billion in assets. On executive compensation, Powell’s response showed that he is still highly skeptical of the necessity of a rulemaking and is not any closer to joining the other agencies in moving forward on a re-proposal. With non-Basel III endgame rulemaking effectively on hold, banks will continue to feel the most significant near-term impact to their regulatory change management through modifications to supervision implemented following the bank failures of 2023 and any prospective changes resulting from VCS Barr’s ongoing project.