Our Take: financial services regulatory update – December 13, 2024

• What happened? On December 12th, the House Republican Steering Committee recommended Representative French Hill (R-AK) to take over the chairmanship of the House Financial Services Committee from Representative Patrick McHenry (R-NC), who is retiring.
• What are Hill’s policy positions? Rep. Hill issued a document outlining his policy principles across the following areas:
  • Regulatory Fairness, Transparency, and Right-Sizing
    • Preventing regulators from influencing bank decisions to offer products and services based on the customer’s industry, such as firearms and digital assets.
    • Making climate stress optional and prohibiting it from affecting capital requirements, instead limiting it to consideration within credit and operational risk assessments.
    • Re-establishing the concept of regulatory tailoring based on institution-specific factors like size and risk profile.
    • Increasing fairness, transparency and efficiency in bank examinations with a new appeal process for supervisory determinations, coordinated timing of examinations, a higher threshold for an 18-month examination cycle, and amendments to the Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk (CAMELS) rating system.
    • Addressing point-of-sale check and debit card fraud that often targets the elderly and vulnerable.
  • Promoting a Healthy Banking Industry for Institutions of All Sizes
    • Streamlining the merger approval process by deeming applications for bank mergers approved unless they have been expressly denied within 120 days, having the Fed defer to regional Federal Reserve banks on certain small/mid-sized bank mergers, increasing flexibility in approving mergers in areas without physical branches, and revisiting the frameworks for evaluating bank mergers.
    • Addressing the lack of de novo bank charters and allowing nonbank capital sources to partner with qualified banks to be pre-approved for a “shelf charter” with the FDIC.
    • Amending the FDIC’s policies for Least Cost Resolution and waiving the national deposit cap rule for the acquisition of a failed or failing bank.
  • Improving Access to Funding and Capital
    • Upholding the 2020 brokered deposits rule, raising the asset threshold under the Small Bank Holding Company Policy Statement, and increasing the maximum number of shareholders for Subchapter S banks.
• What’s next? The House Republican Conference will need to approve Hill as the HFSC chair before he is able to step up to the position in the next Congress.

Our Take

For banks, the Hills are alive. Rep. Hill’s policy principles have much for banks of all sizes to endorse, particularly in terms of reducing their supervisory burden, re-emphasizing tailoring, and streamlining the merger approval process. However, there are limitations to what he can achieve in terms of legislation without support from Democrats due to the Republicans’ narrow majorities in the House and Senate. Some of these policies can and will be addressed by new agency leaders without the need for Congressional action, such as de-emphasizing climate risk management, amending recently updated merger review frameworks, and abandoning the FDIC’s attempt to update the 2020 brokered deposits rule. The agencies will also have substantial leeway to adjust their supervisory practices in terms of examination schedules, tailoring and ratings. Hill will be able to use the bully pulpit of the HFSC to prompt new agency leaders to take these actions and report progress at semi-annual oversight hearings. Pressure from Congress will add to the opportunity for banks to make their cases for adjustment to requirements and supervisory requirements that carry a heavy compliance burden without commensurate benefits for safety and soundness. While the policy document does not discuss digital asset policy, Hill has been a strong advocate in this space and it could be a topic that gains bipartisan support, particularly if the legislation includes strong consumer protection and anti-fraud provisions.

These notable developments hit our radar recently:

• Federal court blocks Nasdaq diversity rule. On December 11th, the U.S. Fifth Circuit Court of Appeals ruled that Nasdaq cannot enforce a rule requiring listed companies to have a certain number of board directors who are women, racial minorities, or identify as LGBTQ. It also required companies to disclose the demographic composition of their boards and explain any lack of diversity.
• Congressional Budget Office (CBO) issues report on recapitalization of government sponsored enterprises (GSEs). On December 13th, the CBO issued a report finding that “the potential value of the GSEs to investors is greater now than it was at the time of the previous analysis, resulting in more scenarios in which they could be recapitalized through the sale of common stock and could repay the Treasury for its stake in the enterprises.”
• EU and U.S. agencies hold joint financial regulatory forum. On December 4th and 5th, representatives from the U.S. regulatory agencies met with representatives of EU agencies including the European Commission, European Banking Authority (EBA), and the European Securities and Markets Authority (ESMA). The forum focused on seven themes: (1) market developments and financial stability; (2) operational resilience and digital finance, including AI and cryptocurrency; (3) sharing and reporting of financial data; (4) anti-money laundering and countering the financing of terrorism (AML/CFT); (5) sustainable finance; (6) banking and insurance; and (7) capital markets.
• Colorado proposes updates to insurance AI risk management. On December 6th, Colorado’s Division of Insurance proposed an expansion of its risk management frameworks for the use of external consumer data and information sources (ECDIS), as well as algorithms and predictive models that use ECDIS, to property and casualty, auto, and health benefit plan insurers.