Implementing the Crapo Bill: An Update
Since the passage of the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA) in May 2018, regulatory agencies—including the Federal Reserve— have been hard at work adopting rules and drafting proposals to implement the act. (This act is often known as the Crapo bill, nicknamed for Idaho senator Mike Crapo, its chief sponsor.) Congress mandated changes to the Dodd-Frank supervisory framework and other areas to reduce the regulatory burden on banking institutions. Many of these changes built on actions the agencies had already taken to better align supervision with the risks posed by the largest banking institutions and to address the findings related to smaller institutions that emerged from the Economic Growth and Regulatory Paperwork Reduction Act review.
Supervisory expectations for community banks tailored
The EGRRCPA includes several changes tailoring requirements for community banks (firms with less than $10 billion in assets). Most significantly, the act requires the agencies to develop a simple community bank leverage ratio (CBLR) for qualifying firms to use to meet capital requirements as an alternative to the more burdensome risk-based capital framework. In November 2018, the agencies issued a proposal for a CBLR requirement of 9 percent. In developing the proposal—to ensure that organizations with riskier profiles continued to be subject to the existing risk-based capital requirements—the agencies considered the balance between a simple leverage ratio approach to capital adequacy and concerns about safety and soundness.
To use the CBLR to satisfy capital requirements, qualifying firms must maintain a leverage ratio greater than 9 percent. Firms meeting the ratio requirements would also be considered well capitalized for prompt corrective action purposes. Along with the related reduction in reporting requirements, the agencies expect the proposal will provide material regulatory relief for qualifying organizations.
The act also exempts banks with less than $10 billion in total consolidated assets from the Volcker Rule, provided that their trading assets and liabilities are below 5 percent of total assets. A proposal was issued in December 2018 to implement this exemption.
The EGRRCPA also includes simplified reporting requirements for less complex banks with under $5 billion in assets. In November 2018, the regulatory agencies jointly issued a proposal to implement these changes. Under the proposal, firms that are not engaged in certain complex or international activities would be allowed to file the most streamlined version of their call reports. In addition, qualifying banks would be able to file short-form reports for the first and third quarters, which, as proposed, would reduce the number of reported items by approximately 37 percent.
In August 2018, regulators approved other changes designed to reduce the regulatory burden, as the asset thresholds for application of the Board of Governors' small bank holding company policy statement and extended on-site examination cycles were raised from less than $1 billion in total assets to less than $3 billion.
The Board of Governors' policy statement allows firms to operate with greater leverage than larger holding companies. To qualify for the policy, a firm can have neither significant nonbanking activities or off-balance-sheet exposures nor a material amount of outstanding debt or equity instruments registered with the Securities and Exchange Commission. To be eligible for an extended 18-month on-site examination cycle (versus a 12-month cycle), a firm must be well capitalized and well managed (a composite rating of outstanding or good).
Tailoring of supervisory expectations for the largest banking organizations
To further tailor supervision of the largest banks, the EGRRCPA raised the threshold for implementation of Dodd-Frank's enhanced prudential standards for risk-based capital and leverage, stress testing, liquidity, risk management, resolution planning, and single counterparty credit limits from $50 billion in total consolidated assets to $250 billion. The bank regulatory agencies may exercise discretion to determine the appropriate standards to apply to firms with assets greater than $100 billion and less than $250 billion.
In October 2018, the Federal Reserve proposed a revised framework for applying enhanced prudential standards for capital and liquidity to large U.S. banking organizations ($100 billion and greater in assets) and certain savings and loan holding companies based on risk. The proposed framework identifies four categories of firms based on five different risk indicators, including size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance-sheet exposure. A firm's risk category would determine requirements for the application of the enhanced prudential standards. A separate interagency proposal was issued at the same time that would tailor requirements for firms with assets greater than $100 billion and less than $250 billion under the agencies' capital rule, the liquidity coverage ratio rule, and the proposed net stable funding ratio rule using the categories.
In January 2019, the Board released a proposal, in keeping with the EGRRCPA, to raise the threshold requiring state-member banks to conduct company-run stress tests from $10 billion in total consolidated assets to $250 billion. Most firms above the threshold would be required to conduct company-run stress tests once every other year. In addition, the company-run stress tests would no longer require the hypothetical adverse scenario. Instead, firms would use baseline and severely adverse scenarios. Firms would still need to submit annual capital plans.
The Board of Governors and the Federal Deposit Insurance Corporation issued a proposal in April 2019 to modify resolution planning requirements for the largest banks using a risk-based focus. As proposed, requirements for the largest, riskiest firms would not change, and requirements for smaller firms would decrease as the risk posed to the financial system fell. The least risky firms would be exempt from resolution planning requirements altogether. Other firms would be eligible for an extended reporting cycle and reduced information requirements.
Regulators also released a proposal in April 2019 to tailor enhanced prudential standard requirements for foreign banking organizations and their U.S. intermediate holding companies.
A look at other changes affecting banks
- Revisions to the definition of high-volatility commercial real estate (HVCRE): The EGRRCPA included a new, narrower definition of HVCRE, which is used to determine risk-based capital requirements. Previously, all loans meeting the HVCRE definition were subject to a risk weight of 150 percent. Under the new definition, only loans defined as HVCRE acquisition, development, or construction loans will require 150 percent risk-based capital coverage. A proposal to implement the new definition was issued in September 2018. However, banks were able to begin reporting under this new rule in their June 30, 2018, call report.
- Increase in the appraisal requirement threshold for residential real estate transactions: The EGRRCPA included a provision exempting rural residential property transactions valued under $400,000 from appraisal requirements. In December 2018, the banking agencies issued a proposal to raise the threshold requiring an appraisal on all residential real estate transactions from $250,000 to $400,000 in value. In lieu of an appraisal, banks would be required to use an evaluation, which provides an estimate of the market value of the property but does not have to be prepared by state licensed or certified appraisers. This approach would provide burden relief without posing a threat to the safety and soundness of financial institutions.
- Private student loan rehabilitation programs: The EGRRCPA amended the Fair Credit Reporting Act to allow, but not require, financial institutions to offer a private education loan rehabilitation program to consumers. If a borrower meets the requirements of a financial institution's rehabilitation program, the financial institution may remove a reported default from the borrower's credit report. Institutions supervised by federal banking agencies should seek prior written approval for a rehabilitation program from their primary regulator. Programs must require a number of consecutive payments sufficient to allow the financial institution to determine that a borrower has the ability and willingness to repay the loan.
In addition to changes to the supervision and regulation framework, the EGRRCPA also included provisions that impact home mortgage lending, consumer protections, and economic development. Information on these actions will be included in a future "ViewPoint" article.