Cooperation is Not a Four-Letter Word

Cooperation is Not a Four-Letter Word

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When Jelena McWilliams was sworn in as the 21st Chairman of the FDIC (June 5, 2018 JRN 35:23), five federal agencies (the Federal Reserve Board, the FDIC Board the OCC, the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC)) had just recently, and jointly, proposed changes to the Volcker Rule.

The Volcker Rule, if you recall,  prohibited banks from proprietary trading and from owning or controlling hedge funds or private equity funds.

The proposed changes were an attempt to simplify the rules and make compliance easier, more efficient and, hopefully more objective, while still protecting federally-insured banks.  Those in favor of proposed changes included McWilliams’ predecessor (and likely successor), Martin Gruenberg, Federal Reserve Governor Lael Brainard and the late former Fed Chairman Paul Volcker, himself.

With a few minor modifications, the new rules were adopted and  went into effect on January 1, 2020 although compliance was not mandatory until January 1, 2021.

Now, a year later, especially in light of the turbulence surrounding Ms. McWilliams’ resignation, we want to:

1) see how these new rules are playing out; and

2) highlight the fact that regulators can (and should) work together toward worthy and just goals, without regard to which side of the aisle they sit.

The final Volcker Rule changes applied a 3-tiered approach, which in general looks like the following:

Significant Exposure: Banks with $20 billion or more in trading assets and liabilities have strict compliance requirements;

Moderate Exposure: Banks with trading assets and liabilities between $1 billion and  $20 billion have more simplified compliance; and

Limited/Exempt: Banks with trading assets and liabilities < $1 billion as well as banks with $10 million or less in total assets with trading assets and liabilities totaling 5% or less of total assets are exempt from the final rule.

The 50 banks listed on page 7 have the largest dollar volume of combined Trading Assets and Trading Liabilities as of their respective September 30, 2021 call reports. Not surprisingly, most of the banks listed are Big, investment banks; only two are community banks (5-Star Cedar Rapids B&T, IA and 4-Star Apple Bank for Savings, NY).

All but one, 3½-Star State Street Bank, MA, are recommended by Bauer (i.e. rated 5-stars or 4-stars), which leads us to believe that the bi-partisan revisions to the Volcker Rule have, in fact, provided us with a stronger and more transparent banking industry. We may be as bold to say that virtually every law that has stood the test of time, has done so after a number of intense debates and revisions and compromises, rather than as a result of any administrative order.

But that’s as high on our pulpit as we are going to get. For better or worse, Jelena McWilliams has stepped down and will resign as FDIC Chairman on February 4th. Her public legacy is yet undetermined, but as for Bauer, we are sorry to see her go. An immigrant herself, McWilliams made it one of her missions to break down barriers that hinder financial inclusion and make our financial system work for everyone.

If you don’t know what’s been going on, it goes hand in hand with what we wrote about last week (JRN 39:02). The deadline for a plan to more closely scrutinize bank merger applications is fast approaching, which is certainly not a bad thing.

However, in their zeal to accomplish that goal, the FDIC Board members essentially went right over McWilliams’ head and took the reigns on the subject. While we are not privy to everything that transpired there, we do know that it prompted her to cut her 5-year term (that was supposed to end in June 2023) short. The Vice Chair would normally take over in this situation, but that position has been vacant  for some time.

The remaining FDIC board members include the aforementioned Martin Gruenberg, Michael Hsu (acting Comptroller of the Currency) and Rohit Chopra (Director of the Consumer Financial Protection Bureau). That leaves two slots to fill at the FDIC. In the meantime, President Biden nominated Jerome Powell for a second term at  the helm of the Federal Reserve. He and Lael Brainerd, who has been tapped as Vice Chair, will each appear before the Senate Banking Committee this week. We don’t foresee either to run into any unsurmountable hurdles.

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