On May 24, the Trump administration followed through on its pledge to begin the process of reforming parts of the Dodd Frank Act, implemented by Obama to curtail the effects of a future 2008 scenario. President Trump signed a bipartisan bill into law that eases the ‘one-size-fits-all’ capital requirements for regional and community financial institutions (RCFIs).
The repeal raises the threshold at which banks become subject to federal oversight from an asset base of $50bn to $250bn, and those with $100bn will be subject to some - but not - all requirements. Banks with less than $10m in assets will also be exempt from the restrictions placed on proprietary trading.
All but 10 systemically important financial institutions (sifis) are expected be exempt from full oversight.
With fewer banks meeting the capital requirements threshold and less chance of fines, it posits to question where that money will be spent in the market.
Will this lead to an age of acquisition, aggressive internal innovation or healthy growth in the US fintech market?
Here, Desirée O’Niell, risk management & regulatory solutions leader, Broadridge Consulting and Christopher Fedele – senior director, GTO Regulatory Strategy give the industry perspective.
What’s the general mood in the fintech industry following the Dodd Frank repeal?
The SEC Chairman Jay Clayton stated at The Wall Street Journal’s CFO network: “I don’t think Dodd-Frank is changing a great deal, just to put a pin in it”. The Senate Bill 2155 and the Agency Guidance Proposals on Volcker are not repeal of Dodd-Frank, rather they are recalibration of the rules based on the size and scope of the covered banking entity. Both are currently in comment cycles (2155 with the Agencies to determine which $100-250bn banks will be considered sifis, Volcker with the industry).
We see the implications as varying by the size of institution – which was the intent of the recalibration – concentrate the rules on the largest institutions who create the most systemic risks – so little changes for these firms – and relieve the burdens from those firms (eg regional banks, community banks) who do not pose risks to the overall system – so smaller institutions will benefit from the refocusing of the rules. We expect some tweaks in reporting, as some of the metrics have been changed.
The fintech mood is categorically change is an opportunity.
What will be the impact for US banking?
The recent proposal to revise the Volker Rule and action to lower the asset threshold should result in a positive net impact on the US banking market. Specifically, the Volker 2.0 proposal should enhance liquidity, streamline the compliance process and overall, assist the market-making process for some institutions. It should also therefore result, by definition, in the return of related trading volume (dollars and trades).
There are three impacts.
Firstly, by lowering the asset threshold this will allow impacted institutions to disconnect from various process and measurements which had a material impact on their business yet didn’t necessarily provide an offsetting compliance benefit. Overall, that will allow those institutions to function more efficiently and better serve their market sector.
Secondly, the recalibration will have minimal/marginal impact on the largest US institutions – compliance with Volcker will become more streamlined. For FBOs, some changes have been made to clarify restrictions on “trading outside the United States,” as well as to harmonize areas where Volcker conflicted with home country regulatory regimes, such as Basel.
Finally, it’s important to note that proprietary trading and certain covered funds relationships are still prohibited. The real impact is anticipated to be a reduced cost of compliance overall, particularly for small and mid-tier banks, whose business models did not encompass proprietary trading to begin with.
We expect that the top tier of banks comprising 95% of trading activity will still be subject to the strictest requirements. Mid-tier banks face a reduced compliance burden, while the smallest banks will enjoy a “presumption of compliance.” In all cases, the regulators have a “reservation of authority” to adjust compliance requirements at their discretion.
And for the US fintech market?
Though the overarching regulatory structure is not being wholesale changed, the ongoing adjustments will still require firms to implement and refine their regulatory compliance frameworks across front, middle and back offices.
The US fintech market will continue to have to address the changes, so will need to be nimble and flexible.
Fintechs will also need to have roadmaps that help banks be more efficient and holistic in their compliance across the breadth and depth of their organizations, and across regulations – whether in the US or across the globe.
Does the repeal affect strategy at Broadridge?
Helping clients and the industry to effectively anticipate and respond to change is a core part of what we provide at Broadridge. We always follow regulatory and industry changes closely in order to help our clients effectively fulfill these initiatives, with the ultimate goal of reducing their business and operating risk.
To accomplish this, Broadridge sits on various industry committees, meets with regulators, SRO’s and most importantly, listens to our clients. These revisions are simply another part of fulfilling our everyday commitment to clients.
How do you expect US fintech players to react?
Work closely with clients to manage the changes and see where new services and capabilities can aid banks in adjusting their compliance functions and how the data being aggregated/processed for the new rules can be used by banks for business growth-oriented initiatives.
Which fintech players (both vendor and bank) are set to benefit the most from the repeal?
For fintech, change is an opportunity – those who will benefit most will be the firms who can be nimble in implementing the changes and keeping in-sync with the ongoing evolution of US and global regulations and the needs to banks to consolidate and make more efficient their regulatory reporting and compliance functions across the full scope of their businesses