Highlights of the Initial Treasury Report on U.S. Financial Regulatory Reform

In February of 2017, President Donald Trump issued an executive order (the “Executive Order”) identifying “core principles for regulating the U.S. financial system” and directing the U.S. Department of the Treasury (the “Treasury”) to study and recommend potential regulatory reforms to align United States (“U.S.”) financial system regulation with the core principles.

On June 12, 2017, the Treasury published an initial report (the “Treasury Report”), that identified several areas for reform of the regulatory framework for the U.S. banking system. The Treasury Report contained recommendations for, among other things, reducing regulatory overlap and duplication by banking sector regulators through the consolidation of regulatory agencies, revamping regulatory agency mandates, increasing oversight by the President, expanding the authority of the Financial Stability Oversight Council (“FSOC”) to permit the FSOC to coordinate regulatory policy making and restructuring the Office of Financial Research to place it under the control and direction of the Treasury.

The Treasury Report recommended that financial regulatory agencies engage in a cost-benefit analysis for all “economically significant” proposed regulations and submit the analysis for public comment and also provided recommendations for increasing foreign investment in the U.S. banking system. The Treasury Report also contained recommendations for an increase in the threshold requirements for bank stress testing and living wills, and indicated the Treasury’s support for the Financial CHOICE Act of 2017’s (“FCA”) “off ramp” from regulatory oversight for highly capitalized banks.

In addition, the Treasury advocated for restructuring the Consumer Financial Protection Bureau, recommended alterations to leverage ratio rules to increase market liquidity, and suggested changes to narrow the applicability of the Volcker Rule, but did not recommend its repeal. The Treasury Report also included recommendations for easing the regulatory burden on community banks and credit unions, including modifications to the U.S. Basel III risk-based capital regime and streamlining regulatory reporting requirements.

Many of the recommendations in the Treasury Report will require repeal, modification or replacement of certain statutes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act.  If the FCA is any indication, proposed legislation to repeal, modify or replace such statutes will likely pass the House of Representatives along party lines, with Democrats uniformly opposed to such measures.  However, such legislation will also require 60 votes in the U.S. Senate, which means that Republicans must obtain the approval of eight Democrats.  Republicans also have the option of seeking changes that can be tied to the federal budget through budget reconciliation measures, which will only require 51 votes in the Senate.  Given the limited progress of Congress on approving other items on President Trump’s legislative agenda, it remains to be seen how many of the Treasury’s proposed reforms will be enacted in the near term.