On May 22, 2018, U.S. Congress passed The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”). The Act, which began as a bill (S.2155) sponsored by Senate Banking Committee Chairman Mike Crapo (R-ID), is the most significant financial regulatory reform legislation since passage of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). While the Act generally preserves the regulatory framework established by the Dodd-Frank Act, it makes several key changes related to:

Regional and Community Banks

• Capital. The Act requires Federal banking agencies (Federal Reserve, OCC and the FDIC) to develop a new “Community Bank Leverage Ratio” rule for banks and bank holding companies with less than $10 billion in total consolidated assets. This would exempt certain institutions from more extensive capital and leverage requirements, provided a firm exceeds 8%-10% in its ratio of equity capital to total consolidated assets and maintains a risk profile consistent with expectations of regulators.  

• Volcker Rule. The Act exempts institutions smaller than $10 billion (with trading assets and liabilities of not more than 5% of total assets) from the Volcker Rule, which prohibits banks from engaging in proprietary trading or entering certain relationships with hedge funds and private-equity funds.

• Examination and Reporting. The Act makes significant changes to allow well-managed, well-capitalized institutions with up to $3 billion in total assets to undergo regulatory examinations once every 18 months (instead of every 12 months). The Act also requires Federal banking agencies to develop regulations to allow institutions smaller than $5 billion (and satisfy certain other criteria required by the agencies) to submit short-form Consolidated Reports of Condition and Income (Call Reports) for quarters 1 and 3.

Large Banks and Financial Institutions

• Enhanced Prudential Standards. The Act raises the total consolidated asset threshold from $50 billion to $250 billion for enhanced prudential supervision standards (resolution planning, company-run and supervisory stress testing, Basel III risk-based capital and leverage rules, liquidity stress testing, and other risk management standards). As a result, institutions smaller than $100 billion in total assets will generally no longer be subject to enhanced prudential supervision. The Federal Reserve retains authority, however, to impose any prudential standard on institutions with assets greater than or equal to $100 billion.

• Supplementary Leverage Ratio. The Act requires Federal banking agencies to amend the supplementary leverage ratio (SLR) requirements for “custodial banks.” Custodial banks are firms that primarily engage in custody, securities safekeeping, and asset servicing activities (e.g., Bank of New York Mellon and State Street Corporation), rather than commercial lending. The Act lowers custodial banks’ regulatory capital requirements by allowing them to exclude deposits held at the Federal Reserve or ECB as part of total assets when calculating its leverage exposure.

• Liquidity Coverage Ratio. The Act directs Federal banking agencies to amend the liquidity coverage ratio (LCR) rules within 3 months of enactment. The LCR is designed to ensure institutions have sufficient assets available to ride out short-term liquidity events. The Act changes the LCR to classify “investment grade” and “liquid and readily marketable” municipal securities as “level 2B” liquid assets, which will have the incidental effect of incentivizing financial institutions to purchase bonds from state and local governments.

Implications for Fintech Companies

Overall, the Act will reduce legal and regulatory compliance burdens for certain financial institutions. This should, in theory, result in greater capital for financial institutions to allocate toward financial innovation or to other CAPEX projects that increase shareholder value. The Act may also increase competitive pressures on fintech firms by leveling the regulatory playing field between banks and fintech firms. Heightened competition between banks and technology firms might prompt further industry consolidation and motivate fintech companies to partner with, or be acquired by, financial institutions.