S 2155

Part
01
of four
Part
01

S 2155: Large Banks

Put together, S 2155 was meant to rollback stringent provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act mainly offers regulatory relief to banks, relax capital
formation regulations, relax mortgage lending rules, and improve consumer protections related to credit reporting among other issues. Below is a detailed overview of how S 2155 affects large banks in the US.

  • The S 2155 Act 'deregulates' 25 of the largest 38 banks in the United States in what critics say would roll back key measures put in place in the aftermath of the 2007-2008 financial crisis.
  • The Economic Growth, Regulatory Relief, and Consumer Protection Act, or S. 2155, changes the criteria used to determine which banks are subject to enhanced regulations, releasing some banks from the regime. Banks previously designated as globally systemically important banks as well as banks with over $250 billion in assets would still be subjected to enhanced prudential regulations.
  • The Act scaled down key regulations for banks with between $100 billion and $250 billion in assets. Under the new regulations, these banks are subject to only supervisory stress tests.
  • In addition, the Federal Reserve is mandated to apply other individual enhanced prudential regulations to banks with between $100 billion and $250 billion in assets.
  • Banks with between $50 billion and $100 billion in assets are no longer to enhanced regulation. However, they are required to comply with the risk committee requirement.
  • S 2155 also relaxed leverage requirements for large custody banks.
  • The new rules also allowed large banks to use certain municipal bonds to meet their liquidity requirements.
Part
02
of four
Part
02

S 2155: Small Banks

The S 2155 Act raised the asset-size threshold at which banks are subjected to less frequent examinations from $1 billion to $3 billion. Under this Act, banks with less than $5 billion in assets face reduced reporting requirements. Below is a detailed overview of how S 2155 will affect small banks.

Affects on Small Banks

  • Under the S 2155 Act, banks with assets valued at less than $10 billion are exempted from the "Volcker Rule". This rule prohibits banks from using customer deposits to generate their own profit. In particular, the rule bans proprietary trading as well as the sponsorship of private equity funds and hedge funds.
  • Small banks are also exempted from some existing risk-based capital and leverage ratio requirements. However, to qualify for this provision, banks need to have a higher community bank leverage ratio.
  • Banks that have less than $5 billion in assets face reduced reporting requirements for the first and third quarterly reports of the year. Initially, all banks were required to submit a report of income and condition to federal bank agencies at the end of every financial quarter of the year. This is an engaging process that involve entering numerous values into “schedules” and forms so as to give a detailed accounting report. The new regulations allow banks with assets under $5 billion to shorten or simplify their reports in the first and third quarter.
  • The Act raised the asset-size threshold at which banks are subjected to less frequent examinations from $1 billion to $3 billion. Federal bank regulators are required to conduct an "on-site examination of the banks they oversee at least once in each 12-month period." However, banks with less than $1 billion in assets and which meet certain criteria related to capital adequacy as well we their score on previous examinations can be exempted from this requirement and examined only once every 18 months.
  • The community bank leverage ratio also exempts certain small banks from risk-weighted capital requirements. The new regulations mandate regulators to develop a capital to unweighted assets Community Bank Leverage Ratio (CBLR) and raise it to between 8% and 10% from the current 5%. However, banks with less than $10 billion in assets that maintain a CBLR above the threshold can be considered to have fulfilled all other leverage and exempted from existing capital requirements. This provision is however applied based on each bank's risk profile.
  • The Act offers a qualified mortgage safe harbor for small banks with less than $10 billion in total assets that offer "mortgages on their books rather than sell them into the mortgage-backed security (MBS) market."
Part
03
of four
Part
03

S 2155: Mortgage Lenders

The signing into law of the S 2155 Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) will have various influences on the mortgage lenders and their activities in the US, including a better risk portfolio, exemptions from escrow, automatic quaifications and exemptions from appraisals for rural areas.

1. Better Risk Portfolio

  • The S 2155 Act will offer a better and more beneficial risk portfolio to the mortgage lenders, especially those dealing with long-term real estate loans. They will be included in the long-term real estate loans, where their credit union’s risk-based net worth ratio will be calculated on this ground. This could potentially increase their risk weight, based on the lender's concentration.

2. Exemptions from Escrow

  • Financial institutions with assets below $10 billion and originates less than 1000 mortgage loans are exempted from escrow requirements. The Truth in Lending Act is an escrow requirement that mortgage lenders need to set up an account where they set some funds aside to pay recurring property expenses. However, maintaining such accounts seemed costly especially for small banking institutions.

3. Automatic Qualification

4. Exemptions from certain HDMA Requirements

5. Exemptions from Appraisals in Rural Areas

  • Rural areas were largely affected prior to the S 2155 Act, where they lacked enough appraisers for the mortgage related services. However, the Act provides an exempt for the general requirement necessitating appraisals in rural areas. Therefore, this allows mortgage lenders to offer services in the rural areas without a glitch.
  • These exemptions are applicable for all rural loans with a portfolio of less than $400,000 and a certified appraiser cannot be found on time. This is a relief to mortgage lenders operating in the rural areas.

6. Temporary Licensing for Mortagage Loan Originators (MLOs)

  • The S 2155 Act provide for state-licenced MLOs licensed in one state to work in other state temporarily as they await for their license approval. This means that the Mortagage Loan Originators can offer their services in other states, thereby increasing their work base.

Part
04
of four
Part
04

S.2155: Case Studies

Two case studies, highlighting the reactions of banks to S.2155, how the banks changed their programs, and how the banks have specifically altered their reciprocal deposit arrangements, are presented in the findings below. Many banks, particularly community banks, are favorable to the passing of S.2155. The banks have also been intensifying the qualification of their reciprocal deposit as non-brokered since the passing of the new law.

Case Study 1

Case Study 2

  • Since the passing of the S.2155, the body of American bankers have changed her programs by endorsing "CDARS and Insured Cash Sweep or ICS" as reciprocal deposit service providers for American banks. The endorsement became necessary following the provision in the new law allowing a well-capitalized bank with a "CAMELS rating of 1 or 2 to hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered."
  • Banks that are not using the services offered by CDARS and ICS, owing to significant concerns, have been encouraged to do so by the association body, following the legislative change. Five Star Bank, New York, is already a registered member under this service program.
  • The American Bankers Association (ABA) has been positive on the passing of the bill and officially placed her support for the S. 2155 law. Throwing her weight behind the bill, the Association believes the law will "right-size financial rules and allow financial institutions to serve their customers and communities better."
  • The law is also considered positive by the ABA because most "reciprocal deposits are no longer considered brokered." Additionally, the passing of S.2155 continues to enjoy positive reviews in that a bank that "drops below well-capitalized is no longer required to obtain a waiver from the FDIC to continue accepting reciprocal deposits." However, the no-waiver requirements are subject to the non-acceptance of reciprocal deposits higher than the bank's former four-quarter average.
  • Some banks, notably, community banks, have specifically altered their reciprocal deposit arrangements by changing their deposit mix through placing more attention on corporate and public-unit deposits. Banks get to succeed in this kind of process and enhance the local functionality of their liquidity. In essence, the S.2155 has made banks more attractive.
  • Before the passing of S.2155, the deposit landscape has been influenced by two factors, namely the ferocious competition for retail deposit-gathering and the solicitation of bank’s local retail deposits, both caused by larger financial institutions.
  • Now that the S.2155 is in full swing, the questions for bank directors include "whether their banks have the best tools to target non-retail deposits?" or "whether their banks can do with reciprocal deposits, now that most reciprocal deposits are considered non-brokered?"
  • According to the ABA, banks are expected to review their liabilities and place significant consideration on reciprocal deposits.

Research Strategy

Our case analysis is based on the reports of Pacific Coast Bankers' Bank (PCCB) and the American Bankers Association (ABA). We chose these two reports based on the credibility of industry players.

After careful study of these reports, we were able to outline how financial institutions have reacted positively to the passing of S.2155. As captured in the PCCB's report, 58% of bankers have embraced the implementation of RD based on the new law. From the reports, we also determined how banks have changed their programs by qualifying their RD as non-brokered and the ABA's endorsement of "CDARS and Insured Cash Sweep or ICS" as reciprocal deposit service providers for American banks.

We were also able to provide how the banks have specifically altered their reciprocal deposit arrangements by meeting the two conditions to qualify their RD as non-brokered. PCBB, California, and Five Star Bank, New York, are provided as examples in this regard.
Sources
Sources

From Part 01
Quotes
  • "This bill raises the Dodd-Frank Wall Street Reform and Consumer Protection Act’s threshold for enhanced regulatory standards from $50 billion to $250 billion, meaning 25 of the 38 largest banks in the United States would no longer be subject to stronger capital and liquidity rules, enhanced risk management standards, living-will requirements, some stress testing requirements, and more."
Quotes
  • "Banks with between $100 billion and $250 billion in assets would be subject to only supervisory stress tests, and the Federal Reserve would have discretion to apply other individual enhanced prudential provisions to these banks. Banks with assets between $50 billion and $100 billion would no longer be subject to enhanced regulation, except for the risk committee requirement. In addition, leverage requirements would be relaxed for large custody banks, and certain municipal bonds could be used by large banks to meet their liquidity requirements."
From Part 02
Quotes
  • "These banks would also be exempt from certain existing risk-based capital and leverage ratio requirements provided they meet a higher community bank leverage ratio. Banks with less than $5 billion would face reduced reporting requirements. "
Quotes
  • "This provision, known as a community bank leverage ratio, would exempt certain small banks from risk-weighted capital requirements. (Incidentally, these rules were first imposed in the 1980s, not by the 2010 Dodd-Frank Act)."
Quotes
  • "The Volcker Rule prohibits banks from using customer deposits for their own profit. They can't own, invest in, or sponsor hedge funds, private equity funds, or other trading operations for their use. The rule is section 619 of the Dodd-Frank Wall Street Reform Act of 2010. "
Quotes
  • " Currently, all banks must submit a report of condition and income to the federal bank agencies at the end of every financial quarter of the year, sometimes referred to as a “call report.”53 Completing the call report involves entering numerous values into forms or “schedules” in order to provide the regulator with a detailed accounting of many aspects of each bank’s income, expenses, and balance sheet."
From Part 04
Quotes
  • "the promotion of localized lending and economic growth."
  • "right-size financial rules and allow financial institutions to better serve their customers and communities."
Quotes
  • "the promotion of localized lending and economic growth."
Quotes
  • "CDARS and Insured Cash Sweep or ICS"
  • "with a CAMELS rating of 1 or 2 to hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered."
  • " whether their banks have the best tools to target non-retail deposits?"
  • "whether their banks can do with reciprocal deposits, now that most reciprocal deposits are considered non-brokered?"
  • "most reciprocal deposits are no longer considered brokered."
  • "drops below well-capitalized are no longer required to obtain a waiver from the FDIC to continue accepting reciprocal deposits."
Quotes
  • "increasing their use of reciprocal deposits promptly, due to the new S.2155 law provisions."
  • "total amount of reciprocal deposits held doesn't exceed the lesser of $5B or 20% of your total liabilities."
  • "for customers with larger deposits"