A Financial System 

That Creates Economic Opportunities

Banks and Credit Unions

U.S. DEPARTMENT OF THE TREASURY

JUNE 2017
A Financial System 

That Creates Economic Opportunities

Banks and Credit Unions

U.S. DEPARTMENT OF THE TREASURY

Report to President Donald J. Trump

Executive Order 13772 on Core Principles

for Regulating the United States Financial System

Steven T. Mnuchin

Secretary

Craig S. Phillips

Counselor to the Secretary
A Financial System That Creates Economic Opportunities • Banks and Credit Unions iii

Table of Contents

Executive Summary 1

Introduction 3

Review of the Process for This Report 3

Scope of This Report and Subsequent Reports 4

The U.S. Depository Sector 5

Why Alignment of Regulation with the Core Principles

is of Critical Importance 6

Summary of Recommendations for Regulatory Reform 10

Background 19

The U.S. Depository System 21

The U.S. Financial Regulatory Structure 24

Overview of Federal and State Regulators 24

Regulatory Structure and Issues of Regulatory Duplication,

Overlap, and Fragmentation 28

The Dodd-Frank Act 32

The U.S. Financial Crisis 32

Overview of Key Objectives of Dodd-Frank 32

Findings and Recommendations 35

Improving the Efficiency of Bank Regulation 37

Capital and Liquidity 37

Community Financial Institutions 56

Improving the Regulatory Engagement Model 61

Living Wills 66

Foreign Banking Organizations 68

Improving the Volcker Rule 71

Providing Credit to Fund Consumer and Commercial Needs

to Drive Economic Growth 79

Consumer Financial Protection Bureau 79

Residential Mortgage Lending 92

Leveraged Lending 102

Small Business Lending 105

Appendices 109

Appendix A: Participants in the Executive Order Engagement Process 109

Appendix B: Table of Recommendations 121

Appendix C: Capital and Liquidity 139
iv A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Acronyms and Abbreviations

Acronym/Abbreviation Term

ACICS Accrediting Council for Independent Colleges and Schools

ALJ Administrative Law Judge

AOCI Accumulated Other Comprehensive Income

ATR Ability-to-Repay

Basel Basel Committee on Banking Supervision

Basel Committee Basel Committee on Banking Supervision

BEA Bureau of Economic Analysis

BHC Bank Holding Company

Board Board of Directors

C&I Commercial & Industrial 

CCAR Comprehensive Capital Analysis and Review

CCyB Countercyclical Capital Buffer

CDFI Community Development Financial Institution

CECL Current Expected Credit Losses

CET1 Common Equity Tier 1 Capital 

CFPB Consumer Financial Protection Bureau

CFTC Commodity Futures Trading Commission 

CLAR Comprehensive Liquidity Assessment and Review

CID Civil Investigative Demand

CO Consent Order

CRA Community Reinvestment Act

CRE Commercial Real Estate

CRT Credit Risk Transfer

CSBS Conference State Bank Supervisors

Dodd-Frank Dodd-Frank Wall Street Reform and Consumer Protection Act 

DFAST Dodd-Frank Act Stress Test

DTI Debt-to-Income

EBITDA Earnings Before Interest, Tax, Depreciation and Amortization

eSLR Enhanced Supplementary Leverage Ratio
A Financial System That Creates Economic Opportunities • Banks and Credit Unions v

Executive Order Executive Order 13772 on Core Principles for Regulating the United 

States Financial System

Fannie Mae Federal National Mortgage Association

FASB Financial Accounting Standards Board

FBIIC Financial and Banking Information Infrastructure Committee

FBO Foreign Banking Organization

FDIC Federal Deposit Insurance Corporation

Federal Reserve Board of Governors of the Federal Reserve System

FFIEC Federal Financial Institutions Examination Council

FHA Federal Housing Administration

FHFA Federal Housing Finance Agency

FINRA Financial Industry Regulatory Authority 

FRB Board of Governors of the Federal Reserve System

Freddie Mac Federal Home Loan Mortgage Corporation

FRTB Fundamental Review of the Trading Book

FSB Financial Stability Board

FSOC Financial Stability Oversight Council

FTC Federal Trade Commission

G-20 Group of 20

GAAP Generally Accepted Accounting Principles

GAO Government Accountability Office

Ginnie Mae Government National Mortgage Association

GSE Government-Sponsored Enterprise,

here refers to Fannie Mae and Freddie Mac

G-SIB Global Systemically Important Bank

HAMP Home Affordable Modification Program

HCAI Housing Credit Availability Index

HCR Horizontal Capital Review

HMDA Home Mortgage Disclosure Act

HQLA High-Quality Liquid Assets

HUD U.S. Department of Housing and Urban Development

HVCRE High Volatility Commercial Real Estate
vi A Financial System That Creates Economic Opportunities • Banks and Credit Unions

IAIS International Association of Insurance Supervisors

IHC Intermediate Holding Company

IOSCO International Organization of Securities Commissions

LCR Liquidity Coverage Ratio

LISCC Large Institution Supervision Coordinating Committee

MBA Mortgage Bankers Association

MBS Mortgage-Backed Security

MDI Minority Depository Institution

MOU Memorandum of Understanding

MRA Matters Requiring Attention

MRIA Matters Requiring Immediate Attention

MSA Mortgage Servicing Assets

MSRB Municipal Securities Rulemaking Board 

NCUA National Credit Union Administration

NFA National Futures Association

NSFR Net Stable Funding Ratio

OCC Office of the Comptroller of the Currency

OLA Orderly Liquidation Authority 

OMB Office of Management and Budget

Policy Statement Federal Reserve Small Bank Holding Company and Savings and Loan 

Holding Company Policy Statement

PLS Private Label Mortgage-Backed Securities

PRI Program-Related Investment

QM Qualified Mortgage

QRM Qualified Residential Mortgage

Reg AB II Asset-Backed Securities Disclosure and Registration Final Rule

REIT Real Estate Investment Trust

RENTD Reasonably Expected Near Term Demand

Repo Repurchase Agreement

RESPA Real Estate Settlement Procedures Act

RLAP Resolution Liquidity Adequacy and Positioning
A Financial System That Creates Economic Opportunities • Banks and Credit Unions vii

RLEN Resolution Liquidity Execution Need

RMBS Residential Mortgage-Backed Securities

RWA Risk-Weighted Assets

SBA Small Business Administration

SCAP Supervisory Capital Assessment Program

SCCL Single-Counterparty Credit Limit

SEC U.S. Securities and Exchange Commission

Secretary Steven T. Mnuchin, Secretary of the Treasury

SLR Supplementary Leverage Ratio

SSB Standard-Setting Bodies

TARP Troubled Asset Relief Program

TILA Truth in Lending Act

TLAC Total Loss-Absorbing Capacity

Treasury U.S. Department of the Treasury

TRID TILA-RESPA Integrated Disclosure 

UDAAP Unfair, Deceptive, or Abusive Acts and Practices

VA U.S. Department of Veterans Affairs
viii A Financial System That Creates Economic Opportunities • Banks and Credit Unions
Executive Summary
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Executive Summary • Introduction

3

Introduction

President Donald J. Trump established the policy of his Administration to regulate the United States 

financial system in a manner consistent with a set of Core Principles. These principles were set forth 

in Executive Order 13772 on February 3, 2017. This Report is prepared by the U.S. Department of 

the Treasury, under the direction of Secretary Steven T. Mnuchin, in response to the Executive Order. 

This Report, and subsequent Reports, will identify any laws, treaties, regulations, guidance, reporting 

and record keeping requirements, and other Government policies that inhibit Federal regulation of 

the U.S. financial system in a manner consistent with the Core Principles. 

The Core Principles are:

A. Empower Americans to make independent financial decisions and informed choices in 

the marketplace, save for retirement, and build individual wealth;

B. Prevent taxpayer-funded bailouts;

C. Foster economic growth and vibrant financial markets through more rigorous regulatory 

impact analysis that addresses systemic risk and market failures, such as moral hazard and 

information asymmetry;

D. Enable American companies to be competitive with foreign firms in domestic and foreign 

markets;

E. Advance American interests in international financial regulatory negotiations and 

meetings;

F. Make regulation efficient, effective, and appropriately tailored; and

G. Restore public accountability within Federal financial regulatory agencies and rationalize 

the Federal financial regulatory framework.

Review of the Process for This Report

As directed by the Executive Order, Treasury consulted with the member agencies of the Financial 

Stability Oversight Council (FSOC), including the Board of Governors of the Federal Reserve 

System (Federal Reserve or FRB), the Office of the Comptroller of the Currency (OCC), the 

Consumer Financial Protection Bureau (CFPB), the Securities and Exchange Commission 

(SEC), the Federal Deposit Insurance Corporation (FDIC), the Commodity Futures Trading 

Commission (CFTC), the Federal Housing Finance Agency (FHFA), and the National Credit 

Union Administration (NCUA). These consultations with FSOC members included holding a 

series of bilateral meetings and evaluation of written submissions. Treasury also consulted with 

FSOC’s independent member with insurance expertise and nonvoting members of FSOC. 

Treasury consulted extensively with a wide range of stakeholders, including trade groups, financial 

services firms, consumer and other advocacy groups, academics, experts, financial markets utilities, 

rating agencies, investors and investment strategists, and others with relevant knowledge. Treasury 

also reviewed a wide range of data, research, and published material from both public and private 

sector sources.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Executive Summary • Scope of This Report and Subsequent Reports

4

Treasury incorporated the widest possible range of perspectives in evaluating approaches to the 

regulation of the U.S. financial system according to the Core Principles. A list of organizations and 

individuals who provided input to Treasury in connection with the preparation of this report is set 

forth as Appendix A.

Scope of This Report and Subsequent Reports

The U.S. financial system is a vast network of various types of institutions that offer services 

to consumers and businesses. It comprises domestic organizations, U.S.-based organizations 

that operate globally, and foreign-owned institutions that have a presence in the United States. 

Financial services are offered across a wide range of categories of institutions, including banks and 

credit unions, asset managers, insurance companies; non-bank financial companies, and various 

market utilities, including exchanges and clearing houses. Markets for liquid financial products 

include a wide range of listed and over-the-counter markets, exchanges and other market utilities 

that provide liquidity for equity, fixed income, financial derivatives, and other financial products. 

In short, the financial system encompasses a wide variety of institutions and services.

Given the breadth of the financial system and the unique regulatory regime governing each segment, Treasury will divide its review of the financial system into a series of reports:

• The depository system, covering banks, savings associations, and credit unions of all sizes, 

types and regulatory charters;

• Capital markets: debt, equity, commodities and derivatives markets, central clearing and 

other operational functions;

• The asset management and insurance industries, and retail and institutional investment 

products and vehicles; and

• Non-bank financial institutions, financial technology, and financial innovation.

This report covers the depository system. Subsequent reports will cover the other topics listed 

above. This report does not cover comprehensive housing reform and the future state of the 

government-sponsored enterprises, Fannie Mae and Freddie Mac. However, reference is made to 

numerous elements of regulations pertaining to mortgage loan origination, servicing and capital 

markets treatment.

On April 21, 2017, President Trump issued two Presidential Memoranda to the Secretary of the 

Treasury. One calls for Treasury to review the Orderly Liquidation Authority (OLA) established 

in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). 

The other calls for Treasury to review the process by which the FSOC determines that a nonbank 

financial company could pose a threat to the financial stability of the United States, subjecting 

such an entity to supervision by the Federal Reserve and enhanced prudential standards, as well 

as the process by which the FSOC designates financial market utilities as systemically important. 

Treasury will conduct a review and submit separate reports to the President in response to each 

Memorandum within 180 days of the issuance thereof. Accordingly, this report will not cover OLA 

or the FSOC designation process.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Executive Summary • The U.S. Depository Sector 

5

The U.S. Depository Sector 

The U.S. banking system is the strongest in the world and is critical in supporting the U.S. economy. There are over 5,900 banks and 5,800 credit unions operating in the United States. Regulated 

depositories reported total assets of $21.4 trillion as of December 31, 2016, or 115% of U.S. GDP. 

Depositories operated by foreign banking organizations play a meaningful role in the U.S. banking 

system, in part by helping connect consumers and businesses to global economic opportunities. 

The depository system can be stratified by size and type of organization, with each playing a unique 

role serving its target client base. Key segments include the eight firms designated as U.S. global 

systemically important banks (G-SIBs), regional banks, mid-sized banks, community banks, and 

credit unions. 

The eight U.S. G-SIBs currently have $10.7 trillion of assets, or approximately 50% of total U.S. 

depository assets, down from 58% in 2008. Regional and mid-sized banks, often operating across 

multiple states, have in the aggregate $6.7 trillion of assets, or approximately 31% of total U.S. 

depository assets. They typically have balance sheets and business models geared toward deposittaking and lending to consumers and businesses, without extensive capital markets activities. 

Community banks and credit unions have total assets of $2.7 trillion and $1.3 trillion, respectively. 

Together, these entities represent over 19% of total U.S. depository assets and play an important 

role in the communities that they serve. They have relatively simple business models, with capital 

ratios generally equal to or higher than their larger counterparts. Community banks and credit 

unions serve the needs of the nation’s small businesses and rural communities, and they play a key 

role in agricultural lending. 

The U.S. operations of foreign banking organizations have total assets that exceed $4.5 trillion, 

which includes the assets of commercial banks, branches, agencies, and non-bank affiliates, representing approximately 20% of our banking system.1

 This segment plays a large role in providing 

business loans and infrastructure finance. They also provide significant capital markets services, 

comprising more than half of the 23 primary dealers of the Federal Reserve Bank of New York.

Despite a relatively weak economic recovery since the financial crisis, the banking system has demonstrated resilience, increasing capital, improving liquidity standards, improving loan portfolio 

quality, and implementing better risk management practices. When the housing bubble burst over 

10 years ago, gaps were revealed in financial regulation that resulted in significant shortcomings in 

both the financial strength and risk-management activities of banking organizations. 

The financial characteristics and operation of the U.S. depository system were transformed as a 

consequence of the July 21, 2010 enactment of Dodd-Frank. Dodd-Frank made sweeping changes 

to regulatory requirements and the powers of independent regulatory agencies. In parallel, the 

banking agencies also imposed major changes in the operating expectations and capital and liquidity requirements of regulated institutions. 

1. Foreign banking organizations are a subset of the other depository sector segments, and market share 

is measured here against U.S. commercial bank assets, including U.S. branches and agencies. Federal 

Reserve Board, Share Data for the U.S. Offices of Foreign Banking Organizations (Sep. 30, 2016),

available at: https://www.federalreserve.gov/releases/iba/fboshr.htm.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Executive Summary • Why Alignment of Regulation with the Core Principles is of Critical Importance

6

As banking regulators are approaching the full implementation of Dodd-Frank, nearly seven years 

after its passage, regulation has proven to be insufficiently tailored to depository institutions based 

on the size and complexity of their business models. Requirements in Dodd-Frank are overseen 

by multiple regulatory agencies with shared or joint rule-making responsibilities and overlapping 

mandates. This complicated oversight structure has raised the cost of compliance for the depository 

sector, particularly for mid-sized and community financial institutions. Moreover, the regulatory 

agencies often do not engage in sufficient coordination, so financial institutions often face duplication of efforts. 

A sensible rebalancing of regulatory principles is warranted in light of the significant improvement 

in the strength of the financial system and the economy, as well as the benefit of perspective since 

the Great Recession. Treasury has identified recommendations that can better align the financial 

system to serve consumers and businesses in order to support their economic objectives and drive 

economic growth. Through thoughtful reform, the soundness of the financial system can be further strengthened. 

Why Alignment of Regulation with the Core 

Principles is of Critical Importance

Breaking the Cycle of Low Economic Growth 

The U.S. economy has experienced the slowest economic recovery of the post-war period. Real 

gross domestic product is only 13% higher than in 2007. Since 2010, total employment has 

risen 12%, while wages have risen only a little more than 4%. The implementation of DoddFrank during this period created a new set of obstacles to the recovery by imposing a series of 

costly regulatory requirements on banks and credit unions, most of which were either unrelated 

to addressing problems leading up to the financial crisis or applied in an overly prescriptive or 

broad manner. 

At the same time as regulatory burdens were increasing, financial institutions faced a prolonged 

period of low interest rates. While the accommodative conditions have lowered consumer, business, and government borrowing costs, they have also reduced the return on household savings and 

made achieving adequate return on the capital of financial institutions more difficult.

The Administration is pursuing a wide range of coordinated strategies to stimulate growth, including tax reform, a new approach to managing international trade, and improvements to government 

accountability, including shrinking, where appropriate, the size and role of government. A more 

efficient system of financial regulation is a critical pillar of policies to stimulate economic growth. 

Two of the most fundamental requirements for economic expansion are the presence of liquid 

and robust financial markets and the availability of credit. American banks and credit unions are 

integral to fulfilling both of these needs. 

The sweeping scope of and excess costs imposed by Dodd-Frank, however, have resulted in a 

slow rate of bank asset and loan growth. At the same time, banking system resources dedicated to 

markets and market liquidity have declined, in large part due to regulatory changes. Finding the 
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Executive Summary • Why Alignment of Regulation with the Core Principles is of Critical Importance

7

correct regulatory balance impacting market liquidity and the extension of credit to consumers and 

businesses is required to fuel economic growth. 

Better Fulfilling the Credit Needs of Consumers and Businesses

A healthier and more dynamic banking sector that provides improved access to credit for U.S. 

consumers and businesses is essential to supporting more robust GDP growth. Improperly tailored 

capital, liquidity, and leverage requirements, as well as a tremendous increase in activities-based regulation, including regulatory parameters that guide loan underwriting, have undermined the ability 

of banks to deliver attractively priced credit in sufficient quantity to meet the needs of the economy. 

Loan growth has been quite slow compared to prior recoveries, up only 25% in the current recovery, 

compared with increases of 64%, 30%, and 87% for the 2001, 1990-91, and 1981-82 recessions, 

respectively (all at the same period of time since the beginning of each recovery). Cumulative asset 

and loan growth at FDIC-insured institutions is 26% since 2010, approximately equal to nominal 

GDP growth. Breaking the cycle of the low rate of GDP growth requires increased access to credit 

for U.S. consumers and businesses, particularly small businesses.

The largest stalled asset class is residential mortgage lending, showing only 5% growth since 2010, 

with credit cards and commercial real estate (excluding multifamily lending) showing growth 

rates of 14% and 24%, respectively. Credit availability in residential mortgages remains tight. The 

Housing Credit Availability Index (HCAI) reported by the Urban Institute is at approximately half 

the level of the 2001-2003 period.2 This tightness has resulted in several trends, including a concentration of the mortgage market in government-supported mortgage programs, which funded 

nearly 70% of 2016 origination volume.

Small business lending has been one of the most anemic sectors, barely recovering to 2008 levels. 

By comparison, origination rates for large business loans are at record levels. The Federal Reserve 

offered further evidence of the challenges of small business credit conditions in its nationwide 

survey published in April 2017.

The lack of tailoring and imprecise calibration in both capital and liquidity standards have diminished the flow of credit to fulfill loan demand. Numerous aspects of risk-based capital standards 

discourage lending in key asset classes. Further, activities-based regulation restricts the flow of 

consumer lending, particularly in small dollar loans, residential mortgage loans, credit cards, and 

indirect auto lending. 

Maintaining Liquid Markets

It is critical that the United States maintain a leadership position in the vitality of its financial 

markets for financial products, which have long been the envy of the world. Robust markets support capital formation, expand economic activity, and attract foreign capital. Equity capital and 

debt capital allow our small and large businesses to expand and drive job and wage growth. Banks 

2. Urban Institute, Housing Credit Availability Index (April 14, 2017), available at: www.urban.org/policy-centers/

housing-finance-policy-center/projects/housing-credit-availability-index.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Executive Summary • Why Alignment of Regulation with the Core Principles is of Critical Importance

8

play a significant role in providing market liquidity, serving as the primary market intermediaries, 

as both principal and agent. 

Factors that contribute to declining market liquidity include an increase in the quantity and quality of liquid assets on bank balance sheets, which has resulted in a decline in the percentage of bank 

balance sheets available to support market-making activities. Implementation of a wide range of 

capital and liquidity rules, and the manner in which these rules interact, may be limiting resources 

for market liquidity, including low-margin products that do not produce sufficient returns, and 

short-term, secured financing. 

The Volcker Rule requires substantial amendment. Its implementation has hindered marketmaking functions necessary to ensure a healthy level of market liquidity. Combined with high 

liquid asset buffers, and limited time to restore buffers during periods of stress, the Volcker Rule 

could result in pro-cyclical behavior and reinforce market volatility during periods of stress. 

Conforming the regulatory environment to promote liquid and vibrant markets is an important 

element of the Core Principles.

Assessing Regulatory Impact and Burden 

The financial crisis of 2008 revealed longstanding flaws in the structure of both global and American 

financial regulation. Widespread and extensive government guarantees undermined market discipline, resulting in moral hazard on the part of investors, lenders and borrowers. Reform was 

desperately needed if future financial crises were to be avoided. In response to the financial crisis, 

Congress enacted Dodd-Frank, a dense 2,319-page piece of legislation that is sweeping in its scope 

and mandates. The length of Dodd-Frank fails to reflect fully its expansive scope as the legislation 

delegated unprecedented authority to financial regulators and mandated hundreds of new regulations. In total, implementing Dodd-Frank required approximately 390 regulations, implemented 

by more than a dozen different regulatory agencies. Dodd-Frank failed to address many drivers of 

the financial crisis, while adding new regulatory burdens. 

Nearly seven years following Dodd-Frank’s enactment, it is important to reexamine these rules, 

both individually and in concert, guided by free-market principles and with an eye towards maximizing economic growth consistent with taxpayer protection. Doing so will help to unleash the 

potential of consumers and businesses, which has been restrained in one of the weakest economic 

recoveries in U.S. economic history. Immediate changes, at both the regulatory and legislative 

level, are needed both to increase economic growth and financial stability. These goals need not be 

in conflict. Greater certainty about the rules, for instance, would allow for more informed choices 

on the part of lenders, investors, and consumers.

During this period, as part of the international response to the global financial crisis, the United 

States has played a leading role in the G-20’s financial regulatory reform agenda and the development of international financial regulatory standards by standard-setting bodies (SSBs), such 

as the Basel Committee on Banking Supervision (Basel Committee) and the Financial Stability 

Board (FSB). The impact of international standards on the global competitiveness of U.S. financial 

institutions requires thoughtful review. 
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Executive Summary • Why Alignment of Regulation with the Core Principles is of Critical Importance

9

Banks and credit unions are confronted with a vast array of regulatory requirements, putting a 

substantial burden on financial and human capital. Most critically, regulatory burdens must be 

appropriately tailored based on the size and complexity of a financial organization’s business model 

and take into account risk and impact. In particular, the use of arbitrary asset thresholds to apply 

regulation has resulted in a “one-size-fits-all” approach that has prevented regulators from focusing 

on a banking organization’s most serious risks. Such asset thresholds also create competitive advantages for the largest institutions, which can more easily absorb regulatory costs, and deter mid-sized 

banks from growing. Regulatory overlap and duplication must be addressed to reduce conflicting 

requirements and inadequately coordinated examinations across the various regulatory bodies.

It is critical that Congress and the regulatory agencies undertake a holistic analysis of the cumulative impact of the regulatory environment. It is also important to modernize and conform outdated statutes and regulations to the realities of the current financial system and better target the 

statutory and regulatory response to the real risks that American consumers and the American 

economy face. This should include statutes of critical importance to the banking sector, such as the 

Community Reinvestment Act (CRA).

The CRA statute is in need of modernization, regulatory oversight must be harmonized, and 

greater clarity in remediating deficiencies is called for. It is very important to better align the 

benefits arising from banks’ CRA investments with the interest and needs of the communities that 

they serve and to improve the current supervisory and regulatory framework for CRA. Treasury 

expects to comprehensively assess how the CRA could be improved to achieve these goals, which 

will include soliciting input from individual consumer advocates and other stakeholders. Aligning 

the regulatory oversight of CRA activities with a heightened focus on community investments is 

a high priority for the Secretary.

Preventing Taxpayer-Funded Bailouts and Maintaining the Safety and 

Soundness of the Financial System

The taxpayer-funded bailouts that occurred during the financial crisis were not only unfair to 

taxpayers and businesses that did not receive a bailout, but also created serious moral hazard risk in 

U.S. financial markets by signaling to market participants that certain investors will not bear the 

consequences of poor investments. Over the long run, this moral hazard threatens to undermine 

market discipline, create too-big-to-fail institutions, and set the stage for future financial crises and 

taxpayer-funded bailouts. Accordingly, one of the Core Principles is to prevent taxpayer-funded 

bailouts. 

To satisfy this Core Principle, two key policies are required. First, there needs to be an effective mechanism for resolving the largest and most complex financial institutions. The Treasury 

Secretary is currently reviewing the OLA established under Title II of Dodd-Frank pursuant to 

the Presidential Memorandum dated April 21, 2017. Thus, this report will defer comment on the 

effectiveness of our current resolution mechanisms. 

The second policy needed to prevent taxpayer-funded bailouts is eliminating regulation that fosters 

the creation or cements the market position of too-big-to-fail institutions. Excessive regulation 

imposes costs on institutions that can create incentives for institutions to grow larger than market 
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Executive Summary • Summary of Recommendations for Regulatory Reform

10

conditions would otherwise require. To the extent regulatory costs can be spread over a large 

number of customers, regulation can create a barrier to entry for smaller firms and confer competitive advantages on the largest institutions. Tailoring regulation therefore is essential to ensure that 

regulation does not play a role in fostering too-big-to-fail institutions.

Beside the need to prevent taxpayer-funded bailouts, the financial sector must be well regulated 

to ensure the safety and soundness of the financial system. Treasury’s recommendations seek to 

right-size financial regulation and remove unnecessary regulatory duplication and overlap. The key 

elements of the regulatory framework that should be retained through any reform include:

• Explicit, appropriately risk-sensitive capital standards;

• Supervised stress-testing appropriately tailored based on banking organizations’ 

complexity;

• Explicit, measurable and transparent liquidity requirements;

• Actionable living wills for the largest systemically-important banks; and

• Enhanced prudential standards, based on the size and complexity of financial 

institutions.

Treasury believes that the recommendations identified in this report would further enhance the 

stability of the financial system by improving the effectiveness of regulation and creating more 

robust and resilient financial institutions.

Summary of Recommendations 

for Regulatory Reform

Treasury’s review of the regulatory framework for the depository sector has identified significant 

areas for reform in order to conform to the Core Principles. The review has identified a wide range 

of changes that could meaningfully simplify and reduce regulatory costs and burdens, while maintaining high standards of safety and soundness and ensuring the accountability of the financial 

system to the American public.

Treasury’s recommendations relating to the reform of the banking sector regulatory framework, as 

set forth within this Report, can be summarized as follows:

• Improving regulatory efficiency and effectiveness by critically evaluating mandates and 

regulatory fragmentation, overlap, and duplication across regulatory agencies;

• Aligning the financial system to help support the U.S. economy;

• Reducing regulatory burden by decreasing unnecessary complexity;

• Tailoring the regulatory approach based on size and complexity of regulated firms and 

requiring greater regulatory cooperation and coordination among financial regulators; and

• Aligning regulations to support market liquidity, investment, and lending in the U.S. 

economy.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Executive Summary • Summary of Recommendations for Regulatory Reform 

11

Treasury’s recommendations to the President are focused on identifying laws, regulations, and 

other government policies that inhibit regulation of the financial system according to the Core 

Principles. In developing the recommendations, several common themes have emerged. First, there 

is a need for enhanced policy coordination among federal financial regulatory agencies. Second, 

supervisory and enforcement policies and practices should be better coordinated for purposes of 

promoting both safety and soundness and financial stability. Increased coordination on the part 

of the regulators will identify problem areas and help financial regulators prioritize enforcement 

actions. Third, financial laws, regulations, and supervisory practices must be harmonized and 

modernized for consistency.

A list of all of Treasury’s recommendations within this report is set forth as Appendix B, including 

the recommended action, method of implementation (Congressional and/or regulatory action), 

and which Core Principles are addressed.

Following is a summary of the recommendations set forth in the report.

Addressing the U.S. Regulatory Structure

Both Congress and the financial regulatory agencies have roles to play in reducing overlap and 

increasing coordination within the U.S. financial regulatory framework.

Treasury recommends that Congress take action to reduce fragmentation, overlap, and duplication 

in the U.S. regulatory structure. This could include consolidating regulators with similar missions 

and more clearly defining regulatory mandates. Increased accountability for all regulators can be 

achieved through oversight by an appointed board or commission or, in the case of a director-led 

agency, appropriate control and oversight by the Executive Branch, including the right of removal 

at will by the President.

Treasury recommends that Congress expand FSOC’s authority to play a larger role in the coordination and direction of regulatory and supervisory policies. This can include giving it the authority 

to appoint a lead regulator on any issue on which multiple agencies may have conflicting and 

overlapping regulatory jurisdiction. 

Treasury recommends that Congress reform the structure and mission of the Office of Financial 

Research to improve its effectiveness and to ensure greater accountability. Treasury recommends 

that the OFR become a functional part of Treasury, with its Director appointed by the Secretary, 

without a fixed term and subject to removal at will, and that the budget of OFR come under the 

control of the Treasury appropriation and budget process.

Finally, the agencies should work together to increase coordination of supervision and examination 

activities. The agencies should also consider coordinating enforcement actions such that only one 

regulator leads enforcement related to a single incident or set of facts.

Refining Capital, Liquidity, and Leverage Standards

Treasury offers a number of recommendations aimed at both decreasing the burden of statutory 

stress testing and improving its effectiveness by tailoring the stress-testing requirements based on 

the size and complexity of banks. For the statutory, company-led annual Dodd-Frank Act stress 
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Executive Summary • Summary of Recommendations for Regulatory Reform 

12

test (DFAST), Treasury recommends raising the dollar threshold of participation to $50 billion 

from the current threshold of $10 billion in total assets. Treasury also supports giving the banking 

regulators the flexibility to implement a threshold for mandatory stress-testing that is tailored to 

business model, balance sheet, and organizational complexity such that institutions with assets 

greater than $50 billion could be exempt from stress-testing requirements.

Treasury recommends eliminating the mid-year DFAST cycle and reducing the number of supervisory scenarios from three to two – the baseline and severely adverse scenario. For the companyrun stress tests, banks should be permitted to determine the appropriate number of models that are 

required to develop sufficient output results, based on the complexity of the banking organization 

and the nature of its assets.

Treasury recommends that Congress amend the $50 billion threshold under Section 165 of DoddFrank for the application of enhanced prudential standards to more appropriately tailor these 

standards to the risk profile of bank holding companies. The Federal Reserve should also revise the 

threshold for application of Comprehensive Capital Analysis and Review (CCAR) to match the 

revised threshold for application of the enhanced prudential standards. The CCAR process should 

be adjusted to a two-year cycle, which will not compromise quality in that stress-testing results 

are forecast over a nine quarter cycle. Provision could be made for off-cycle submission if a revised 

capital plan is required due to extraordinary events or in the case of financial distress.

Treasury supports an off-ramp exemption for DFAST, CCAR, and certain other prudential standards for any bank that elects to maintain a sufficiently high level of capital, such as the 10% 

leverage ratio proposed by H.R. 10, the Financial CHOICE Act of 2017.

In order to provide for more transparent and accountable regulatory processes, the Federal 

Reserve should subject its stress-testing and capital planning review frameworks to public notice 

and comment. Treasury makes further recommendations concerning the CCAR process and the 

process of setting economic assumptions and modelling parameters, in both the quantitative 

and qualitative assessments, that may result in estimates of excessive capital requirements in the 

severely adverse scenario.

The CCAR qualitative assessment is too subjective and non-transparent, and hence should be 

eliminated as a sole objection to a capital plan. The qualitative assessment should be adjusted for 

all banking organizations to conform to the horizontal capital review (as the Federal Reserve has 

already done for non-complex banking groups with assets less than $250 billion, to decrease the 

regulatory burden).

Additionally, further emphasis should be given to the use of standardized approaches over advanced 

approaches for risk-weighting assets to simplify the capital regime. Also, a more transparent, rulesbased approach should be used in the calculation of operational risk capital.

The scope of application of the liquidity coverage ratio (LCR) should be considerably narrowed to 

include only internationally active banks. The single-counterparty credit limit (SCCL) also should 

only apply to banks that are subject to the revised threshold for the application of the enhanced 

prudential standards. The degree of conservatism in the cash flow calculations methodologies and 

other aspects of the LCR process should be adjusted, including greater reliance on a banking 

organization’s historical experience.
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Executive Summary • Summary of Recommendations for Regulatory Reform 

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Treasury recommends delaying the domestic implementation of the Net Stable Funding Ratio 

(NSFR) and Fundamental Review of the Trading Book (FRTB) rules until they can be appropriately calibrated and assessed. Both of these standards represent additional regulatory burden and 

would introduce potentially unnecessary capital and liquidity requirements on top of existing 

capital and liquidity requirements. U.S. regulators should also rationalize and improve the riskbased capital regime over time through, for example, reducing redundant calculation approaches 

and improving risk sensitivity in the measurement of derivative and securities lending exposures.

Treasury recommends that the potential impact of the FASB Current Expected Credit Losses 

(CECL) standard on banks’ capital levels be carefully reviewed by U.S. prudential regulators with 

a view towards harmonizing the application of the standard with regulators’ supervisory efforts.

Treasury recommends that the living will process be made a two year cycle rather than the current annual process, which is not required by Dodd-Frank. Treasury also recommends that the 

threshold for participation in the living will process be revised to match the revised threshold for 

application of the enhanced prudential standards. This change would only include those banks 

that have a sufficient level of complexity as to justify the living will requirement. Other changes 

Treasury recommends include improving the quality and transparency of guidance and promoting 

better regulatory harmonization and timely response following submission of living wills.

Treasury recommends that living wills guidance be subject to notice and comment before becoming 

final. While the Federal Reserve and the FDIC have increased their coordination and responsiveness to companies seeking guidance on the preparation of their living wills, ongoing discrepancies 

in guidance remain. Treasury recommends that section 165(d) of Dodd-Frank be amended to 

remove the FDIC from the living wills process. The Federal Reserve should be required to complete its review and give feedback to firms on their living wills within six months.

Providing Credit to Fund Consumers and Businesses to Drive Economic Growth

Treasury has identified numerous regulatory factors that are unnecessarily limiting the flow of 

credit to consumers and businesses and thereby constraining economic growth and vitality. Some 

of these regulatory factors also unnecessarily restrict the range of choices and options for borrowers, particularly consumers, through undue restrictions on banks’ ability to design and deliver 

responsible lending products.

Treasury’s recommendations for revising capital and liquidity regulatory regimes are aimed at 

increasing banks’ lending capacity while maintaining safety and soundness standards. Treasury 

recommends recalibrating capital requirements that place an undue burden on individual loan 

asset classes, particularly for mid-sized and community financial institutions. 

A significant restructuring in the authority and execution of regulatory responsibilities by the 

CFPB is necessary. The CFPB was created to pursue an important mission, but its unaccountable structure and unduly broad regulatory powers have led to predictable regulatory abuses and 

excesses. The CFPB’s approach to rulemaking and enforcement has hindered consumer access to 

credit, limited innovation, and imposed unduly high compliance burdens, particularly on small 

institutions. Treasury’s recommendations include: making the Director of the CFPB removable at 

will by the President or, alternatively, restructuring the CFPB as an independent multi-member 
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Executive Summary • Summary of Recommendations for Regulatory Reform 

14

commission or board; funding the CFPB through the annual appropriations process; adopting 

reforms to ensure that regulated entities have adequate notice of CFPB interpretations of law 

before subjecting them to enforcement actions; and curbing abuses in investigations and enforcement actions. 

The regulatory environment should protect consumers’ interests and allow banks adequate leeway 

to exercise reasonably constructed consumer lending regimes, giving consumers the broadest array 

of choices, supported by appropriately designed and implemented compliance regimes. The regulatory environment should also promote financial inclusion, bringing more consumers into the 

banking system and out of less regulated markets.

Treasury has reviewed and made recommendations to improve, and reduce the costs of, lending 

flows from the banking system across a range of product types, including residential mortgages, 

leveraged lending, and small business lending. A significant amount of regulatory overlap of 

activities-based regulation exists across consumer and commercial lending that should be addressed 

through inter-agency review and coordination. This overlap puts a particularly high burden on 

mid-sized and community banking organizations. 

Improving Market Liquidity

The cumulative effect of a number of bank regulations implementing Dodd-Frank may be limiting 

market liquidity. Maintaining strong, vibrant markets at all times, particularly during periods of 

market stress, is aligned with the Core Principles and is necessary to support economic growth, 

avoid systemic risk, and therefore minimize the risk of a taxpayer-funded bailout. 

Consideration of adjustments to the Supplementary Leverage Ratio (SLR) and enhanced 

Supplementary Leverage Ratio (eSLR) is important to address unfavorable impacts these requirements may have on market liquidity and low-risk assets. Specifically, adjustments should be made 

to the calibration of the eSLR buffer and the leverage exposure calculation. Exceptions from the 

denominator of total exposure should include: (1) cash on deposit with central banks; (2) U.S. 

Treasury securities; and (3) initial margin for centrally cleared derivatives.

Treasury recommends significant changes to the Volcker Rule, including changes to the statute, 

regulations and supervision. Undue compliance burdens must be eliminated in order to eliminate 

unnecessary impact on market liquidity. Treasury supports in principle the Volcker Rule’s limitations on proprietary trading and does not recommend its repeal. 

Banks with $10 billion or less in assets should not be subject to the Volcker Rule. Treasury also 

recommends that the proprietary trading restrictions of the rule not apply to banks with greater 

than $10 billion in assets unless they exceed a threshold amount of trading assets and liabilities. 

In addition, Treasury has identified various ways of reducing the complexity of the Volcker 

Rule to decrease regulatory compliance burdens. Treasury advocates simplifying the definition 

of proprietary trading and allowing banks to more easily hedge their risks and conduct marketmaking activities. Treasury’s recommendations respond to the concern that undue constraints on 

market making present risks to market liquidity, particularly during times of stress. Treasury also 

recommends changes to the compliance program requirements of the rule in order to decrease 

regulatory burden. 
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Similarly, the covered funds provisions of the rule require modification to decrease unnecessary 

burdens, including by refining the definition of a covered fund. This change can greatly assist in 

the formation of venture and other capital that is critical to fund economic growth opportunities. 

Finally, given the fragmentation of responsibility for implementing the Volcker Rule across five 

agencies, these agencies should ensure that their guidance and enforcement of the rule is consistent 

and coordinated. 

Allowing Community Banks and Credit Unions to Thrive

In order to promote the orderly operation and expansion of the community banking and credit 

union sector, Treasury recommends that the overall regulatory burden be significantly adjusted. 

This is appropriate in light of the complexity and lack of systemic risk of such financial institutions.

The capital regime for community banks having total assets less than $10 billion should be simplified, 

which can be achieved by providing for an exemption from the U.S. Basel III risk-based capital regime 

and, if required, an exemption from Dodd-Frank’s Collins Amendment. This change could address 

the treatment of select asset classes that are integral to banking models, such as mortgage servicing 

assets and certain types of commercial real estate loans. In addition, Treasury recommends raising the 

Small Bank Holding Company Policy Statement asset threshold from $1 billion to $2 billion. 

Treasury recommends that regulators undertake additional efforts to streamline regulatory supervisory burden and reporting requirements for all community financial institutions, including the 

scale of Call Reports (i.e., each bank’s consolidated reports of condition and income).3 Regulators 

should undertake a critical review of their coordination procedures and consider forming a consolidated examination force. Further, greater accountability and clarity should be incorporated into 

the examination procedures and data collection requirements.

Treasury recommends changes to the CFPB’s ATR/QM rule and raising the total asset threshold 

for making Small Creditor QM loans from the current $2 billion to a higher asset threshold of 

between $5 and $10 billion to accommodate loans made and retained by a larger set of community 

financial institutions. 

For credit unions, Treasury recommends raising the scope of application for stress-testing requirements for federally-insured credit unions to $50 billion in assets (from $10 billion in assets currently). The final rule requiring credit unions with assets greater than $100 million to satisfy a riskweighted capital framework should also be repealed. Instead, credit unions of all sizes should have 

a simple leverage test, with consideration as to whether the current capital requirement should be 

revised in order to promote greater equality with equivalent commercial bank capital requirements. 

As with banks, credit unions should be granted relief from the current level, design, and lack of 

notice and transparency of the supervision and examination processes. Examination should be 

more tailored and cost efficient to avoid burdensome and unnecessary procedures. This would 

require coordination between NCUA, CFPB, and state regulators. Procedures that are redundant 

between regulators should be streamlined.

3. To access call reports see FFIEC, Central Data Repository’s Public Data Distribution, available at cdr.ffiec.

gov/public.
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Advancing American Interests and Global Competitiveness

Treasury recommends increased transparency and accountability in international financial regulatory standard-setting bodies. Improved inter-agency coordination should be adopted to ensure 

the best harmonization of U.S. participation in applicable international forums. International 

regulatory standards should only be implemented through consideration of their alignment with 

domestic objectives and should be carefully and appropriately tailored to meet the needs of the 

U.S. financial services industry and the American people. 

Treasury recommends additional study of the recalibration of standards for capital and liquidity 

that have been imposed on U.S. G-SIBs. These regulations add significant complexity to capital and 

liquidity requirements and may have adverse economic consequences that can be addressed without 

impacting safety and soundness. The elements of U.S. regulations that should be reevaluated include: 

the U.S. G-SIB surcharge, the mandatory minimum debt ratio included in the Federal Reserve’s total 

loss absorbing capacity (TLAC) and minimum debt rule, and the calibration of the eSLR.

Treasury generally supports efforts to finalize remaining elements of the international reforms at 

the Basel Committee including establishing a global risk-based capital floor in order to promote 

a more level playing field for U.S. firms and to strengthen the capital adequacy of global banks, 

especially non-U.S. institutions that, in some cases, have significantly lower capital requirements. 

Treasury recommends that banking agencies carefully consider the implications for U.S. credit 

intermediation and systemic risk from the implementation in the United States of a revised standardized approach for credit risk under the Basel III capital framework. U.S. regulators should 

provide clarity on how the U.S.-specific adoption of any new Basel standards will affect capital 

requirements and risk-weighted asset calculations for U.S. firms.

Improving the Regulatory Engagement Model

In conducting its review of the depository sector and the regulatory engagement model, Treasury 

has identified areas for review and further evaluation to improve the effectiveness of regulation. 

The role of the boards of directors (Boards) of banking organizations can be improved to enhance 

accountability by appropriately defining the Board’s role and responsibilities for regulatory oversight and governance. A greater degree of inter-agency cooperation and coordination pertaining to 

regulatory actions and consent orders should be encouraged, in order to improve the transparency 

and timely resolution of such actions. 

Boards of banking organizations provide oversight that is critical to the successful and sound 

operation of these enterprises. The failure of Board governance and oversight of banking organizations was a major contributor to the financial crisis. The ability to attract and retain high-quality 

talent on Boards, as well as consistent principles that promote discipline and accountability, are 

important components of a successful governance model for banking organizations. 

Treasury has identified several areas in which regulators’ expectations of Boards should be reformed. 

Regulatory expectations of Boards suffer from a number of limitations, including the following: 

they may, in some instances, crowd out critical functions that Boards and Board Committees should 

play; blur the responsibilities between the Board and management; and impose a “one-size-fits-all” 

approach, which places a particular burden on mid-sized and community financial institutions.
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Boards should be held to the highest standards when developing and implementing comprehensive 

regulatory compliance procedures and should in turn hold management to the same standards. This 

would, of course, involve Boards engaging with regulators and reviewing significant regulatory actions 

and complaints. At the same time, Treasury recommends an inter-agency review of the collective 

requirements imposed on Boards in order to reassess and better tailor these aggregate expectations 

and restore balance in the relationship between regulators, Boards, and bank management.

Treasury endorses rigorous regulatory procedures and accountability in the regulation of depository 

institutions. However, some rebalancing of the volume of regulatory actions based on materiality 

and the nature of required remediation may be warranted. A modified regulatory approach could 

restore more accountability on the part of Boards and management teams. This modified approach 

might focus more on regulatory coordination, along with supervisory guidance and recommendations, in lieu of overly prescriptive actions requiring specific remediation, such as matters requiring 

immediate attention. Regulators and banking organizations should develop an improved approach 

to addressing and clearing regulatory actions in order to limit the sustained and unnecessary 

restriction of banking activities and services provided to customers.

Enhancing Use of Regulatory Cost-Benefit Analysis

While Congress has imposed discrete cost-benefit analysis requirements on independent financial 

regulatory agencies – including the CFTC, SEC, FDIC, Federal Reserve, OCC, and CFPB – 

these agencies have long been exempt from Executive Order 12866 (discussed below). As a result, 

the financial regulators have not adopted uniform and consistent methods to analyze costs and 

benefits, and their cost-benefit analyses have sometimes lacked analytical rigor. Federal financial 

regulatory agencies should follow the principles of transparency and public accountability by conducting rigorous cost-benefit analyses and making greater use of notices of proposed rulemakings 

to solicit public comment. In particular, Treasury recommends that financial regulatory agencies 

perform and make available for public comment a cost-benefit analysis with respect to at least all 

“economically significant” proposed regulations, as such term is used in Executive Order 12866. 

Such analysis should be included in the administrative record of the final rule. 

Encouraging Foreign Investment in the U.S. Banking System

Treasury considers foreign investment in the U.S. banking system to be an aid to diversifying the 

risk of the financial system and propelling economic growth. Among other reasons, such investment and related connection back to the home jurisdiction of these banks can frequently enhance 

a bridge of further foreign corporate investment in the United States. 

The application of U.S. enhanced prudential standards to foreign banking organizations (FBOs) 

should be based on their U.S. risk profile, using the same revised threshold as is used for the 

application of the enhanced prudential standards to U.S. bank holding companies, rather than on 

global consolidated assets.

Treasury supports the continuation of the Federal Reserve’s intermediate holding company (IHC) 

regime to promote consolidated prudential supervision over FBOs’ U.S. banking and non-banking 

activities (including investment banking and securities dealing) and the application of the TLAC 

rule to improve the resolvability of G-SIBs. However, changes to the current framework should 
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Executive Summary • Summary of Recommendations for Regulatory Reform 

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be considered to encourage foreign banks to increase investment in U.S. financial markets and 

provide credit to the U.S. economy. 

Consistent with the thresholds recommended for U.S. BHCs, Treasury recommends that the 

threshold for IHCs to comply with U.S. CCAR be raised from the current $50 billion level to 

match the revised threshold for the application of enhanced prudential standards, subject to the 

ability of the Federal Reserve to impose these requirements on smaller IHCs in cases where the 

potential risks posed by the firm justify the additional requirements. 

Treasury recommends that the Federal Reserve review the recalibration of the internal TLAC 

requirement. In assessing the appropriate calibration, the Federal Reserve should consider the foreign parent’s ability to provide capital and liquidity resources to the U.S. IHC, provided arrangements are made with home country supervisors for deploying unallocated TLAC from the parent, 

among other factors.

Other IHC regulatory standards, such as living wills and liquidity, should also be recalibrated. In 

considering such a recalibration, greater emphasis should be given to the degree to which home 

country regulations are comparable to the regulations applied to similar U.S. BHCs. Where regulations are sufficiently comparable, FBOs should be allowed to meet certain U.S. requirements 

through compliance with home country regimes.
Background
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Background • The U.S. Depository System

21

The U.S. Depository System

Introduction

The U.S. banking system is the largest and most diverse in the world. Currently in the United States 

there are approximately 5,900 regulated banks that range in size from a few million dollars in assets 

to well over two trillion dollars in assets.1 There are also approximately 5,800 credit unions with total 

assets of $1.3 trillion.2 Regulated depository institutions held total assets of almost $21.4 trillion dollars in 2016, or 115% of GDP.3

 The U.S. banking system is estimated to employ almost 2.8 million 

Americans and is indispensable to producing long-term economic growth.4

The U.S. banking system provides a secure way for consumers and businesses to store deposits. It 

is a primary conduit for capital markets activities, and a source of credit for consumer mortgages, 

credit cards, auto loans, small business, and commercial lending. The banking system facilitates 

the free flow of capital domestically and globally. Recent research indicates that debit card, credit 

card, ACH, and check payments facilitated through the U.S. banking system amounted to over 

144 billion payment transactions in 2015 with a value of almost $178 trillion.5

Key Segments

The U.S. banking system is composed of a diverse set of banking organizations that provide critical 

financial services to the U.S. economy, local communities and regions, and to the global financial 

system. The key segments of the banking system can be grouped as follows:

• The largest, most complex banks are the G-SIBs, identified as such through the U.S. and 

international G-SIB score methodology; 

• Regional banks are BHCs or banks with more than $50 billion in assets and that are not 

among the G-SIBs defined above;6

• Mid-sized banks are BHCs or banks with $10 to $50 billion in assets; 

• Community banks are BHCs or banks with less than $10 billion in assets; 

• Foreign banking organizations participate in the U.S. banking system through investments or ownership positions across this array of segments as well as through their U.S. 

branches and agencies; and

• Credit unions are member-owned financial cooperatives that serve designated communities. 

1. SNL Financial Data on all U.S. Depositories filing Call Reports. SNL Financial, May 2017 (SNL Data).

2. National Credit Union Administration. “Industry at a Glance,” (Dec. 31, 2016), available at: www.ncua.gov/

analysis/Pages/industry/at-a-glance-dec-2016.pdf.

3. SNL Data. 

4. Id. 

5. Board of Governors of the Federal Reserve System. “The Federal Reserve Payments Study 2016”, (Feb. 16, 

2017), available at: www.federalreserve.gov/paymentsystems/files/2016-payments-study-20161222.pdf.

6. This definition of regional banks will include large internationally active banks (i.e. banking organizations with more 

than $250 billion in assets or more than $10 billion in on-balance sheet foreign exposure) that are not G-SIBs.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

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G-SIBs

U.S. G-SIBs, eight firms in total, have $10.7 trillion in assets, comprising almost 50% of domestic banking assets, and play an important role in capital markets intermediation domestically 

and globally.7

U.S. G-SIBs’ financial results have recovered since the financial crisis and benefit from their size, 

geographic scope, diverse client base, and revenue sources. Capitalization rates have improved 

since the financial crisis, and the range of Tier 1 Common Equity ratios at the G-SIBs stands 

between 10 and 16% of risk-weighted assets. As of the fourth quarter of 2016, these institutions 

produced returns on equity between 6% and 12%.8

Regional and Mid-sized Banks

Regional and mid-sized banks, as defined here, hold $5.3 trillion in assets (25% of industry assets) 

and $1.4 trillion in assets (6% of industry assets), respectively.9 These institutions generally have 

balance sheets and business models that are more closely aligned with lending and deposit taking. 

There are approximately 90 institutions in these two groups.

Regional and mid-sized banks’ results have generally recovered in recent years like the G-SIBs. 

Capitalization rates and asset quality performance have continued to improve during the post-crisis 

recovery in line with industry-wide trends. The unusually low interest rate environment and significantly increased regulatory burden arising from the implementation of Dodd-Frank has had an 

effect on performance of regional and mid-sized banks.10 In particular, asset thresholds used to apply 

regulatory requirements, especially Dodd-Frank’s $10 billion threshold for applying stress tests and 

$50 billion threshold for applying enhanced prudential standards, have created barriers that have 

deterred regional and mid-sized banks from expanding their operations. Treasury is concerned that 

such thresholds are limiting competition against the largest institutions and, consequentially, may be 

contributing to the solidification of the market position of the largest institutions. 

Community Banks

Community banks hold $2.7 trillion or 13% of industry assets and are providers of local banking 

services to communities across America. These banks employ business models that are concentrated in local real estate, consumer, and small business lending. Community banks are generally 

funded, owned, and operated locally. There are approximately 5,500 such banks in the United 

States today.11

7. SNL Data. This information is consolidated for top-tier bank holding companies (BHCs) and standalone 

banks not controlled by a BHC parent. 

8. SNL Data.

9. Due to rounding, numbers may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.

10. See Bouwman, Christa H.S., Hu, Shuting (Sophia), Johnson, Shane A., Differential Bank Behaviors 

around the Dodd-Frank Act Size Thresholds (May 25, 2017), available at: https://ssrn.com/

abstract=2974235. See also Baily, Martin N., Holmes, Sarah E., The regional banks: The evolution of the financial sector, Part II (Aug. 13, 2015), available at: https://www.brookings.edu/research/

the-regional-banks-the-evolution-of-the-financial-sector-part-ii/.

11. SNL Data. 
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Among community banks, there is a subset of institutions (less than 1%) designated as Community 

Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs) by 

Treasury12 and FDIC,13 respectively. CDFIs and MDIs operate under the same business models 

as community banks; however, they are often considered a distinct sector of the banking industry 

because of their CDFI/MDI designations. CDFIs and MDIs are often the only source of credit and 

financial services in impoverished urban and rural low- and moderate-income areas with limited 

access to the banking system. As of the fourth quarter 2016, the median asset size of a CDFI and 

MDI was $240 million and $263 million, respectively.14

While the generally positive post-crisis trends in capitalization rates and stronger asset quality 

extend to many community banks, the increased regulatory burden imposed since the implementation of Dodd-Frank has had a disproportionate impact on the competitiveness and viability 

of community banks as reflected in the sustained decline in number of institutions. FDIC data 

shows that the number of federally insured banks declined from 17,901 banks in 198415 to 5,913 

banks in 2016.16 While many factors may contribute to this long-term trend, regulatory burden is 

certainly a contributing factor. At the same time, de novo applications for new bank charters are 

at all-time lows. 

Community banks disproportionately serve the needs of the nation’s small businesses and rural 

communities, accounting for 43% of all small loans to businesses and 90% of agriculture loans.17

Credit Unions

Credit union charters are granted by federal or state governments, and the credit union system is 

comprised of approximately 5,800 credit unions with assets totaling $1.3 trillion. 95% of credit 

unions in the system have assets of less than $1 billion.18

Currently, the credit union system is very well capitalized, with the aggregate net worth ratio 

(equivalent to bank leverage ratio) of approximately 11%. However, the number of credit unions 

12. Banks certified as CDFIs by Treasury’s CDFI Fund are institutions that must demonstrate that at least 60% 

of total lending, services, and other activities serve a community or targeted population of individuals who 

are low-income persons or lack adequate access to financial products or services.

13. The FDIC deems an institution as a MDI according to either: (1) a concentration of ownership among members of a certain minority group, or (2) a concentration of board membership among that minority group by 

an institution that primarily serves that minority group. The FDIC classifies MDIs based on minority status as 

African American, Asian American, Hispanic American, multi-racial, and Native American.

14. Treasury analysis; FDIC call report data, Fourth Quarter 2016.

15. Federal Deposit Insurance Corporation. “FDIC Community Banking Study 2012”. Dec. 2012, available at: 

www.fdic.gov/regulations/resources/cbi/report/cbi-full.pdf.

16. FDIC Quarterly Banking Report on all FDIC-insured institutions. 

17. Federal Deposit Insurance Corporation. “Community Bank Performance: Fourth Quarter 2016”. (Feb. 28, 

2017), available at: www.fdic.gov/bank/analytical/qbp/2016dec/qbpcb.html.

18. National Credit Union Administration. Call Report Quarterly Summary Reports. Dec. 2016. available at: 

https://www.ncua.gov/analysis/Pages/call-report-data/Reports/PACA-Facts/paca-facts-2016-12.pdf.
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Background • The U.S. Financial Regulatory Structure

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has declined by approximately 18% since 2011.19 Consolidation is largely seen as a long-term 

trend with the decline concentrated in small credit unions.20

Foreign Banking Organizations

FBOs are foreign banks, including all banking and nonbanking subsidiaries, which have a U.S. presence generally through controlling investments in U.S. banks or BHCs, or that operate U.S. branches 

or agencies. Collectively, the U.S. operations of FBOs have total assets that exceed $4.5 trillion.21

The U.S. Financial Regulatory Structure

Overview of Federal and State Regulators

The eight major U.S. federal financial regulators can be categorized into those focused on prudential banking regulation promoting safety and soundness, including the Federal Reserve, FDIC, 

OCC, and NCUA; those focused on financial markets, including the SEC and the CFTC; one 

focused on housing finance, the FHFA; and one focused on consumer financial protection, the 

CFPB. Additionally, self-regulatory organizations help regulate and oversee certain parts of the 

financial sector, including the Financial Industry Regulatory Authority (FINRA), the Municipal 

Securities Rulemaking Board (MSRB), and the National Futures Association (NFA). Insurance is 

primarily regulated at the state level. 

Federal Banking Regulators

The Board of Governors of the Federal Reserve System (Federal Reserve)

The Federal Reserve serves a central role in the financial system overseeing monetary policy through 

the Federal Open Market Committee as well as operating, through the Federal Reserve Banks, key 

components of the payment, clearing, and settlement system. It also regulates BHCs, savings and 

loan holding companies, state-chartered member banks, and nonbank financial companies designated by the FSOC for Federal Reserve supervision. The Federal Reserve’s mission also includes 

maintaining the stability of the financial system.

While the Federal Reserve regulates and supervises all BHCs on a consolidated basis, it generally defers to the functional regulator of a BHC’s subsidiary on matters related to that specific 

subsidiary. Federal Reserve supervision is generally conducted by the Federal Reserve Banks acting 

under delegated authority, though the Federal Reserve also directly supervises firms within its 

Large Institution Supervision Coordinating Committee (LISCC) framework22

19. Id.

20. National Association of Federal Credit Unions. 2016 NAFCU Report on Credit Unions. Nov. 2016, available 

at: https://www.nafcu.org/research/reportoncreditunions/. 

21. SNL Data; see also Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks per Federal 

Reserve as of 2016, available at: https://www.federalreserve.gov/econresdata/releases/assetliab/current.htm.

22. Federal Reserve, Large Institution Supervision Coordinating Committee, July 2016, available at:

www.federalreserve.gov/bankinforeg/large-institution-supervision.htm.
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Dodd-Frank required the Federal Reserve to establish enhanced prudential standards for large U.S. 

BHCs and for certain U.S. operations of foreign banking organizations, as well as for nonbank 

financial companies designated by the FSOC. The Federal Reserve is one of the five agencies 

responsible for implementing the Volcker Rule, the Qualified Residential Mortgage Rule, and 

other agency rules. It also administers stress tests for BHCs and, in conjunction with the FDIC, 

reviews the living wills of large BHCs and FSOC-designated nonbank financial companies. 

Federal Deposit Insurance Corporation (FDIC) 

The FDIC works to maintain stability and public confidence in the nation’s financial system by 

insuring deposits, examining and supervising financial institutions for safety and soundness and 

consumer protection, working to make large and complex financial institutions resolvable, and 

acting as receiver of failed banks. The FDIC is the primary federal regulator for state-chartered 

banks that are not members of the Federal Reserve System, and has authority to monitor and 

conduct examinations at insured depository institutions where it is not the primary regulator. The 

FDIC is appointed receiver for all insured depository institution failures.

The agency was mandated by Dodd-Frank to issue rules covering, among other things, the Volcker 

Rule, living wills, and Title II orderly liquidation authority implementation, and to work with the 

other financial regulatory agencies regarding capital, liquidity, and stress-testing. 

Office of the Comptroller of the Currency (OCC) 

The OCC charters, regulates, and supervises all national banks and federal savings associations as 

well as federal branches and agencies of foreign banks.

The agency was mandated by Dodd-Frank to work with the other financial regulatory agencies to 

enact rules covering credit risk retention for asset-backed securitizations, capital, liquidity, stress 

testing, the Volcker Rule, and executive incentive compensation. Title III of Dodd-Frank abolished the Office of Thrift Supervision and transferred the supervision and regulation of federally 

chartered savings associations to the OCC.

National Credit Union Administration (NCUA) 

The NCUA promotes safety and soundness by regulating and supervising the credit union system, 

which provides confidence in the national system of cooperative credit and protects consumer 

rights and member deposits. The NCUA charters, regulates, and supervises federal credit unions. 

The NCUA also administers the National Credit Union Share Insurance Fund, which provides 

deposit insurance for deposit accounts of all federal and most state-chartered credit unions. 

Under Dodd-Frank, the NCUA is one of several regulators tasked with writing new executive 

incentive-based compensation rules. The NCUA has also implemented a stress testing rule for 

credit unions with more than $10 billion in assets.

Other Federal Regulators

Consumer Financial Protection Bureau (CFPB) 

Created by Dodd-Frank, the CFPB regulates the offering and provision of consumer financial products and services under federal consumer financial laws, develops consumer education initiatives, 
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Background • The U.S. Financial Regulatory Structure

26

and researches and monitors the market for financial services. The CFPB has supervisory and 

enforcement authority over: 1) banks, thrifts, and credit unions with assets over $10 billion, as 

well as their affiliates, 2) all nonbank residential mortgage originators, brokers, and servicers, 3) 

all payday lenders, 4) all nonbank private student lenders, 5) larger participants in markets for 

other consumer financial products or services as determined by CFPB rulemaking, and 6) other 

firms where the CFPB has reasonable cause to determine their conduct poses risks to consumers 

related to the offering or provision of consumer financial products or services. Authority over 18 

enumerated federal consumer financial laws, which was previously divided among seven agencies, 

was consolidated within the CFPB under Dodd-Frank. Dodd-Frank specifically granted the CFPB 

authority to write and enforce rules covering, among other things, mortgage lending and servicing, 

unified mortgage disclosures, and the prohibition on UDAAP. 

Federal Housing Finance Agency (FHFA)

The FHFA is responsible for the oversight of components of the secondary mortgage markets—the 

government-sponsored enterprises of Fannie Mae, Freddie Mac, and the Federal Home Loan Bank 

System. Since 2008, FHFA has been the conservator of Fannie Mae and Freddie Mac.

The FHFA was mandated by Dodd-Frank to enact specified joint rules with other agencies on 

topics such as mortgage originator compensation, mortgage risk retention, appraisal requirements, 

and stress testing. 

State Banking Regulators

All 50 states, the District of Columbia, and U.S. territories have banking regulators that supervise approximately 5,000 depository institutions with aggregate assets of more than $4.9 trillion. 

Insured state depository institutions are also subject to supervision and regulation by the FDIC, 

and state depository institutions that elect to become members of the Federal Reserve System are 

also subject to supervision and regulation by the Federal Reserve. 

The states also supervise most non-depository financial institutions, including mortgage loan originators and servicers, consumer finance companies, payday lenders, and money service businesses. 

As part of their non-depository authority, many state regulators supervise financial institutions in 

the growing financial technology sector. Currently, state regulators license approximately 16,000 

mortgage companies and more than 138,000 non-depository financial institutions.

Markets Regulators

Commodity Futures Trading Commission (CFTC) 

The CFTC was established in 1974 as an independent federal regulatory agency with exclusive 

jurisdiction over the markets for commodity futures and options on futures. The Commodity 

Exchange Act is the federal law governing futures markets and the CFTC’s authorities. Though 

originally focused on agricultural commodity futures contracts, the CFTC’s jurisdiction also 

extends to futures contracts on energy products, metals, financial assets and indexes, interest rates, 

and other financial, commercial, or economic contingencies. In 2010, Dodd-Frank amended the 

Commodity Exchange Act to expand the CFTC’s jurisdiction to include swaps and implement the 

Volcker Rule. 
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Background • The U.S. Financial Regulatory Structure

27

The CFTC’s mission is to foster open, transparent, competitive, and financially sound markets 

to avoid systemic risk and to protect market users and their funds, consumers, and the public 

from fraud, manipulation, and abusive practices related to derivatives and other products that 

are subject to the Commodity Exchange Act.23 To promote market integrity, the CFTC polices 

the markets and participants under its jurisdiction for abuses and brings enforcement actions. 

The CFTC oversees industry self-regulatory organizations, including traditional organized futures 

exchanges or boards of trade known as designated contract markets. The CFTC also registers and 

oversees other market entities such as swap execution facilities, derivatives clearing organizations, 

and swap data repositories. Further, the CFTC requires registration of market intermediaries and 

their personnel, including swap dealers, futures commission merchants, introducing brokers, commodity pool operators, and commodity trading advisors.

Securities and Exchange Commission (SEC) 

The SEC’s mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate 

capital formation. Broadly, the SEC has jurisdiction over brokers and dealers, securities offerings 

in the primary and secondary markets, investment companies, investment advisers, credit rating 

agencies, and security-based swap dealers.

The SEC was mandated by Dodd-Frank to enact rules in areas including registration of certain 

private funds (hedge funds and private equity funds), the Volcker Rule, security-based swaps, clearing agencies, municipal securities advisors, executive compensation, proxy voting, asset-backed 

securitizations, credit rating agencies, and specialized disclosures. 

Self-regulatory Organizations 

Financial Industry Regulatory Authority (FINRA)

FINRA’s mission is to provide investor protection and to promote market integrity through effective and efficient regulation of its member broker-dealers. It has responsibility for overseeing securities markets and their members, establishing the standards under which their members conduct 

business, monitoring business conduct, and bringing disciplinary actions against members for 

violating applicable federal statutes, SEC rules, and FINRA rules.24

Municipal Securities Rulemaking Board (MSRB)

The mission of the MSRB is to protect investors, state and local government issuers, other municipal entities and the public interest by promoting a fair and efficient municipal market through (i) 

the establishment of rules for dealers and municipal advisors, (ii) the collection and dissemination 

of market information, and (iii) market leadership, outreach, and education.25 The MSRB develops 

23. CFTC, Agency Financial Report, Fiscal Year 2016, available at: http://www.cftc.gov/idc/groups/public/

@aboutcftc/documents/file/2016afr.pdf.

24. GAO. Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness (Complex and 

Fragmented Structure) (Feb. 2016) at 22, available at: www.gao.gov/assets/680/675400.pdf.

25. Id. at 23. 
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Background • Regulatory Structure and Issues of Regulatory Duplication, Overlap, and Fragmentation

28

rules for broker-dealers engaged in underwriting, trading, and selling municipal securities with the 

goals of protecting investors and issuers and promoting a fair and efficient marketplace.26

National Futures Association (NFA)

The NFA is a self-regulatory organization whose mission is to provide regulatory programs and 

services that ensure futures industry integrity, protect market participants, and help NFA members 

meet their regulatory responsibilities. The NFA establishes and enforces rules governing member 

behavior including futures commission merchants, commodity pool operators, commodity trading 

advisors, introducing brokers, designated contract markets, swap execution facilities, commercial 

firms, and banks.27

Regulatory Structure and Issues of Regulatory 

Duplication, Overlap, and Fragmentation

Regulatory Fragmentation, Overlap, and Duplication 

A strong financial regulatory framework is vital to promote economic growth and financial stability, 

and to protect the safety and soundness of U.S. financial institutions. Regulatory fragmentation, 

overlap, and duplication, however, can lead to ineffective regulatory oversight and inefficiencies 

that are costly to the taxpayers, consumers, and businesses. Significant opportunities exist to rationalize and streamline the U.S. regulatory framework. Doing so could both improve the efficacy of 

the regulatory framework and also facilitate saving and increase investment in the economy.

The U.S. financial regulatory system has developed over more than 150 years through a series of 

incremental legislative and policy actions in response to financial crises and market developments. 

While reforms have eliminated some regulatory agencies, they have also created new ones. The 

financial regulatory structure is fragmented among regulators with varying missions, including 

safety and soundness, consumer protection, securities and derivatives markets regulation, insurance 

supervision, and systemic risk oversight. This fragmentation results in overlapping and duplicative 

mandates and could benefit from streamlining and coordination. 

In 2016, the Government Accountability Office (GAO) released a report in which it reviewed the 

current financial regulatory structure and the effects of fragmentation and overlap.28 The GAO 

found that the existing regulatory structure does not always ensure (1) efficient and effective oversight, (2) consistent financial oversight, and (3) consistent consumer protections. Specifically, the 

report concluded that significant fragmentation, overlap, and duplication exist within the regulatory framework.

26. Id.

27. Id. at footnote 32.

28. GAO, Complex and Fragmented Structure. The GAO defined fragmentation, overlap, and duplication as 

follows: (1) fragmentation: more than one federal agency is involved in the same broad area of need and 

opportunities exist to improve service delivery; (2) overlap: multiple agencies have similar goals, engage in 

similar activities or strategies, or target similar beneficiaries; and (3) duplication: two or more agencies or 

programs are engaged in the same activities or provide the same services to the same beneficiaries.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Background • Regulatory Structure and Issues of Regulatory Duplication, Overlap, and Fragmentation

29

Note: This figure depicts the primary regulators in the U.S. financial regulatory structure, as well as their primary oversight responsibilities. “Regulators” generally refers to entities that have rulemaking, 

supervisory, and enforcement authorities over financial institutions or entities. There are additional agencies involved in regulating the financial markets and there may be other possible regulatory connections 

than those depicted in this figure. A list of acronyms is available on page iv. Source: GAO GAO-16-175

Figure 1: U.S. Financial Regulatory Structure, 2016

Board of Governors of the

Federal Reserve System

FDIC

OCC

NCUA

State Banking Regulators

State Securities Regulators

State Insurance Regulators

FTC

CFPB

FHFA

SEC

CFTC

FINRA

MSRB

NFA

REGULATED ENTITIES

REGULATORS

Depository

institutions

Insurance

companies

Nondepository 

Institutions that offer 

consumer financial 

products or services

Broker-dealers or 

other securities and 

derivatives markets 

intermediaries

Investment companies, 

investment advisers, or 

municipal advisors

Fannie Mae, Freddie 

Mac, and Federal Home 

Loan Banks

Financial market

utilities and other 

infrastructures

Consolidated supervision or systemic risk-related oversight Insurance oversight

Securities and derivatives markets oversight Housing finance oversight

Consumer financial protection oversight

Financial Stability Oversight Council member agency

Safety and soundness oversight
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Background • Regulatory Structure and Issues of Regulatory Duplication, Overlap, and Fragmentation

30

There are numerous examples of overlap in the depository regulatory framework. For example, 

state and federal regulators (including the FDIC and the Federal Reserve) share oversight of the 

safety and soundness of state-chartered banks. As another example, as administrator of the Deposit 

Insurance Fund, the FDIC has backup supervisory authorities over all banks and thrifts that are 

federally insured. Thus, there is overlap between the FDIC, the Federal Reserve, the OCC, and 

state banking regulators regarding supervisory responsibilities. For credit unions, there are elements 

of overlap between the NCUA, as consolidated regulator, and the CFPB and state regulators. These 

areas of overlap can create confusion and increased costs for supervised entities, as well as increased 

burdens for the regulatory agencies themselves. Although Dodd-Frank created the CFPB in part to 

rectify the fragmentation of authority among regulators with respect to consumer financial protection, its authority on such matters is not unique and is duplicative with the supervisory activities 

of the Federal Reserve, OCC, FDIC, NCUA, and state regulators.

In light of this regulatory fragmentation, enhanced coordination among federal and state agencies 

is vital. There are numerous examples of regulators’ current efforts to coordinate. For example, as 

the GAO noted, the federal banking regulators, CFPB, and state banking regulators coordinate 

through the Federal Financial Institutions Examination Council.29 Further, the Riegle Community 

Development and Regulatory Improvement Act of 1994 requires the prudential regulators to 

coordinate examinations. The Federal Reserve, FDIC, and Conference of State Bank Supervisors 

(a non-governmental association of state regulators) executed an agreement aimed at providing 

a seamless supervisory process and minimizing regulatory burden.30 In addition, in 2013, the 

Conference of State Bank Supervisors and the CFPB developed a supervisory coordination framework that established a process for how state regulators and the CFPB will share supervision of nondepository financial services providers and state-chartered depository institutions with more than 

$10 billion in assets.31 The FSOC also provides a forum for regulators to convene and collaborate. 

Further, cybersecurity is addressed among a broad group of federal and state regulators through 

the Financial and Banking Information Infrastructure Committee (FBIIC). While these efforts 

have increased the amount of coordination among the regulators, improved coordination and 

streamlining are necessary to ensure the efficiency and effectiveness of the regulatory framework.

Opportunities for Reform

Treasury recommends that Congress take action to reduce fragmentation, overlap, and duplication in 

financial regulation. This could include consolidating regulators with similar missions and more clearly 

defining regulatory mandates. Increased accountability for all regulators should be achieved through 

oversight by an appointed board or commission, or in the case of a director-led agency, appropriate 

control and oversight by the Executive Branch, including the right of removal at will by the President.

The statutory mandate of the FSOC should be broadened so that it can assign a lead regulator as 

primary regulator on issues where multiple agencies may have conflicting and overlapping regulatory jurisdiction. This new authority would allow the FSOC to play a larger role in the coordination 

29. Id at 40. 

30. Id. at 41.

31. Id. 
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Background • Regulatory Structure and Issues of Regulatory Duplication, Overlap, and Fragmentation

31

and direction of regulatory and supervisory policies. The FSOC should also be reformed to further 

facilitate information sharing and coordination among the member agencies regarding financial 

services policy, rulemaking, examinations, reporting, and enforcement. 

The Office of Financial Research was created by Dodd-Frank, in part, as an independent resource to 

support the FSOC and its members in advancing the FSOC’s financial stability mission. Congress 

should reform the structure and mission of the Office of Financial Research to improve its effectiveness and to ensure greater accountability. As part of this assessment, Treasury recommends 

that the OFR become a functional part of Treasury, with its Director appointed by the Secretary, 

without a fixed term and subject to removal at will, and that the budget of OFR come under the 

control of the Treasury appropriation and budget process.

Cyber-Security Regulatory Overlap

Technology is a critical feature of the U.S. financial markets and plays an integral 

role in the operations of financial institutions. Given the increasingly important role 

of technology, the possibility exists for new vulnerabilities and risks of operational 

disruption in the financial sector due to a cyber incident. Thus, cybersecurity is a 

critical component of financial regulation. In cybersecurity, financial institutions share 

the same goal as regulatory agencies: maintaining the safety and soundness of the 

financial system by mitigating and protecting financial institutions and the sector 

from cybersecurity risks.

Better coordination on cybersecurity regulation is needed to achieve this goal and 

enhance the resiliency of the sector. Given the risk of fragmentation and overlap, 

Treasury recommends that federal and state financial regulatory agencies establish 

processes for coordinating regulatory tools and examinations across sub-sectors. 

Furthermore, these efforts can serve as a foundation for additional necessary work.

Treasury recommends that further coordination should occur on two fronts. First, 

financial regulatory agencies should work to harmonize regulations, including 

using a common lexicon. Second, financial regulators should work to harmonize 

interpretations and implementation of specific rules and guidance around cybersecurity. For example, currently, there may be a risk of overlap in requirements for 

the various sub-market segments where some financial regulatory agencies have 

each finalized differing cybersecurity requirements that impact the same financial 

institutions. Coordination around these two important aspects of cybersecurity 

regulation will enable additional efficiencies in staffing personnel and resources 

related to regulatory compliance and oversight.

This additional work will be aided by ongoing activities among financial regulators 

through the Financial and Banking Information Infrastructure Committee (FBIIC). The 

FBIIC is a public sector body consisting of 18 federal agencies and state member 

organizations from across the financial regulatory community charged with coordinating efforts to improve the reliability and security of the financial sector infrastructure.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Background • The Dodd-Frank Act

32

Finally, the agencies should work together to increase coordination of supervision and examination 

activities. The agencies should also consider coordinating enforcement actions such that only one 

regulator leads enforcement related to a single incident or facts or set of facts.

The Dodd-Frank Act

The U.S. Financial Crisis

The financial crisis that engulfed the U.S. economy in 2008 was initially precipitated by weaknesses in U.S. housing prices, an increase in mortgage delinquencies, and plummeting values of 

mortgage-backed securities (MBS), particularly those backed by sub-prime mortgages. Major 

developments during 2008 included: the merger of Bear Stearns with JPMorgan Chase, facilitated 

by an emergency financing package provided by the Federal Reserve Bank of New York; the placing 

of the two mortgage GSEs, Fannie Mae and Freddie Mac, into conservatorship by the FHFA; the 

bankruptcy of Lehman Brothers; and the extension of substantial government assistance to AIG.

As the financial crisis expanded from the mortgage sector into a system-wide liquidity crisis, the 

U.S. government responded with significant administrative and legislative interventions. The 

Federal Reserve developed numerous financing facilities across a wide range of asset classes and 

implemented a significant GSE MBS purchase program (following Treasury’s GSE MBS Purchase 

Program).32 Congress approved the $700 billion Troubled Asset Relief Program (TARP), which 

was primarily deployed in the form of capital investment in U.S. banks and non-bank financial 

institutions.33 The FDIC introduced a debt guarantee program for depository institution holding 

companies, insured depository institutions, and affiliates.34 In 2008 and 2009, economic stimulus 

packages were instituted totaling more than $1 trillion.

In 2009, the Federal Reserve and the other federal banking agencies completed a large bank stress 

test to assess the adequacy of capital in the system. This became a prelude to subsequent stresstesting regimes to assess capital adequacy under adverse and severely adverse scenarios.

In the summer of 2009, the Administration issued a legislative reform plan that would later serve 

as a basis for legislation. After significant congressional revisions, President Obama signed DoddFrank into law on July 21, 2010.35

Overview of Key Objectives of Dodd-Frank

Dodd-Frank is enormous in its scale, reach, and complexity. Much of this report evaluates the 

structure and effectiveness of portions of Dodd-Frank, relative to both its objectives and the nature 

of its implementation, which has unfolded for nearly seven years since enactment.

32. See Federal Reserve, Agency Mortgage-Backed Securities (MBS) Purchase Program (Feb. 12, 2016), 

available at: www.federalreserve.gov/regreform/reform-mbs.htm. 

33. See generally 12 U.S.C. §§ 5211–5241. 

34. See e.g. FDIC, Temporary Liquidity Guarantee Program (Feb. 27, 2013), available at: www.fdic.gov/regulations/resources/tlgp/index.html. 

35. Pub. L. No. 111-203, 124 Stat. 1376-2223 (2010).
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Background • The Dodd-Frank Act

33

Given its scale, it is difficult to summarize the totality of Dodd-Frank. The key characteristics of 

Dodd-Frank most relevant to the scope of this report include the following:

• Mitigation of Systemic Risk

Dodd-Frank established the FSOC for the oversight of systemic risks.36 Among other 

responsibilities and authorities, the FSOC can designate nonbank financial companies for 

Federal Reserve supervision,37 and can designate financial market utilities as systemically 

important.38 Dodd-Frank also required the Federal Reserve to adopt enhanced prudential 

standards for U.S. BHCs having total assets of at least $50 billion, along with certain 

foreign banking organizations and designated nonbank financial companies.39 Among 

other elements, these banking organizations are subject to DFAST.40 These standards also 

provide for higher capital and liquidity requirements to decrease both the incidence and 

severity of the failure of a large, complex financial institution. Dodd-Frank established 

the OFR in part to support the FSOC and its member agencies.41

• Resolution Planning

Dodd-Frank established the Dodd-Frank Title I framework for a resolution planning 

process at certain financial companies, which included the development of “living 

wills,”42 and the Orderly Liquidation Authority in Dodd-Frank Title II.43

• Creation of the CFPB

The CFPB was created as an independent bureau in the Federal Reserve System44 to have 

primary regulatory authority for consumer financial products and services under federal 

laws, including supervisory and enforcement authority with respect to federal consumer 

financial laws over insured banks, thrifts, and credit unions having assets over $10 billion.45

In light of the significant role that residential mortgage lending played in contributing to 

the crisis, the CFPB also has authority over all non-bank residential mortgage originators, 

brokers and servicers.46 Dodd-Frank also establishes several elements of structural reform of 

mortgage finance standards and establishes federal standards in this area. 

• Volcker Rule

Dodd-Frank includes the Volcker Rule,47 which prohibits banking entities from engaging in 

proprietary trading and limits investment in certain hedge funds and private equity funds. 

36. Dodd-Frank §§ 111(a), 112.

37. Id. at § 113. 

38. Id. at § 804(a).

39. Dodd-Frank § 165(a).

40. Id. at (i)(2).

41. Dodd-Frank § 152.

42. Id. at § 165(d)(1). 

43. Id at § 204. 

44. Id. at § 1011(a).

45. Id. at § 1025.

46. Id. at § 1024.

47. Id. at § 619.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Background • The Dodd-Frank Act

34

• Central Clearing of Swaps and Derivatives

Dodd-Frank requires the exchange trading and clearing of certain derivatives that were 

previously traded on an over-the-counter basis.48 The law also increased the reporting 

requirements for such trading through repositories and required the registration of 

certain previously unregistered market participants.49 Central counterparties can be designated systemically important by the FSOC, which results in additional risk-management 

standards and potential access to the Federal Reserve discount window.50

• Investor Protections

Dodd-Frank addressed numerous investor protection concerns that arose during the 

financial crisis, including reform of the credit rating agencies.51

• Elimination of the Office of Thrift Supervision

Dodd-Frank eliminated the Office of Thrift Supervision and transferred its duties to 

the OCC, the Federal Reserve, and the CFPB.52 This reorganization made the Federal 

Reserve the consolidated regulator of savings and loan holding companies with insurance 

company subsidiaries.53

Dodd-Frank significantly changed the federal financial regulatory landscape, imposed new requirements on a broad array of U.S. financial institutions, prescribed more than 390 agency rulemaking 

requirements, and mandated 67 studies by various federal entities.54 The net result of Dodd-Frank 

has been the largest and most complex increase in financial regulation in modern times. 

Much of this report explores the impact of Dodd-Frank. Among other things, this report finds 

that Dodd-Frank has increased the burden of regulatory compliance without adequate cost-benefit 

analysis and that Dodd-Frank has prolonged the moral hazard arising from regulations that could 

lead to taxpayer-funded bailouts.

48. See Dodd-Frank §§ 721-74. 

49. See 7 U.S.C. § 6s(a); see also 15 U.S.C. § 78o-10(a).

50. Dodd-Frank § 804(a). 

51. See, e.g., Dodd-Frank §§ 932, 935, 939.

52. Dodd-Frank §§312-3.

53. Dodd-Frank §606.

54. See: Davis Polk, Dodd-Frank Progress Report (July 19, 2016) at 2, available at: www.davispolk.com/

files/2016-dodd-frank-six-year-anniversary-report.pdf.
Findings and Recommendations
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Findings and Recommendations • Capital and Liquidity

37

IMPROVING THE EFFICIENCY

OF BANK REGULATION

Capital and Liquidity

Overview

The capital and liquidity standards established by banking regulators are critically important to a 

sound regulatory framework. Such standards also have a tremendous impact on a bank’s balance 

sheet strategy and its ability to raise capital to expand its business. The capital treatment of assets 

frames an institution’s approach to the selection and prioritization of lines of business, branch 

footprint, and client segmentation. It also has a tremendous impact on how the needs of retail 

and commercial clients are served. In a similar manner, liquidity standards dictate the portion 

of the balance sheet that must be invested in short-term, high-quality assets to provide sufficient 

and quick access to liquidity as needed. Although such standards are necessary for supporting the 

safety and soundness of individual institutions as well as for promoting systemic stability, they can 

decrease the resources a bank has available for customer loans. 

Capital and liquidity requirements must work together in providing a cushion against potential 

losses and providing adequate funding to reduce the risk of insolvency during periods of distress. 

Conversely, an excess of capital and liquidity in the banking system will detract from the flow of 

consumer and commercial credit and can inhibit economic growth.

The U.S. banking system is significantly better capitalized today than it was prior to the financial 

crisis. For the largest U.S. bank holding companies, which are subject to the Federal Reserve’s CCAR 

stress tests, discussed further below, high-quality common equity capital has increased by more than 

$700 billion, to $1.2 trillion since 2009. 1 The combined common equity risk-based capital ratio has 

similarly more than doubled, from 5.5% to 12.2%.2 These firms are projected to be able to withstand 

almost $600 billion in losses generated by a period of severe distress, like a financial crisis, and still 

have enough capital to continue to lend and provide critical services to the economy.3

Large U.S. banks hold nearly 24% of their assets in high-quality liquid assets such as cash, U.S. 

Treasury securities, and agency securities, which is about five times higher than their pre-crisis 

share.4 Moreover, the largest banks have significantly reduced their reliance upon less-stable, shortterm wholesale funding.

1. Press Release, CCAR, Federal Reserve Releases Results of Comprehensive Capital Analysis and Review

(Jun. 29, 2016), available at: www.federalreserve.gov/newsevents/pressreleases/bcreg20160629a.htm.

2. Id.

3. Id. 

4. The Clearing House, The State of American Banking: An assessment of the resiliency of U.S. banks and 

their ability to support steady economic growth (Nov. 2016), available at: www.theclearinghouse.org/-/

media/action%20line/documents/volume%20vii/20161201_state-of-american-banking-report_tch.pdf. 
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Findings and Recommendations • Capital and Liquidity

38

Percent

2001 2003 2005 2007 2009 2011 2013 2015

Figure 2: Tier 1 Capital Ratios

Tier 1 Capital

Tier 1 Common Capital

Source: Federal Reserve Note: Consolidated U.S. Banking Organizations

14

12

10

8

6

4 

As Of: 2016 Q4

Percent

2009 2010 2011 2012 2013 2014 2015 2016

Figure 3: Select Liquid Assets

Note: Cash and U.S. Treasuries held by the eight U.S. G-SIBs. 

20

16

12

8

4

0

Source: Federal Reserve

2500

2000

1500

1000

500

0

As Of: 2016 Q4

Cash & U.S. Treasuries (right axis)

Cash & U.S. Treasuries Percent of Total Assets (left axis)

Billions of US$
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Findings and Recommendations • Capital and Liquidity

39

Improved Safety of the Largest U.S. Bank Holding Companies 

Figure 4 shows the change in capital levels from 2009 to 2016 and shows the amount of such capital 

relative to projected losses under the severely adverse scenario calculations of the regulatory stress tests. 

The table below lists the rules that constitute the key elements of the U.S. bank capital and liquidity regulatory regime. A more robust discussion of the various elements of the regime is set forth 

as Appendix C. 

Table 1: Key Elements of the Capital and Liquidity Regime 

Capital Regime Liquidity Regime

• Risk-based capital ratios calculated under both the 

advanced (internal models) and standardized (regulatordetermined) approaches for calculating risk-weighted 

assets, with applicable capital buffers (e.g., G-SIB capital 

surcharge and the countercyclical capital buffer)

• Leverage capital ratios including the U.S. leverage 

ratio, SLR, and eSLR

• Stressed risk-based capital and leverage ratios to be met 

under CCAR (which includes firms’ planned capital 

distributions to shareholders) and Dodd-Frank stress tests

• Quantitative liquidity rules including the LCR and 

the proposed NSFR

• Internal company liquidity stress testing

• Supervisory assessments including the Federal 

Reserve’s Comprehensive Liquidity Assessment 

Review (CLAR) and the Federal Reserve’s and FDIC’s 

resolution planning-related capabilities assessment 

(Resolution Liquidity Execution Need (RLEN) 

and Resolution Adequacy and Positioning (RLAP) 

requirements)

Trillions (in U.S. dollars)

Figure 4: Strengthened Capital Position of the U.S. Banking System

Source: Treasury staff calculations based on Federal Reserve 2016 DFAST Results * Before any capital distributions

2.5

2.0

1.5

1.0

0.5

0

Banks could face ~$600b 

in projected losses plus a 

substantial projected decline 

in revenues...

2009 Capital Level 2016 Capital Level Stressed Revenues CCAR Stressed Losses Capital Level After 

CCAR Losses*

Growth in High Quality Capital High Quality Capital Available after CCAR Stress Scenario Losses 

(9 Quarters)

~$0.5 T

Decline in Net 

Revenues

Stressed Net 

Revenues

~$1.2T

~$0.6 T

~$1.0 T

U.S. banks have more 

than doubled the 

amount of high quality 

capital since the crisis.

Trillions (in U.S. dollars)

Source: Treasury staff calculations based on Federal Reserve 2016 DFAST Results * Before any capital distributions

2.5

2.0

1.5

1.0

0.5

0

Banks could face ~$600b 

in projected losses plus a 

substantial projected decline 

in revenues...

2009 Capital Level 2016 Capital Level Stressed Revenues CCAR Stressed Losses Capital Level After 

CCAR Losses*

Growth in High Quality Capital High Quality Capital Available after CCAR Stress Scenario Losses 

(9 Quarters)

~$0.5 T

Decline in Net 

Revenues

Stressed Net 

Revenues

~$1.2T

~$0.6 T

~$1.0 T

U.S. banks have more 

than doubled the 

amount of high quality 

capital since the crisis.

...and still have 

more capital 

than in 2009.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Findings and Recommendations • Capital and Liquidity

40

Tailoring of U.S. Bank Regulations

In the implementation of Dodd-Frank and the Basel Committee international banking 

standards, U.S. regulators have relied upon asset thresholds to apply regulations. DoddFrank section 165 sets a $50 billion asset threshold for application to bank holding companies of most of the enhanced prudential standards, including requirements for annual 

supervisor-administered stress tests and living wills, among others. In addition, banks 

with assets over $10 billion and less than $50 billion are subject to annual company-run 

stress test requirements and certain risk-management requirements. Banks with total 

assets less than $10 billion are exempt from the stress-test requirements.

The U.S. implementation of the international Basel III standards has differentiated 

among banking organizations principally through two approaches: the “internationally active” bank threshold, which is generally stated as having at least $250 billion 

in assets or at least $10 billion in total on-balance sheet foreign exposure, and the 

complex “global systemically important bank” methodology, which scores banks 

based on a comparison of key indicators of systemic risk. Internationally active banks 

become subject to a number of new requirements, including the LCR, the SLR, and 

the countercyclical capital buffer. Banks with sufficiently high systemic risk scores 

are identified as G-SIBs and become subject to the most extensive capital requirements, including capital buffers on the risk-based and leverage ratio capital rules and 

the TLAC and minimum debt rules.

Since the implementation of these rules, regulators have been actively engaged in 

efforts to listen to regulated firms and fine-tune their rules. Among other efforts by 

regulators, the Federal Reserve recently exempted bank holding companies with 

less than $250 billion in assets and less than $75 billion in nonbank activities from 

the qualitative assessment of the CCAR stress-testing process. As required by 

Congress, in February 2016, the banking agencies expanded the number of smaller 

banks eligible for an 18-month examination cycle instead of the previously applicable 

one-year exam cycle. The final rule raised the threshold for this determination from 

$500 million to $1 billion. The Federal Financial Institutions Examination Council 

(FFIEC), the banking agencies, and the NCUA also recently concluded their review 

of bank and credit union regulations. This review was conducted in accordance 

with the Economic Growth and Regulatory Paperwork Reduction Act and identified 

outdated, unnecessary, or unduly burdensome regulations.*

Despite such efforts, industry participants and policymakers have continued to question the effectiveness of the calibration of these regulatory thresholds. Insufficient 

tailoring results in bank regulators misallocating staff time and resources by focusing 

on firms that do not present the greatest risks to the financial system. Further, the 

magnitude of regulatory requirements applicable to regional, mid-sized, and community banks that do not present risks to the financial system requires such banks 

to expend resources on building and maintaining a costly compliance infrastructure, 

when such resources would be better spent on lending and serving customers.

* FFIEC, Joint Report to Congress: Economic Growth and Regulatory Paperwork Reduction Act, (Mar. 

2017), available at: www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
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Excessive regulation creates barriers to entry for mid-sized and community banks 

that solidify and protect the positions of the largest banks. Asset thresholds for 

increased regulatory requirements create inappropriate incentives. “One-size-fits-all” 

regulatory standards undermine a diversification of business models.

Table 2 summarizes the current tailoring of the capital and liquidity standards adopted 

or proposed by the U.S. banking agencies. 

Table 2: Current Regulatory Tailoring of U.S. Bank Capital and Liquidity Rules

Applicable Regulations

Current Tailoring of Rules

G-SIB Int'l Active 

($250b+)*

Regional 

($50-250b)

Mid-size 

($10-50b)

Small 

(<$10b)

COMPREHENSIVE CAPITAL ANALYSIS & REVIEW (CCAR)

Global market shock for trading** Yes (6/8) No No No No

Counterparty default scenario** Yes (8/8) No No No No

Qualitative Fed-run process review Yes Yes*** No*** No No

Quantitative Fed-run stress tests Yes Yes Yes No No

Fed ability to object to capital plans through CCAR Yes Yes Yes No No

DODD-FRANK ACT STRESS TESTS (DFAST)

Quantitative Fed-run stress tests Yes Yes Yes No No

Company-run stress tests Yes Yes Yes Yes No

Annual stress test Yes Yes Yes Yes No

Mid-year stress test Yes Yes Yes No No

CAPITAL STANDARDS

Risk-based

G-SIB capital buffers Yes No No No No

Countercyclical capital buffer Yes Yes No No No

Including AOCI changes in capital Yes Yes No No No

Risk-based (i.e., Basel III)**** Yes Yes Yes Yes Yes

Leverage ratio

Enhanced Supplementary leverage ratio (eSLR) Yes No No No No

Supplementary leverage ratio (SLR) of 3% Yes Yes No No No

U.S. leverage ratio Yes Yes Yes Yes Yes

TLAC and long-term debt requirement Yes No No No No

LIQUIDITY REQUIREMENTS

Liquidity coverage ratio (LCR) Yes Yes No No No

Modified LCR No No Yes No No

Net stable funding ratio (NSFR), proposed rule Yes Yes No No No

Modified NSFR, proposed rule No No Yes No No

* Internationally Active includes banks with $250 b or more in assets or more than $10 b in on-balance sheet foreign exposure. **The global market shock and counterparty default scenario apply to 

G-SIBs because these firms have significant trading activities, not because they are G-SIBs. *** Large and noncomplex BHCs (i.e., non-G-SIBs with assets between $50 b and $250 b and with nonbank 

assets of less than $75 b) are exempt from the qualitative assessment of the Federal Reserve CCAR exercise. **** Includes the Standardized Approaches to calculating risk-weighted assets (i.e., denominator) and the revised regulatory capital rules that increased the quantity and quality of capital (i.e., numerator). 
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Treasury supports robust, clearly defined capital and liquidity standards. Capital provides an important 

safeguard against losses and bank insolvency, and a rigorous liquidity regulatory regime mitigates the 

risk of runs on liquidity that can precipitate wide-spread financial system stresses. Likewise, Treasury 

supports a transparent regulatory process, with clear rules, analytical methodologies and procedures, 

and ample public disclosure to increase the public accountability of both banks and regulators.

Implementation of International Financial Regulatory Standards

In many instances, the U.S. banking agencies have implemented standards for U.S. G-SIBs and 

other large internationally active U.S. banks that are more conservative than the international 

standards established by the Basel Committee or the Financial Stability Board. U.S. leadership on 

international standard-setting bodies helps enable a level playing field for U.S. financial services 

firms by encouraging other jurisdictions to implement financial regulation consistent with our 

domestic priorities. When international compromise results in weaker-than-desired recommendations and the U.S. banking agencies have determined that a different standard is more appropriate 

for the U.S. market, U.S. regulators have applied additional stringency. Currently, U.S. banking 

rules with such elements include the G-SIB risk-based capital surcharge, the eSLR, the TLAC and 

long-term debt rule, the calculation of risk-weighted assets (RWA), and the LCR. 

 International Banking Standard* U.S. Standard

CAPITAL RULES

G-SIB risk-based 

capital surcharge

• G-SIB surcharge ranges from 1 to 2.5% • The U.S. G-SIB surcharge was calibrated to 

be roughly double the international standard 

and was calculated using short-term 

wholesale funding reliance as a factor. 

Leverage Ratio 

(specifically, the 

eSLR in the U.S.)

• 3% of leverage exposure (including onand off-balance sheet exposures)• For U.S. G-SIBs: 5% of leverage exposure 

for bank holding company; and 6% of 

leverage exposure for insured depository 

institution subsidiaries

Total Loss 

Absorbing 

Capacity (TLAC)

• Leverage: 6.75% of leverage exposure

• Risk-based: 18% of risk-weighted assets 

plus regulatory capital buffers**

• Long-term debt: 33% of TLAC

• Leverage: 9.5% of leverage exposure

• Risk-based: 18% of risk-weighted assets plus 

regulatory capital buffers 

• Long-term debt: higher of (1) 6% of riskweighted assets plus the U.S. G-SIB surcharge 

or (2) 4.5% of total leverage exposure

* Several other jurisdictions have also adopted rules that exceed international standards, including the U.K. 

and Switzerland, which have added additional surcharges for the leverage ratio and risk-based capital 

requirements. See Bank of England, Supplement to the December 2015 Financial Stability Report: The 

Framework of Capital Requirements for UK Banks at 22 (Dec. 2015), available at: www.bankofengland.

co.uk/publications/Documents/fsr/2015/fsrsupp.pdf.

** The FSB TLAC term sheet notes that “[t]his requirement does not include any applicable regulatory capital 

(Basel III) buffers, which must be met in addition to the TLAC RWA Minimum.” See FSB, Principles on LossAbsorbing and Recapitalisation Capacity of G-SIBs in Resolution at 10 (Nov. 9, 2015), available at: www.

fsb.org/wp-content/uploads/TLAC-Principles-and-Term-Sheet-for-publication-final.pdf.

Table 3: U.S. Implementation of International Financial Regulatory Standards
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 International Banking Standard* U.S. Standard

Calculation of 

Risk-weighted 

assets

• No risk-weight floor. Non-U.S. banks make 

greater use of internal models, which can result 

in lower capital requirements relative to assets.

• Risk-weight floor, i.e., standardized 

approaches, is required under Dodd-Frank 

• Operational risk calculation for riskweighted assets permits: basic indicators, 

standardized, and internal models

• U.S. firms may only use an internal models 

approach, which is also subject to additional 

stringency because of a supervisory overlay.

• Securitization exposures: a risk-weight 

floor of 15% across three permitted 

approaches (internal models, external 

ratings, and a standardized approach). 

Simple, transparent, and comparable 

transactions are eligible for reduced capital 

requirements, e.g., a 10% risk-weight floor.

• Securitizations (excluding agency MBS) are 

subject to a risk-weight floor of 20% based 

on a generally more conservative riskweight approach, known as the simplified 

supervisory formula approach. This approach 

was adopted because Dodd-Frank generally 

prohibits reliance on external ratings. 

LIQUIDITY RULES

Liquidity 

Coverage Ratio 

(LCR)

• Requires sufficient high quality liquid 

assets that can be converted into cash 

with little or no loss of value to survive a 

significant 30-day stress scenario 

• The U.S. LCR rule (i) uses a stricter 

definition of high quality liquid assets (e.g., 

excludes most municipal securities and nonagency MBS); (ii) uses the largest liquidity 

mismatch over a 30-day stress period (while 

the Basel standard focuses on cumulative 

cash flows over the 30-day window); and 

(iii) applies a modified, less stringent LCR 

for non-internationally active banks.

Net Stable 

Funding Ratio 

(NSFR)

• Requires a stable funding profile to reduce 

the risk that regular sources of funds will 

erode a bank’s liquidity position

• The U.S. NSFR proposal (i) uses a stricter 

definition of high-quality liquid assets (same 

as U.S. LCR); and (ii) includes a modified 

NSFR for non-internationally active banks 

parallel to the LCR.

Challenges Facing the U.S. Economy

The United States is experiencing a historically weak economic recovery. The availability of bank 

credit to consumers and businesses in various segments of the economy has been restrained and is 

growing slowly. While it is unclear whether slow loan growth has weakened the economic recovery, 

there is some indication that the supply of credit in key areas of the economy is significantly curtailed 

due to regulatory restrictions, as discussed in this report. Regulatory requirements have increased 

the costs of providing services to consumers, steered lenders away from certain forms of lending, 

and otherwise impeded the efficient allocation of credit with improperly tailored regulation.

Real gross domestic product has grown at a pace that is slower than the past seven recoveries and 

is now only 113% of the 2007 level.5 The 2008-09 recession was the deepest since the Great 

Depression, and its negative impact has persisted because of the slow recovery.

5. Haver Analytics Financial Data on GDP based on data from the Bureau of Economic Analysis. Haver 

Analytics, May 2017. 
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The recovery in bank lending has mirrored the slow recovery in the broader economy, with particular weakness in small business and mortgage lending.6

 A healthy banking sector enables an 

economy to flourish, while a weak or anemic banking sector can stall an economy. 

Small businesses are historically large contributors to employment and economic growth.7 These 

businesses employ almost half of the private sector workforce and create three out of five net new 

jobs in the United States.8 Yet, small business lending by banks has been one of the most anemic 

sectors, barely recovering to the levels of 2008. By comparison, bank lending to large businesses is 

at record levels, though loan growth here has also been arrested recently.9

Figure 6 shows the rate of loan growth during the pre-crisis and post-crisis periods, including periods 

designated as recessions by the National Bureau of Economic Research. The average rate of loan 

growth in the post-crisis period is substantially below the rate experienced in the pre-crisis period.

6. Total residential mortgages and small business loan growth for FDIC-insured institutions is approximately 

negative to flat since 2008 per FDIC balance sheet data for all FDIC-insured institutions. See FDIC 

Quarterly Banking Profile, available at: www.fdic.gov/bank/analytical/qbp.

7. House Committee on Small Business. Fast Facts on Small Business, available at: smallbusiness.house.gov/

uploadedfiles/april_recess_small_biz_talking_pts.pdf.

8. Small Business and Entrepreneurship Council, Small Business Facts and Data, available at: sbecouncil.org/

about-us/facts-and-data.

9. Id. 

Percent

-4 0 4 8 12 16 20 24 28

Figure 5: Real GDP Change from Recession End

Range of Previous 7 Recoveries

CBO (Jan. 2008)

Source: BEA, CBO

60

50

40

30

20

10

0

-10

As Of: 2017 Q1

Quarters from Recession End

Current Recovery

Average of the Previous 7 Recoveries
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Quarters from Recession End

Percent

1994 1998 2002 2006 2010 2014

Figure 6: Bank Loan Growth (Annual) 

Pre-Crisis Average

Source: FDIC, Census Bureau Note: Gray bars signify NBER recessions.

15

10

5

0

-5

-10 

As Of: 2016 Q4

Post-Crisis Average

Percent

-4 0 4 8 12 16 20 24 28 32 36 40 44 48

Figure 7: Growth in Bank Lending Since End of Recession

Range of Previous 7 Recoveries

300

250

200

150

100

50

0

-50

Current Recovery

Average of the Previous 7 Recoveries

Source: Financial Accounts of the United States, Federal Reserve As Of: 2017 Q1

Years
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Percent

2005 2007 2009 2011 2013 2015

Figure 8: Change in Small Business Lending Since 2008

Source: FDIC 

170

150

130

110

90

70

50

As Of: 2016

Large Business Loans

(greater than $1MM)

Small Business Loans

(less than $1MM)

Percent

Figure 9: Small Businesses and Start-Ups

Source: SBA, NBER paper

80

60

40

20

0 Share of Net New Jobs

Since Mid-2009 

Share of Private 

Sector Workforce 

Share of Gross Job Creation Share of Employment 

Small Businesses Start-Ups

60%

50%

20%

3%

Note: 2008 = 100
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As is the case with the overall economic recovery since the recession, bank lending has lagged 

when compared to prior recoveries (see figure 7). This disparity is most notable in the imbalance of 

availability of loans to large companies compared to small businesses (see figure 8).

Beyond small business lending, the growth of mortgage loans on bank balance sheets has also been 

slow (even after considering the effects of the liquidation of legacy mortgage portfolios). More 

broadly, credit availability in the residential mortgage market is constrained. The HCAI reported 

by the Urban Institute10 is at approximately half the level of the 2001-2003 period. More permissive 

standards in the FHA and VA programs and flexibility afforded the GSEs through exemption from 

the QM rule has contributed to a concentration of the mortgage market in government-supported 

mortgage programs, which funded nearly 70% of 2016 originations.11

10. Urban Institute, Housing Credit Availability Index, (April 14, 2017), available at: www.urban.org/

policy-centers/housing-finance-policy-center/projects/housing-credit-availability-index. 

11. Urban Institute, Housing Finance at a Glance (Mar. 2017), available at: www.urban.org/sites/default/files/

publication/89056/march_chartbook_final.pdf.

Percent

1950 1960 1970 1980 1990 2000 2010

Figure 10: Residential Investment as a Share of GDP 

Source: BEA

8

7

6

5

4

3

2

1

0

As Of: 2016

Long-Run Average
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Housing constituted a contribution to U.S. GDP of approximately 18% in 2016 and satisfies 

a basic need of all families.12 A key component of housing’s role in the economy is residential 

investment, which has averaged almost 5% of GDP over the long run but has yet to fully recover.

Small businesses and the housing industry are key contributors to job growth and GDP. Figures 9 

and 10 show the importance of small businesses to job creation and the historic contribution of 

housing as a percentage of GDP.

Key Issues with Current Regulatory Regime

Treasury’s recommendations concerning regulatory relief relating to capital and liquidity are 

designed to reform several aspects of the current regulatory regime. These include recommendations 

to: (1) better tailor rules according to an institution’s size and complexity; (2) reduce unnecessary 

burdens of regulation and increase the transparency of regulatory requirements; and (3) improve 

regulatory coherence to improve the ability of banks to promote liquid markets. Together these 

reforms should result in a more efficient use of capital and liquidity and provide banks with greater 

capacity to increase the supply of credit to the economy and promote liquidity in our markets. 

Insufficient Regulatory Tailoring

Among the most burdensome financial regulatory requirements are the enhanced prudential regulations which apply to financial companies with total consolidated assets of $50 billion or more as well 

as company-run and supervisory stress tests, which begin to apply when financial companies have total 

consolidated assets over $10 billion. The number of banks required to conduct some form of stresstesting has expanded to more than 100 firms,13 which is well beyond the 19 banks that underwent 

the original exercise known as the Supervisory Capital Assessment Program (SCAP). These 19 banks 

represented about two-thirds of the assets and about half of the loans in the U.S. banking system.14 In 

comparison, today’s CCAR process covers more than 80% of U.S. bank holding company assets.15

Moreover, the burden of the exercise has greatly increased. Today, CCAR is the binding capital 

regime for the majority of large banks16 and results in significant supervisory intervention in the 

12. Internal Treasury Analysis. Data from Haver Analytics and U.S. Bureau of Economic Analysis News Release, 

Table 3 (May 26, 2017), available at: www.bea.gov/newsreleases/national/gdp/2017/pdf/gdp1q17_2nd.pdf. 

13. The company-run stress test requirement applies to all financial companies, not just BHCs. For the number of holding companies that exceed $10 billion in assets, see National Information Center. Holding 

Companies with Assets Greater than $10 Billion. Available at: www.ffiec.gov/nicpubweb/nicweb/

HCSGreaterThan10B.aspx. 

14. Press Release. The Federal Reserve Bank of New York, Statement Regarding the Supervisory Capital 

Assessment Program (May 7, 2009), available at: www.federalreserve.gov/newsevents/press/bcreg/bernankescap20090507.htm. 

15. Press Release. The Federal Reserve Bank of New York, Federal Reserve Releases Results of Supervisory 

Bank Stress Tests (June 23, 2016), available at: www.federalreserve.gov/newsevents/pressreleases/

bcreg20160623a.htm.

16. According to analysis by The Clearing House, the capital regime that requires the majority of large banks 

to hold the greatest level of capital is the Federal Reserve’s CCAR exercise. See The Clearing House. The 

Capital Allocation Inherent in the Federal Reserve’s Capital Stress Test. Jan. 2017, available at: www.theclearinghouse.org/~/media/TCH/Documents/TCH%20WEEKLY/2017/20170130_WP_Implicit_Risk_

Weights_in_CCAR.pdf. 
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core capital planning decisions of firms’ boards and management. Firms with more than $50 billion in assets have monthly, quarterly, and annual data submissions in addition to undergoing the 

exercise twice a year, all of which requires these banks to expend significant amounts of time and 

resources. As detailed in a November 2016 GAO study, a wide range of costs to firms arise from 

this regulatory burden, including direct compliance costs (for staff, consultants, technology, and 

risk-management systems).17

In addition to stress-testing, a number of other prudential standards apply to more than 30 BHCs, 

including the LCR rule. The LCR rule can generate costs to firms through foregone net interest 

income because the rule requires firms to invest in high quality liquid assets that generally have 

low relative yields compared to many other assets. These costs can be more acute for firms that rely 

more heavily on net interest income than fee income. In general, smaller regional BHCs tend to 

generate more of their revenues from net interest income than the largest BHCs.

Reducing Complexity, Inconsistencies, and Unnecessary Costs 

The current capital and liquidity regime could be made less costly by reducing its excessive conservativism, opacity, and duplication.

Strong capital requirements are critical in mitigating the harmful economic effects that result from 

an undercapitalized banking system. While some modest further benefits could likely be realized, 

the continual ratcheting up of capital requirements is not a costless means of making the banking 

system safer. Studies of the effects of higher capital requirements indicate that invariably some of 

the higher costs are passed on to borrowing households and businesses, although these studies 

disagree on the magnitude of such effects.18

17. GAO. Additional Actions Could Help Ensure the Achievement of Stress Test Goals at p. 30. Nov. 15, 2016, available at: www.gao.gov/products/GAO-17-48. GAO, for example, noted that that among surveyed CCAR firms: (i) 

annual costs ranged from $4 to $90 million, with about half of estimates between $15 and $30 million; (ii) staff dedicated to CCAR ranged from 100 to about 500 employees with part-time responsibility for the stress tests and an 

additional 2,000-plus employees spending part of their time supporting others; (iii) one-third of the surveyed CCAR 

firms used paid consultants; (iv) several said they expected continued growth in stress test-related costs because 

of the Federal Reserve’s continually increasing supervisory expectations; and (v) the companies’ estimates of the 

amount of additional capital they have held to avoid a CCAR objection ranged from $500 million to $15 billion.

18. Literature reviews conducted by Oliver Wyman and staff at the OFR, IMF, and Federal Reserve generally 

review a similar set of studies that attempt to estimate the costs of higher bank capital requirements. See 

Oliver Wyman. Interaction, Coherence, and Overall Calibration of Post Crisis Basel Reforms. August 9, 

2016, available at: www.oliverwyman.com/content/dam/oliver-wyman/global/en/2016/aug/post-crisis-baselreforms.pdf. See also Jihad Dagher, Giovanni Dell’Ariccia, Luc Laeven, Lev Ratnovski, and Hui Tong. Benefits 

and Costs of Bank Capital. IMF, March 2016, available at: www.imf.org/external/pubs/ft/sdn/2016/

sdn1604.pdf. See also Federal Reserve Board. An Empirical Economic Assessment of the Costs and 

Benefits of Bank Capital in the US. March 31, 2017, available at: www.federalreserve.gov/econres/feds/

files/2017034pap.pdf. These reviewed studies generally found evidence of higher credit costs to borrowers and reduced lending capacity. The magnitude of the higher cost of credit upon borrowing costs generally 

ranged from 2 to 21 bps for a 1 percentage point increase in bank capital requirements. Oliver Wyman estimated that range would imply a gross increase in credit of between 15 to 109 bps (assuming an increase 

in capital requirements of 5.3% in the U.S.). The estimated range of credit contraction (see IMF table 4B) is 

focused on reduced volumes of bank credit during the implementation phase of higher capital requirements. 
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In addition to direct costs to borrowers, firms struggle with supervisory processes that are opaque, 

complex, and excessively conservative, such as the current design and implementation of the 

CCAR exercise and the process to determine a firm’s operational risk capital requirements. The 

qualitative aspects of the CCAR process are particularly opaque. Likewise, the lack of transparency 

around the quantitative aspects of CCAR can make it more difficult for firms to efficiently allocate 

capital across products and exposures. Furthermore, the lack of transparency with CCAR creates 

opportunities for regulators to steer lending to particular asset classes.

The capital regime also has a number of current and expected redundancies. For example, the 

risk-based capital regime requires many of the largest banks to calculate capital requirements under 

both advanced approaches (i.e., internal models calculated by firms) and standardized approaches 

(i.e., regulator prescribed capital requirements).

Beyond the costs created by the capital and liquidity requirements currently in place, several potential 

rules, if adopted in the United States, could further increase the costs to banks of conducting their 

business. These include the FRTB standard meant to revise capital rules for banks’ trading activities and the NSFR standard designed to promote greater funding stability.19 U.S. banks are already 

subject to rigorous rules meant to address these different areas of trading book and liquidity risk.20

The proposed Single-Counterparty Credit Limit requirements, which are designed to limit interconnectedness between financial institutions, are also expected to require complex calculations that firms 

would likely find difficult or costly to implement. Moreover, the methodologies and calibrations used 

in the SCCL may not accurately reflect certain business activities, such as securities lending.

Another potential driver of costs is the pending intersection of the new CECL accounting standard 

and existing capital rules. CECL requires banks to set reserves using a lifetime forecast of losses, 

which generally requires a bank to provision a much larger amount for loan losses at the time of 

loan origination than would be required under the current “incurred loss” accounting model.21 It 

is unclear if such changes are needed to promote a more robust U.S. banking system. 

19. As an example of these significant expected costs, consider that the Basel Committee estimated that the 

final FRTB would raise trading book minimum capital requirements as much as 40% higher than the current 

capital requirements for such trading book exposures on a weighted-average basis and 22% higher for the 

median bank. See Basel Committee. Explanatory Note on the Revised Minimum Capital Requirements for 

Market Risk. Jan. 2016, available at: www.bis.org/bcbs/publ/d352_note.pdf. 

20. Consider that FRTB changes would be in addition to trading book capital requirements, which have 

increased by about two to three times after the crisis in 2009-10 (see Basel Committee on Banking 

Supervision, Results of the Basel III Monitoring Exercise as of 30 June 2012 at Table 6. March 2013, 

available at: http://www.bis.org/publ/bcbs243.pdf. See also Standard and Poors. Basel 2.5 Increases the 

Squeeze on Investment Banking Returns. May 15, 2012, available at: www.standardandpoors.com/en_AP/

web/guest/article/-/view/sourceId/7303774) and which are now subject to Volcker restrictions, greater central clearing requirements, and severe capital shocks under the supervisory CCAR stress regime. The NSFR 

would apply on top of the LCR, internal liquidity stress tests, and supervisory reviews of liquidity positions.

21. Cristian Deritis and Deniz K. Tudor, CECL’s Implications for Bank Profitability, System Stability, and 

Economic Growth, Moody’s Analytics. Available at: www.moodysanalytics.com/~/media/Insight/

Publications/2016/cecls-implications-for-bank-profitability-system-stability-economic-growth.pdf. 
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Improve the Coherence of Regulations to Support Market Liquidity

A capital regime that is exclusively dependent upon a leverage ratio, or that makes it a primary 

binding capital constraint,22 could have the unintended outcome of encouraging risk-taking by 

banking organizations. Because the leverage ratio requires the same amount of capital irrespective 

of an exposure’s risk profile, a binding leverage ratio generally encourages firms to invest in higherrisk assets (which are generally associated with higher yields) than they would if risk-based capital 

rules were their binding constraint. These incentive issues are generally more significant for banks 

subject to higher liquidity requirements and whose business models involve intermediating lowrisk assets such as cash and government-related securities than for banks whose business models are 

predominantly focused on higher yielding lending activities.

The current interaction of the leverage ratio, particularly the enhanced supplementary leverage 

ratio, and other rules creates incentives that discourage critical banking functions, including taking 

low-risk deposits, providing access to centrally cleared derivatives for market participants, and 

providing secured repo financing, which supports market liquidity.

The eSLR and the LCR can make it difficult for banks to accept safe-haven deposits from customers. In order for a bank constrained by the leverage ratio to accept additional deposits from its 

customers, the bank would need to either issue new equity capital or sell other assets in a sufficient 

amount to free up enough capital to accept such customer funds. Likewise, a bank at its LCR 

limit may have to invest in additional low-yielding high quality liquid assets to accept additional 

deposits. These deposits, when placed at the central bank, add little incremental credit risk or 

funding risk mismatches to the banking system yet would be discouraged by these rules today. 

The leverage ratio imposes significant capital requirements on initial margin, which is collected to 

reduce risk on centrally cleared exposures.23 Because of the low-margin and high-volume nature 

of the business of providing clients access to central clearing, high leverage ratio capital charges 

discourage firms from providing such services. Acting CFTC Chair Giancarlo recently estimated 

that addressing the leverage ratio treatment of initial margin would reduce bank capital by only 

22. When a bank is required to hold more capital under risk-based capital standards than under leverage standards, risk-based capital would be considered its “binding constraint.” Conversely, a bank that is required to 

hold more capital under leverage standards than under risk-based capital standards would consider leverage capital to be its “binding constraint.” While both types of capital standards can incentivize firms to raise 

their absolute level of capital (i.e., the numerator), these standards encourage firms to manage their denominators in distinct ways. A bank bound by risk-based capital is incentivized to increase its exposures to assets 

that carry lower risk weights. However, such a bank may also seek to reduce its risk weights without reducing actual economic risks; a leverage ratio backstop is a key means to limit this incentive. If leverage standards are the binding constraint, a bank has an incentive to reduce its overall leverage, but with a preference 

for shedding lower-yielding exposures (generally correlated with lower risk weights) because the bank would 

seek to maintain returns even while reducing its size.

23. Futures Industry Association. FIA Analysis: Leverage Ratio Proposals Will Negatively Impact Client Clearing. July 

7, 2016, available at: fia.org/articles/fia-analysis-leverage-ratio-proposals-will-negatively-impact-client-clearing. See 

also Bipartisan Policy Center, Did Policymakers Get Post-Crisis Financial Regulation Right? Sept. 2016, available 

at: cdn.bipartisanpolicy.org/wp-content/uploads/2016/09/BPC-FRRI-Post-Crisis-Financial-Regulation.pdf.
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1% but would reduce clearing capital costs by 70% and promote additional market activity.24 The 

number of firms engaged in this business has declined from 100 in 2002 to 55 at the start of 2017, 

of which only 19 firms actually were holding initial margin from clients.25 Moreover, specific product classes may have even fewer market providers. Beyond the treatment of margin, the leverage 

ratio uses a methodology to measure derivatives exposures, known as the current exposure method, 

which is fairly insensitive to risk and which results in higher leverage ratio capital requirements for 

derivatives activities relative to risk-based capital requirements. 

Recommendations

Appropriately Tailor Rules for Banks

Appropriate Tailoring of DFAST, CCAR, LCR, and SCCL

Reforms of the regulatory capital regime should be made to accomplish the objective of clear 

and transparent standards that do not impose undue burdens and that are based on the size and 

complexity of a bank’s balance sheet and business. 

Treasury recommends that the threshold for participation in the company-run DFAST be raised 

to $50 billion in total assets (from the current threshold of more than $10 billion). The banking 

regulators should be granted authority to further calibrate this threshold on an upward basis by 

reference to factors related to the degree of risk and complexity of the institution. Such an approach 

would help to avoid creating inefficient incentives and cliff effects around particular asset sizes.

In addition, the mid-year DFAST cycle should be eliminated, and the number of supervisory scenarios should be reduced from three to two—the baseline and severely adverse scenario. Further, as 

a company-led process, leeway should be granted for banks to determine the appropriate number 

of models that are sufficient to develop appropriate output results, aligned with the scale and 

complexity of the banking organization and nature of its asset mix.

Treasury recommends that Congress amend the $50 billion threshold under Section 165 of DoddFrank for the application of enhanced prudential standards to more appropriately tailor these 

standards to the risk profile of bank holding companies. The Federal Reserve should also revise the 

threshold for application of CCAR to match the revised threshold for application of the enhanced 

prudential standards. 

Beyond stress testing, the scope of application of the LCR should be narrowed: the U.S. LCR 

should be limited to G-SIBs and a less stringent standard should be applied to internationally 

active bank holding companies that are not G-SIBs. In addition, the complexity of the calculations 

required to comply with the proposed SCCL requirements are such that the rule should be limited 

in application to only the largest banks. Accordingly, the SCCL also should only apply to banks 

that are subject to the revised threshold for the application of the enhanced prudential standards. 

24. J. Christopher Giancarlo. Changing Swaps Trading Liquidity, Market Fragmentation and Regulatory 

Comity in Post-Reform Global Swaps Markets. Remarks before the International Swaps and Derivatives 

Association 32nd Annual Meeting, Lisbon, Portugal. May 10, 2017, available at: www.cftc.gov/PressRoom/

SpeechesTestimony/opagiancarlo-22.

25. Id.
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Creating an “Off-Ramp” for Highly Capitalized Banks

An alternative approach for providing regulatory relief that should be considered would be to 

establish a “regulatory off-ramp” from all capital and liquidity requirements, nearly all aspects of 

the Dodd-Frank’s enhanced prudential standards, and the Volcker Rule for depository institution 

holding companies and insured depository institutions. This approach would require the institution to elect to maintain a sufficiently high level of capital, such as a 10% non-risk-weighted 

leverage ratio, consistent with H.R. 10, the Financial CHOICE Act. 

Reduce Unnecessary Burdens and Improve Transparency

Improve Capital and Liquidity Supervisory Processes and Guidance

Subjective assumptions built into the Federal Reserve’s CCAR models have resulted in an improperly 

calibrated stress test, which risks skewing capital requirements and bank activity away from what 

market-based decisions would otherwise dictate and in favor of activity favored by regulators resulting in excess capital retained by banks, which reduces lending capacity. Such assumptions also skew 

the amount of capital that banks hold. Assumptions in the CCAR process should be re-assessed, such 

as the assumption that firms continue to make capital distributions and grow their balance sheets and 

risk-weighted asset exposures in severely adverse scenarios. Moreover, the Federal Reserve’s modeling 

practices should be improved by better recognizing firms’ unique risk profiles. 

Treasury also recommends that the Federal Reserve consider changing the CCAR process to a 

two-year cycle, with more frequent reviews permitted to allow revisions to capital plans in the case 

of extraordinary events.

In addition, the U.S. banking regulators should delay domestic implementation of the NSFR and FRTB 

standards until U.S. regulators can appropriately assess and calibrate them. Depending on their final 

calibration, applying these standards could be duplicative of other capital and liquidity requirements. 

To simplify the capital regime over time, Treasury recommends keeping the standardized approaches 

for calculating risk-weighted assets, but reducing reliance upon the advanced approaches for calculating firms’ overall risk-based capital requirements. However, because risk sensitivity remains an 

important objective of risk-based capital and other standards, U.S. regulators should consider where 

it would be appropriate to introduce more appropriate risk sensitivity such as in the measurement of 

derivative and securities lending exposures for the standardized approaches and the proposed SCCL.

Treasury also recommends that the prudential regulators review the potential impact of the CECL 

standard on banks’ capital levels and formulate recommendations to harmonize the application of 

the standard with regulators’ supervisory efforts.

Improving the Transparency of the CCAR and Other Supervisory Processes

Treasury recommends that the Federal Reserve subject its stress-testing and capital planning review 

frameworks to public notice and comment, including with respect to its models, economic scenarios, and other material parameters and methodologies. 

The qualitative assessment of CCAR is subjective, with limited transparency into regulatory 

expectations. For this reason, Treasury recommends that the qualitative CCAR element should no 

longer be the sole basis for the Federal Reserve’s objection to capital plans for all banks subject to 
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CCAR. To further reduce regulatory burden, the qualitative assessment for all banking organizations should be adjusted to conform to the horizontal capital review standard the Federal Reserve 

has already implemented for non-complex banking groups with assets less than $250 billion.

The CCAR process could also be modified to provide management with greater control of capital 

distribution planning by providing firms an accurate understanding of the capital buffers they 

would have after considering the projected results of the Federal Reserve’s supervisory models 

under the severely adverse scenario. This additional certainty about the size of a firm’s capital cushion could be achieved through changing the sequence of the current CCAR process or by making 

required capital amounts more certain through integrating the risk-based capital and CCAR stress 

testing regimes, without increasing post-stress capital requirements.26

Further, any countercyclical capital requirements should be implemented through the existing 

CCAR and DFAST stress testing processes rather than through the countercyclical capital buffer 

currently included in the risk-based capital rules. 

Finally, the method of calculating operating risk capital requirements under the advanced approaches 

should be made more transparent as compared to the current approach, which is driven in large 

part by supervisory actions. 

Improving Regulatory Coherence to Improve the Functioning of Capital Markets

Addressing the Impact of the SLR

Significant adjustments should be made to the calculation of the SLR. In particular, deductions 

from the leverage exposure denominator should be made, including for:

• Cash on deposit with central banks;

• U.S. Treasury securities;

• Initial margin for centrally cleared derivatives.

Changing Liquidity Requirements

Treasury recommends expanded treatment of certain qualifying instruments as HQLA. This would 

include categorizing high-grade municipal bonds as Level 2B liquid assets (rather than generally 

not being counted as HQLA currently). In addition, improvements should be made to the degree 

of conservatism in cash flow assumptions incorporated into calculations of the LCR to more fully 

reflect banks’ historical experience with calculation methodologies. 

Recalibrating the U.S. Implementation of Certain International Financial 

Regulatory Standards

U.S. implementation of certain international standards in a manner more stringent than the 

international standard can make U.S. institutions less competitive globally. While international 

standards are not binding on the United States and should be implemented by domestic regulators 

in a manner tailored to the U.S. market, U.S. regulatory requirements that exceed the applicable 

international standard can sometimes create an undue burden of higher costs to our economy, 

26. Daniel K. Tarullo. Next Steps in the Evolution of Stress Testing. Remarks at the Yale University School of 

Management Leaders Forum, New Haven, Connecticut. Sept. 26, 2016, available at: www.federalreserve.

gov/newsevents/speech/tarullo20160926a.htm. 
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U.S. Participation in International Financial Regulatory 

Standard-Setting Processes

One of the Core Principles is to advance American interests in international financial 

regulatory negotiations and meetings. To this end, U.S. engagement in international 

financial regulatory standard-setting bodies remains important to promote financial 

stability, level the playing field for U.S. financial institutions, prevent unnecessary 

regulatory standard-setting that could stifle financial innovation, and assure the 

competitiveness of U.S. companies and markets, including encouraging foreign 

investment in the U.S. banking system.

As part of the international response to the global financial crisis, the United States 

has played a leading role in the G-20 and the Financial Stability Board. The G-20 

has played a key role in helping to set the post-crisis financial regulatory reform 

agenda, which the FSB helps implement. The FSB helps coordinate the work of 

international standard setting bodies, such as the Basel Committee, the International 

Organization of Securities Commissions (IOSCO), and the International Association 

for Insurance Supervisors (IAIS). These bodies use international financial regulatory 

standards to increase the resiliency of the global financial system, a crucial element 

to support strong, balanced, and sustainable economic growth. 

The U.S. SSB representatives, including applicable U.S. regulators, advocate for 

our domestic financial regulatory agenda at SSBs, and influence the international 

standard setting process. These international financial regulatory standard setting 

processes enable the United States to promote international standards consistent 

with U.S. policy and a level playing field for U.S. financial institutions. As a result, 

domestic U.S. regulatory implementation of such standards for U.S. firms is largely 

consistent with the corresponding international standard. 

While the Basel Committee does issue proposals for comment, it sometimes does 

so late in the standard setting process. As a result, public participation in the Basel 

Committee process sometimes comes after the United States and other regulators have 

already reached understandings on the basic framework, thus limiting the potential for 

the public to meaningfully influence the Basel Committee’s process. Similar complaints 

about transparency and accountability have been raised with respect to other key international standard setting processes, specifically those taking place at IOSCO and IAIS.

Treasury recommends that rigorous thought be given to the structure and mandate of 

SSBs as well as processes through which international financial regulatory standards 

are established. In particular, the United States should lead efforts to narrow the scope 

of SSBs’ initiatives, specifically by streamlining their mandates and eliminating existing 

overlapping objectives. In addition, Treasury recommends increased transparency and 

accountability, so that the views and concerns of external stakeholders are appropriately and timely considered and accounted for. Finally, Treasury recommends that the 

U.S. members continue to advocate for and shape international regulatory standards 

that are in alignment with domestic financial regulatory objectives.
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and risk making U.S. firms less competitive internationally. U.S. rules that exceed international 

standards that should be recalibrated include (i) the U.S. G-SIB risk-based surcharge, including its 

focus on short-term wholesale funding reliance; (ii) the mandatory minimum debt ratio included 

in the Federal Reserve’s TLAC and minimum debt rules; and (iii) the eSLR .

Refining U.S. Approach to Basel Committee Standards and Processes

Treasury supports efforts to finalize remaining elements of the international reforms at the Basel 

Committee including establishing a global risk-based capital floor in order to promote a more 

level playing field for U.S. firms and strengthen the capital adequacy of global banks. U.S. firms 

currently operate with high levels of capital compared to their international counterparts. They 

also are subject to a risk-based capital floor, while many foreign competitors do not adhere to such 

a standard. Moreover, more strongly capitalized foreign banks would further reduce risks for our 

largest, most globally active firms. 

The banking agencies should carefully consider the implications on U.S. credit intermediation and 

systemic risk from the implementation in the United States of a revised standardized approach 

for credit risk under the Basel III capital framework. U.S. regulators should provide clarity on 

how the U.S.-specific adoption of any new Basel standards will affect capital requirements and 

risk-weighted asset calculations for U.S. firms.

Community Financial Institutions

Treasury strongly supports efforts to further enable our community bank and credit union sectors. 

Approximately one in four counties rely exclusively on community banks for banking services 

within county lines, and nearly half of the rural counties have only community banks located within 

them. As such, these institutions serve as a critical backbone to America’s communities, including 

our rural economy, and are an essential provider of credit to small and mid-sized businesses.

Community financial institutions’ business models have come under pressure from a slow economic recovery and low interest rate environment, additional competition (e.g., internet banks 

and nonbank lenders), and added compliance costs from new regulations. Together such factors 

have contributed to a difficult operating environment and the ongoing consolidation of smaller 

banks and credit unions. FDIC analysis shows that the number of federally insured banks declined 

from 17,901 in 198427 to less than 5,913 banks in 2016.28 The impact of consolidation has been 

particularly profound on smaller banks as the number of institutions with assets less than $100 

million declined by 85% between 1985 and 2013.29 Similarly, the total number of credit unions in 

27. Gruenberg, Martin J., FDIC on Wall Street Reform: Oversight of Financial Stability and Consumer and 

Investor Protections; to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate (Feb. 14, 

2013), available at: https://www.fdic.gov/news/news/speeches/archives/2013/spfeb1313.html.

28. FDIC, Quarterly Banking Profile, All Institutions Performance, Fourth Quarter 2016, available at: https://

www.fdic.gov/bank/analytical/qbp/2016dec/qbpall.html.

29. FDIC, Community Banks Remain Resilient Amid Industry Consolidation. FDIC Quarterly, 2014, Vol. 8, No. 

2, available at: www.fdic.gov/bank/analytical/quarterly/2014_vol8_2/article.pdf.
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the country has declined by approximately 18% since 2011 (from 7,094 institutions in 201130 to 

5,785 institutions in 201631), with the impact mostly concentrated among smaller credit unions.32

Feedback provided to Treasury suggests that the cumulative effects of regulatory requirements 

weigh heavily on community banks and credit unions.

Treasury has identified a number of issues and has made recommendations with respect to rightsizing capital requirements, enabling capital formation, encouraging new charters, and reducing a 

number of other regulatory burdens that hinder these institutions’ ability to serve their customers.

Right-Sizing Capital Requirements for Community Banks and Credit Unions

Community banks operate under a mix of capital regimes, integrating aspects of regimes for larger 

banks with some adjustment in recognition of their smaller scale and lower systemic risk relative 

to larger banks. The federal banking agencies have elected to apply the Basel III risk-based capital 

regime and its attendant changes to the required quality and quantity of capital to smaller banks 

and BHCs. While regulators exempted smaller banks from stress-testing and liquidity standards 

applied to large banks and BHCs, they nevertheless required all banks to satisfy the Basel III common equity tier 1 capital (CET1) ratio of 4.5%, when fully phased-in by 2019, the 2.5% capital 

conservation buffer (aggregate 7% CET1), along with the complex rules used to calculate common 

equity, and meet higher capital requirements on specific asset classes through the introduction 

of higher risk-weights.33 Regulations implementing Basel III standards have caused a number of 

issues for community banks, including the treatment of high volatility commercial real estate 

(HVCRE) and mortgage servicing assets (MSAs). In addition, community banks have concerns 

over the application of the capital conservation buffer to institutions with less than $10 billion in 

assets as well as the CECL accounting standard discussed above. 34

Credit unions have also become subject to new capital rules in recent years. The NCUA finalized 

its risk-based capital rule in October 2015 for federally-insured credit unions with at least $100 

million in assets, which will become effective in 2019.35 This rule generally parallels the Basel 

III standards for banks.36 In addition, while stress testing is not required for credit unions under 

Dodd-Frank, the NCUA finalized a rule in April 2014 that requires federally insured credit unions 

with assets of $10 billion or more to be subject to stress test requirements.37 In February 2017, 

the NCUA issued an advance notice of proposed rulemaking to solicit comment on alternative 

30. NCUA, Financial Trends in Federally Insured Credit Unions (Dec. 31, 2011), available at: https://www.ncua.

gov/Legal/Documents/Reports/FT20111231.pdf.

31. NCUA, NCUA Chart Pack (Dec. 31, 2016), available at: https://www.ncua.gov/analysis/Pages/call-reportdata/Reports/Chart-Pack/chart-pack-2016-12.pdf.

32. National Association of Federal Credit Unions. 2016 NAFCU Report on Credit Unions. Nov. 2016, available 

at: https://www.nafcu.org/research/reportoncreditunions.

33. Federal Reserve Board, FDIC, and OCC, New Capital Rule: Community Bank Guide (July 2013), available at: 

https://www.federalreserve.gov/bankinforeg/basel/files/capital_rule_community_bank_guide_20130709.pdf.

34. Id.

35. NCUA, Risk Based Capital. 80 Fed. Reg. 66626. (Oct. 29, 2015).

36. Basel III was published in December 2010 and revised in June 2011. The text is available at http://www.bis.

org/publ/bcbs189.htm.

37. NCUA, Capital Planning and Stress Testing. 79 Fed. Reg. 24311 (Apr. 30, 2014).
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forms of capital that could help federally insured credit unions raise capital without solely relying 

on retained earnings.38

Recommendations for Community Banks

Treasury recommends that the regulators simplify the overall capital regime for community banks, as 

the complex U.S. capital rules implementing Basel III standards are not appropriately tailored today. 

Several options could be considered to simplify and reduce the burden on community banks, which 

unless otherwise specified is a term we apply to banks with less than $10 billion in assets.

The bank regulators should explore exempting community banks from the risk-based capital 

regime implementing the Basel III standards. The greater emphasis on common equity, achieved 

through adoption of the Basel III CET1 standard, is an important element of post-crisis rules that 

should be retained. In addition, if required to tailor the capital rules for community banks, section 

171 of the Dodd-Frank Act, known as the Collins Amendment, should be amended. Exempting 

small banks from the U.S. Basel III risk-based capital rules would tailor capital regulations to better 

reflect the risk profile of community banks and would allow for revising the capital treatment of 

various asset classes including mortgage servicing assets and certain types of commercial real estate. 

This would allow community banks to better serve borrowers in their communities. 

Credit losses on commercial real estate loans have been a key factor in bank failures, both in 

this most recent financial crisis and past crises.39 As a result, federal banking regulators increased 

capital requirements for HVCRE40 and have also issued guidance for concentration limits more 

recently.41 We recommend that regulators move forward with efforts to simplify and clarify the 

definition of HVCRE loans to avoid the application of higher risk-weights for loans where it 

would be unnecessary.

38. NCUA, Alternative Capital. 82 Fed. Reg. 9691 (Feb. 8, 2017).

39. See, e.g., GAO, Financial Institutions: Causes and Consequences of Recent Bank Failures (Jan. 2013), 

available at: http://www.gao.gov/assets/660/651154.pdf. (Ten states concentrated in the western, 

Midwestern, and southeastern United States—all areas where the housing market had experienced strong 

growth in the prior decade—experienced 10 or more commercial bank or thrift (bank) failures between 2008 

and 2011. The failures of the smaller banks (those with less than $1 billion in assets) in these states were 

largely driven by credit losses on commercial real estate (CRE) loans. The failed banks also had often pursued aggressive growth strategies using nontraditional, riskier funding sources and exhibited weak underwriting and credit administration practices. The rapid growth of CRE portfolios led to high concentrations 

that increased the banks’ exposure to the sustained real estate and economic downturn that began in 2007. 

GAO’s econometric model revealed that CRE concentrations and the use of brokered deposits, a funding source carrying higher risk than core deposits, were associated with an increased likelihood of failure for 

banks across all states during the period.)

40. Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition 

Provisions, Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market Discipline 

and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital 

Rule. OCC, Federal Reserve, Regulatory Capital Rules: Regulatory Capital, Implementation of Basel 

III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Riskweighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based 

Capital Rule, and Market Risk Capital Rule, 78 Fed. Reg. 62018. (Oct. 11, 2013).

41. Federal Reserve Board, FDIC, and OCC, Statement on Prudent Risk Management for Commercial Real 

Estate Lending, (Dec. 8, 2015). available at: https://www.federalreserve.gov/newsevents/pressreleases/

files/bcreg20151218a1.pdf.
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Treasury recommends providing relief from the Federal Reserve’s Small Bank Holding Company 

and Savings and Loan Holding Company Policy Statement (Policy Statement) requirements by 

further raising the threshold for compliance with bank holding company requirements.42 The 

Policy Statement allows BHCs with less than $1 billion in assets to operate with higher levels of 

debt. The Federal Reserve’s Policy Statement recognizes that acquisition debt is often required 

in the transfer of ownership between small banks. Small institutions are often sold to other 

small institutions and small bank acquirers need the financing to make these acquisitions. The 

Federal Reserve raised the exemption limit from $500 million to $1 billion in accordance with 

the enactment of legislation in December 2014. At its current $1 billion threshold, the Policy 

Statement covers over 80% of the BHCs and savings and loan holding companies.43 Raising the 

threshold to $2 billion would provide substantial additional and appropriate relief to several 

hundred more BHCs.44

Recommendations for Community Development Financial Institutions and Minority 

Depository Institutions

In addition to above described regulatory relief, it may be appropriate to grant CDFI banks and 

MDIs additional flexibility in utilizing subordinated debt or capital, particularly capital that is 

borrowed by the holding company and injected into the bank. Such capital may include programrelated investments (PRIs) received from foundations or impact investors.

Recommendations for Federally-Insured Credit Unions

Treasury supports a review and recalibration of NCUA regulations relating to credit union capital 

and stress-testing requirements. 

NCUA should revise the risk-based capital requirements to only apply to credit unions with total 

assets in excess of $10 billion or eliminate altogether risk-based capital requirements for credit 

unions satisfying a 10% simple leverage (net worth) test. This would eliminate the need for the 

October 2015 final rule implementing risk-based capital requirements for credit unions with over 

$100 million in assets starting in 2019.45

In line with the recommendation for the tailoring of capital regulations for community banks, 

Treasury recommends generally raising the scope of application for stress testing of federallyinsured credit unions to $50 billion in assets from the current $10 billion threshold. 

Consistent with the first recommendation above regarding the application of risk-based capital 

requirements only to credit unions with total assets in excess of $10 billion, Treasury supports 

allowing such credit unions to rely in part on appropriately designed supplemental capital to 

meet a portion of their risk-based capital requirements. Such supplemental capital instruments, if 

42. 12 C.F.R. Part 225, Appendix C. While the Policy Statement refers mostly to BHCs, the Policy Statement 

provides that most of its provisions apply to savings and loan holding companies as if they were BHCs. 

43. Killian, Thomas W., Changes to Small BHC Policy Statement: Implications for M&A, Capital Planning, and 

Investment Strategy (April 20, 2015), available at: http://www.sandleroneill.com/Collateral/Documents/

English-US/Small%20BHC%20Policy%20Statement%20Note.pdf.

44. Federal Reserve Y9C data per SNL Financial; staff estimates.

45. NCUA, Risk Based Capital. 80 Fed. Reg. 66626. (Oct. 29, 2015).
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required to have essential prudential features (e.g., noncumulative perpetual preferred stock and 

subordinated debt with long-maturity and lack of early event acceleration), will allow credit unions 

to increase their capital from investors rather than relying solely on retained earnings. 

Encouraging De Novo Activity

Formation of new banking institutions is crucial for a dynamic and growing economy, and 

Treasury strongly supports efforts to encourage de novo formation. Treasury recommends 

implementing changes to the existing regulatory capital requirements and other burdensome 

rules for community banks as discussed above and a critical review of capital requirements 

applicable to de novo banks. Further, the application process of obtaining deposit insurance should be significantly streamlined, and Treasury supports the FDIC’s recent efforts to 

encourage de novo charters. 

Simplifying Regulation

Regulatory Reporting

Currently, the bank Call Report form is over 80 pages and contains a substantial amount of data 

fields which are not applicable to community banks and their business model. The regulators 

have already taken steps to simplify Call Reports for smaller banks (those with under $1 billion in 

assets)46, but further changes are needed. 

Treasury recommends that the regulators continue to streamline current regulatory reporting 

requirements for all community financial institutions. Treasury recommends that the regulators 

focus their efforts on applicability of each line item. 

Examinations

As required by legislation enacted into law in 2015, in February 2016, the banking regulators 

expanded the number of smaller banks eligible for an 18-month examination cycle.47 The final rule 

also raised the dollar threshold for this determination from $500 million to $1 billion. However, 

Treasury recommends that Congress consider raising this threshold further. The NCUA should 

also implement parallel changes to extend examination cycles for smaller credit unions. In addition, all regulators should expand upon current efforts to further coordinate and rationalize their 

examination and data collection procedures to promote accountability and clarity.

Agricultural and Rural Credit

Generally, agricultural banks are small institutions48, with the median asset size of $118 million. 

Providing banking services in rural areas is particularly difficult given the scarcity of key service 

46. OCC, Federal Reserve, FDIC, Proposed Agency Information Collection Activities; Comment Request. 81 

Fed. Reg. 54190. (Aug. 15, 2016). 

47. OCC, Federal Reserve, FDIC, Expanded Examination Cycle for Certain Small Insured Depository Institutions 

and U.S. Branches and Agencies of Foreign Banks. 81 Fed. Reg. 90949 (Dec. 16, 2016). 

48. American Bankers Association, 2016 Farm Bank Performance Report (May 3, 2016), available at: http://

www.aba.com/Tools/Function/Ag/Documents/2016FarmBankPerformanceReport.pdf. Farm banks are 

defined by the ABA as banks whose ratio of domestic farm loans to total domestic loans are greater than or 

equal to the industry average, which was 15.6% in 2016.
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providers, such as appraisers and other legal and compliance staff. As such, the regulators need to 

recognize these circumstances and provide special consideration to agricultural and rural banks’ 

compliance challenges. 

Increase Threshold for Making Small Creditor QM Loans

Treasury recommends changes to the CFPB’s ATR/QM rule and raising the total asset threshold 

for making Small Creditor QM loans from the current $2 billion to a higher asset threshold of 

between $5 and $10 billion to accommodate loans made and retained by a larger set of community 

financial institutions.

Improving the Regulatory Engagement Model

Overview

In an effort to identify opportunities to make regulation more efficient, effective, and appropriately 

tailored, Treasury has sought to identify cross-cutting areas of potential focus in the reassessment 

of banking regulation. Set out below is an exploration of these topics, including the regulatory 

requirements on a banking organization’s board of directors, the enhanced use of regulatory costbenefit analysis, and improvements in the process for remediating regulatory issues. Also included 

is a discussion of the nature of compliance expectations regarding the CRA.

Reassessing Regulatory Requirements on a Banking Organization’s Board of 

Directors

The oversight provided by the Board of Directors of a U.S. banking organization is critical to 

the successful and sound operation of the enterprise. Maintaining discipline and accountability 

on the part of Boards, based on the recognition of core functions and consistent principles, is an 

important tenet for any successful governance model. The failure of Boards in oversight of banking 

organizations was a major contributor to the financial crisis.

One of the most fundamental elements of the governance framework is the separation of duties 

between management, responsible for day-to-day operations of the business, and the Board, 

responsible for oversight of the business and affairs of the organization. As noted by The Clearing 

House in its research on board governance, “blurring of this distinction detracts from effective 

governance by potentially reducing the Board’s ability to focus on its core oversight functions, and 

therefore impairing the Board’s ability to perform its critical oversight role, and creating uncertainty as to roles and responsibilities.”49

Through Treasury’s discussion with a wide range of stakeholders, including chief executive officers, 

trade group representatives, Board members, and governance experts, several themes emerged. 

First, there are over 800 provisions in law, regulation, and agency guidance that impose obligations 

49. The Clearing House. The Role of the Board of Directors in Promoting Effective Governance and Safety and 

Soundness for Large U.S. Banking Organizations (May 2016), at 6.
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on bank Boards.50 This volume crowds out time that should be allocated to oversight of the enterprise’s business risk and strategy. Second, there is a considerable volume of non-strategic regulatory 

matters requiring Board attention that has the impact of blurring the appropriate line between 

management and Board duties. Finally, there is little coherence in the panoply of requirements 

imposed on Boards by various financial regulators, on top of federal and state statutory requirements. This has resulted in significant overlap, a lack of thoughtful coordination of aggregate 

requirements and expectations, and a lack of periodic review or reassessment of the impact of 

aggregate requirements placed on Boards. This has a particularly negative impact on mid-size and 

smaller banking organizations.

The duties imposed on Boards are too voluminous, lack appropriate tailoring, and undermine the 

important distinction between the role of management and that of Boards of Directors. A significant 

shift in the nature and structure of Board involvement in regulatory matters could be made with 

little or no increase in risks posed to the financial system. In fact, allowing Boards to fulfill a clearer 

set of agreed duties, per an enterprise’s corporate governance model, would reduce risk by restoring 

their appropriate governance authority. Treasury recommends an inter-agency review of the collective 

requirements imposed on Boards in order to reassess and better tailor these aggregate expectations 

and restore balance in the relationship between regulators, Boards, and bank management.

Enhanced Use of Regulatory Cost-Benefit Analysis

For over three decades, presidents of both parties have directed executive agencies to evaluate the costs 

and benefits of new regulatory actions.51 The current framework, set forth in Executive Order 12866, 

directs executive agencies to assess the cost and benefits of new rules with particular focus on evaluation and review of economically significant regulations — actions expected to have an annual economic impact of $100 million or more.52 Cost-benefit analysis in the regulatory process is premised 

on the common sense recognition that new rules should be designed to do more good than harm.53

This analytical discipline promotes economic efficiency as well as accountability by better apprising 

the public of the expected impact of a new regulation.54 Cost-benefit analysis also requires agencies to 

consider the trade-offs and potential unintended consequences of new government interventions in 

50. See Letter of Bank Director Regulatory Burdens to Chairwoman Yellen available at: https://www.federalreserve.

gov/SECRS/2016/March/20160329/R-1510/R-1510_021916_130213_541812673740_1.pdf.

51. Executive Order 12291, 46 FR 13193 (Feb. 17, 1981); Executive Order 12498, 50 FR 1036 (Jan. 4, 1985). 

Even before the issuance of Executive Order 12291, however, Presidents had sought to increase executive 

agencies’ use of cost-benefit analysis. See Edward P. Fuchs and James Anderson, The Institutionalization of 

Cost-Benefit Analysis, 10 Pub. Productivity Rev. 25, 27-30 (1987) (examining efforts to implement cost-benefit analysis in Nixon, Ford, and Carter Administrations). 

52. See section 3(f) of Executive Order 12866, 58 FR 51735 (Oct. 4, 1993).

53. Cass Sunstein, The Cost-Benefit State (Coase-Sandor Institute for Law & Economics Working Paper No. 

39, 1996), at 1. 

54. Id. at 4 (“Cost-benefit requirements . . . can be understood as a way of diminishing interest-group pressures 

on regulation and also as a method for ensuring that the consequences of regulation are not shrouded in 

mystery but are instead made available for public inspection and review.”).
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the free market.55 Finally, cost-benefit analysis aids the President and Congress in assessing whether 

proposed regulations, and their underlying statutes, promote the public interest.56

Importantly, however, while Congress has imposed discrete cost-benefit analysis requirements on 

independent financial regulatory agencies – including the CFTC, SEC, FDIC, Federal Reserve, 

OCC, and CFPB57 – these agencies have long been exempt from Executive Order 12866.58 As a 

result, the financial regulators have not adopted uniform and consistent methods to analyze costs and 

benefits, and their cost-benefit analyses have sometimes lacked analytical rigor.59 GAO has therefore 

recommended that the financial regulatory agencies more fully apply Office of Management and 

Budget (OMB) guidance on cost-benefit analysis issued under Executive Order 12866,60 and there is 

bipartisan legislative support for broader cost-benefit analysis by these agencies.61

Although the financial regulatory agencies have sought to incorporate cost-benefit analysis in their 

rulemakings, the current approach remains fragmented and inconsistent. Requiring these agencies to apply cost-benefit analysis to at least all economically significant regulations in a uniform 

and consistent manner would improve the design and implementation of the financial regulatory 

framework. In addition, a more consistent, comprehensive, and uniform approach to cost-benefit 

analysis would improve the transparency of the rulemaking process and make the agencies more 

accountable to Congress and to the public.62

With respect to at least all economically significant proposed regulations, Treasury recommends that 

financial regulatory agencies perform and make available for public comment a cost-benefit analysis. 

That analysis should be included in the administrative record of the final rule. Some variations are 

to be expected given the differing statutory mandates of each agency, but the financial regulatory 

agencies should seek to achieve greater consistency in their methodology and use of cost-benefit 

analysis—modeled on Executive Order 12866 and OMB Circular A-4. These agencies should also be 

required to coordinate their cost-benefit analysis when proposing joint or related regulations. 

55. See section 1(a) of Executive Order 12866 (requiring agencies to assess costs and benefits of “available 

regulatory alternatives”).

56. Sunstein, The Cost-Benefit State, at 22-23.

57. See Maeve Carey, Cost-Benefit and Other Analysis Requirements in the Rulemaking Process, Congressional 

Research Service (Dec. 9, 2014) at 16-22, available at https://fas.org/sgp/crs/misc/R41974.pdf, for an overview of 

the statutory requirements to perform cost-benefit analysis applicable to certain independent regulatory agencies. 

58. Section 3(b) of Executive Order 12866; see also definition of “independent regulatory agency” in 44 U.S.C. 

§ 3502(5). The OCC became an independent agency for purposes of Executive Order 12866 following 

enactment of Dodd-Frank.

59. Dodd-Frank Act Regulations: Implementation Could Benefit from Additional Analyses and Coordination, 

GAO (2011) at 17-18, available at http://www.gao.gov/assets/590/586210.pdf. (“However, none of the 

benefit-cost analyses of the federal financial regulators [for Dodd-Frank rulemakings] that we reviewed either 

explained why benefits and costs could not be monetized or quantified or discussed the strengths and limitations of the available qualitative information.”).

60. Id. at 18.

61. See, e.g., The Independent Agency Regulatory Analysis Act of 2015 (S. 1607) (sponsored by Senators 

Portman and Warner).

62. See Paul Rose and Christopher Walker, The Importance of Cost-Benefit Analysis in Financial Regulation, 

U.S. Chamber of Commerce Center for Capital Markets Competitiveness (March 2013), at 11-15.
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Community Reinvestment Act (CRA)

The Community Reinvestment Act of 19771 was enacted in response to concerns 

that federally insured banking institutions were not making sufficient credit available in local areas in which they were chartered and operate. The CRA applies to 

depository institutions insured by the FDIC.2 The CRA does not apply to credit 

unions and other nonbank entities.3 The OCC, the Federal Reserve, and the FDIC 

administer the CRA for the insured depository institutions that they supervise.4

The CRA requires the banking regulators to rate how well the institutions meet 

local credit needs in their designated “assessment areas,” defined as those where 

institutions have local deposit-taking operations.5 CRA examination reports and 

ratings are made public through the FFIEC.6 While all three prudential regulators 

are involved in checking CRA compliance, none are responsible for evaluating how 

well the CRA accomplishes its mission.7

Regulators use CRA ratings as a factor when approving firms’ applications to 

engage in certain activities, such as opening branches, relocating the main office 

or a branch office, and making acquisitions (business combinations).8 If a bank 

is downgraded to a level that is below “satisfactory,” it would be restricted from 

mergers, acquisitions, opening branches and entering into business arrangements 

until its next CRA exam.9 Because CRA exams are typically conducted only every 

three to five years, and the receipt of a final rating can take a year or more, the 

remediation of CRA issues can often take years to complete. Until such remediation occurs, firms’ ability to expand and grow their business can be constrained for 

multiple years, including undertaking mergers.

The CRA examination process and rating system needs to reflect the variety of 

ways banks do business and meet the needs of diverse consumers and communities. Increasingly, banks use technology, such as automated and online offerings, 

to extend services outside of physical branches. Consideration should also be 

given to effective, innovative means of serving consumers and communities, as 

1. 12 U.S.C. § 2901; see also at 12 C.F.R. 228 (Regulation BB).

2. 12 U.S.C. § 2902.

3. Id.

4. Id.

5. See, e.g., 12 C.F.R. § 228.41.

6. 12 C.F.R. 25.43. Examination Reports are available at: https://www.ffiec.gov/craadweb/DisRptMain.aspx.

7. See Getter, Darryl E., The Effectiveness of the Community Reinvestment Act, Congressional 

Research Service, (2015), at. 8, available at: https://www.newyorkfed.org/medialibrary/media/outreach-and-education/cra/reports/CRS-The-Effectiveness-of-the-Community-Reinvestment-Act.pdf.

8. See OCC. Comptroller’s Licensing Manual, Public Notice and Comments (May 2017), available at: 

https://www.occ.gov/publications/publications-by-type/licensing-manuals/PublicNCbooklet.pdf.

9. Getter, The Effectiveness of the Community Reinvestment Act, at 6.
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Improving the Process for Remediating Identified Regulatory Issues

Areas that could benefit from review and improvement include the breadth and nature of regulatory actions, 

including matters requiring attention (MRAs), matters requiring immediate attention (MRIAs), and consent orders (COs), and the use and impact of regulatory ratings on banking operations and effectiveness. 

Treasury endorses rigorous procedures and accountability for the regulation of depository institutions. Likewise, as noted above, it is critical that both the Board and management play their appropriate role in the oversight of regulatory compliance and the remediation of identified regulatory 

lapses. An appropriate “tone at the top” at both regulators and banking organizations is required to 

fulfill these expectations, with mutual accountability and a common understanding of responsibility. This must grow from relationships between firms and regulators based on transparency and 

clear rules and guidance.

Treasury recommends an interagency reassessment of the volume and nature of MRAs, MRIAs, and 

COs to evaluate their impact, consistency, and overlap and to establish consistent interagency standards. Treasury also recommends that regulators and banking organizations develop an improved 

approach to addressing and clearing regulatory actions. Many banking organizations report multiyear delays in even receiving a plan to clear regulatory actions, which clouds their business activities 

during such delays. This is reported to be particularly acute in circumstances where there is a lack 

of transparency in rules and rulemaking in enforcement-led regulatory compliance regimes. 

demonstrated by measures such as customer satisfaction reviews, needs assessments, and partnerships with community-based organizations. In addition, when 

assessing the extent to which the convenience and needs of the community would 

be served by an acquisition or a merger, regulators should give careful and equal 

weight to the views of individuals who support and oppose the activity.

Treasury expects to comprehensively assess how the CRA could be improved, 

which will include soliciting input from individual consumer advocates and other 

stakeholders. Aligning the regulatory oversight of CRA activities with a heightened 

focus on community investments will be a high priority for the Secretary. Treasury 

plans to review several aspects of the CRA framework, including assessing the need 

for: improvement in how banks’ CRA investments are measured to improve their 

benefit to communities; additional harmonization of CRA supervision given the oversight by multiple regulators; changes in the way CRA geographic assessment areas 

are defined because of the changing nature of technology and other factors; and 

improvement in the regulatory review and rating assessment process, which would 

consider the frequency of examinations, the ability of institutions to remediate ratings, and the transparency of how the overall CRA assessment rating is determined. 

Treasury believes that it is important that banks’ CRA investments better align with 

the needs of the communities that they serve, are made in a manner that is consistent with a firm’s safety and soundness, and that such investments be subject to 

efficient and effective supervision. 
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Living Wills

Overview

Section 165(d) of Dodd-Frank requires large bank holding companies (those with $50 billion or 

more in total consolidated assets) and nonbank financial companies designated by the FSOC to 

prepare living wills for their rapid and orderly resolution under the U.S. Bankruptcy Code or other 

applicable law.63

Living wills are reviewed by the Federal Reserve and the FDIC.64 Following their review, the 

Federal Reserve and the FDIC may jointly determine that a plan is not credible or would not 

facilitate an orderly resolution under the U.S. Bankruptcy Code.65 Treasury supports the ongoing 

requirements of living wills, subject to refinements as set forth below, in particular properly tailoring the threshold of participation. 

Dodd-Frank requires the agencies to take actions upon jointly determining that a firm’s living will 

is deficient, or “not credible.”66 In the first phase, the Federal Reserve and the FDIC issue a joint 

notice of deficiency.67 The firm then has 90 days to resubmit a living will that addresses the outlined deficiencies, although the agencies may jointly agree to extend or reduce this time period.68

Thereafter, if the resubmitted living will is still deemed deficient, a two-stage process is initiated:

• First, if a firm does not cure the deficiencies in a timely manner, the Federal Reserve and 

the FDIC may jointly impose (a) more stringent capital, leverage, or liquidity requirements or (b) restrictions on the company’s growth, activities, or operations.69

• Second, if the Federal Reserve and the FDIC have jointly imposed any of the requirements or restrictions under the first step above, and the firm has still failed to submit a 

revised living will that adequately remedies the identified deficiencies within two years, 

the agencies may jointly order the divestiture of certain assets or operations, subject to 

the following requirements: (a) the agencies must first consult with the FSOC; and (b) 

the agencies must jointly determine that divestiture is necessary to facilitate an orderly 

resolution under the Bankruptcy Code in the event of the company’s failure.70

To date, the Federal Reserve and FDIC have issued joint deficiency determinations only once—to 

five of the largest firms following their 2015 submissions. Four of the five firms remedied their 

plans upon the subsequent re-submission. Only Wells Fargo’s plan remained deficient, and it was 

63. Dodd-Frank § 165(d).

64. Id.

65. Dodd-Frank § 165(d)(4).

66. Id.

67. Id.

68. Dodd-Frank §165(d)(4); 12 C.F.R. §243.5 (Federal Reserve); §381.5 (FDIC).

69. Dodd-Frank § 165(d)(5)(A); 12 C.F.R. §243.6 (Federal Reserve); §381.6 (FDIC).

70. Dodd-Frank § 165(d)(5)(B); 12 C.F.R. §243.6(c) (Federal Reserve); §381.6(c) (FDIC).
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subjected to restrictions on the growth of its international and nonbank activities. These restrictions were lifted in April 2017 upon a satisfactory re-submission by Wells Fargo.71

The slow accretion of guidance for living wills without the benefit of public notice and comment 

has imposed an undue burden on participating institutions. Living wills’ thresholds of participation should be more appropriately tailored to the size and complexity of banks’ business models 

and not serve as supplemental capital and liquidity regulatory guidance requirements. Current 

guidance has required the pre-positioning of excess amounts of liquidity and capital by requiring 

banks to pre-fund a bankruptcy through the Resolution Liquidity Execution Need (RLEN) and 

Resolution Adequacy and Positioning (RLAP) standards.72 Further improvement on guidance for 

living wills should be made, subject to public notice and comment. 

Recommendations for Regulatory Reform

The following are Treasury’s recommendations for improving the regulatory approach to living wills.

Raise threshold for living will requirements 

Treasury recommends changing the threshold for compliance with living will requirements for 

BHCs from the current threshold of $50 billion to match the revised threshold for application of 

enhanced prudential standards. The Federal Reserve and FDIC have used their authority to tailor 

the application of these requirements for smaller institutions, but the statute still compels the agencies to require bank holding companies at or above the $50 billion asset threshold to periodically 

submit some sort of a living will.

Adjust living will submission frequency

Section 165(d) of Dodd-Frank does not specify a timeframe for living will submissions. The agencies, in a 2011 joint rulemaking, required annual submissions, although the agencies have since 

granted numerous extensions.73 The agencies should formalize a change of the living will process 

to a two-year cycle. 

The agencies could require firms to provide notice of material events that occur between living 

will submissions. If the agencies identify potential concerns arising from such a material event, the 

agencies could require the firm to submit a revised living will. 

Improve living will guidance

The agencies should be held accountable to develop specific, clear, and accountable guidance for 

living will submissions as well as the assessment framework for determining deficiencies in living 

71. See Hamilton, Jesse, Wells Fargo’s Living Will Approved After Third Try, Bloomberg 

(Apr. 24, 2017), available at: https://www.bloomberg.com/news/articles/2017-04-24/

wells-fargo-s-third-time-a-charm-as-it-clears-living-will-hurdle.

72. See Federal Reserve Board and FDIC, Guidance for 2017 §165(d) Annual Resolution Plan Submissions By 

Domestic Covered Companies that Submitted Resolution Plans in July 2015 (Apr. 13, 2016), available at: 

https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20160413a1.pdf. 

73. 12 C.F.R. §243.3 (Federal Reserve); §381.3 (FDIC).
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will submissions (including remediation procedures). All assessment framework and guidance 

should be subject to a public notice and comment process.

As noted above, the agencies’ living will guidance has effectively required companies to increase 

capital and liquidity standards through Resolution Liquidity Execution Need (RLEN) and 

Resolution Liquidity Adequacy and Positioning (RLAP) requirements. It is particularly important 

that any such guidance that effectively acts as a regulatory requirement should be minimized and 

that such guidance be subject to notice and public comment before going into effect.74

Consolidate regulatory oversight and improve timeliness of feedback

While the Federal Reserve and the FDIC have increased their coordination and responsiveness 

to companies seeking guidance on the preparation of their living wills, ongoing discrepancies in 

guidance remain. Treasury recommends that section 165(d) of Dodd-Frank be amended to remove 

the FDIC from the living wills process. In addition, the Federal Reserve should be required to 

complete its review and give feedback to firms on their living wills within six months.

Foreign Banking Organizations

Overview

Foreign banking organizations operate in the United States across a spectrum of business models 

and sizes, ranging from a single U.S. branch to mid-sized banks with traditional retail footprints to 

some of the largest broker-dealers in the United States. FBOs represent 20% of total U.S. banking 

system assets, provide about one-third of U.S. business loans,75 and comprise more than half of the 

23 primary dealers of the Federal Reserve Bank of New York.76

The financial crisis demonstrated a need to reassess the extent of reliance on home country supervision of risk management, capital, and liquidity of the U.S. operations of FBOs. In recognition 

of the increased complexity, interconnectedness, and concentration of U.S. operations of FBOs, 

reforms introduced new requirements to improve the supervisory framework and create a more 

level playing field between U.S. and foreign banks. However, as discussed below, the application of 

these requirements needs to be reevaluated so that FBOs are not unduly constrained.

74. Moreover, as noted in the capital, leverage and liquidity section, requirements to pre-fund a bankruptcy filing 

via RLEN and RLAP standards should be calibrated in a way that does not unnecessarily trap capital and 

liquidity in subsidiaries.

75. Federal Reserve Board, Share Data for the U.S. Offices of Foreign Banking Organizations, (Sep. 30, 2016), 

available at: https://www.federalreserve.gov/releases/iba/fboshr.htm. The Federal Reserve asset figures do 

not include certain non-bank affiliates and credit unions.

76. Federal Reserve Bank of New York, Primary Dealers, available at: https://www.newyorkfed.org/markets/

primarydealers.
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Enhanced Prudential Standards

Section 165 of Dodd-Frank requires the Federal Reserve to adopt tailored enhanced prudential 

standards applicable to large BHCs and certain FBOs.77 As adopted by the Federal Reserve, the 

enhanced prudential standards applicable to FBOs with $50 billion or more of total U.S. assets 

include extensive capital, liquidity, risk-management and stress testing requirements.78 FBOs with 

global total consolidated assets of $50 billion or more, but less than $50 billion in combined 

U.S. assets, are subject to less-stringent enhanced prudential standards.79 These smaller FBOs may 

comply with most of the new enhanced prudential standards by certifying that their compliance 

with home country requirements for capital, liquidity, and stress testing are consistent with U.S. 

requirements.80 However, such FBOs must also satisfy risk management requirements adopted by 

the Federal Reserve.81 FBOs with global assets of between $10 and 50 billion can also satisfy the 

Federal Reserve’s stress testing requirements by certifying compliance with their home country 

stress testing regime, but are subject to the Federal Reserve’s risk management requirements.82

The Federal Reserve also adopted rules, as required by section 165 of Dodd-Frank, requiring FBOs 

with $50 billion or more in total consolidated assets to submit resolution plans to the Federal Reserve 

and FDIC demonstrating how their U.S. operations would be resolved under the Bankruptcy Code.83

Because the statutory threshold for application of these requirements is based on total consolidated 

assets, not U.S. assets, it has resulted in more than 100 FBOs being required to submit resolution 

plans, some of which have only a small U.S. presence.84 Although the Federal Reserve and FDIC 

have tailored the resolution plan requirements for FBOs based on size and complexity (as well as for 

smaller, less complex U.S. bank holding companies), the requirement still places unnecessary burdens 

on institutions whose U.S. operations do not pose risks to financial stability.

Intermediate Holding Company Requirements

The Federal Reserve also requires FBOs with $50 billion or more in U.S. non-branch assets to 

establish an intermediate holding company over its U.S. banking and non-banking subsidiaries.85

The IHC requirement provides the Federal Reserve a platform for consolidated supervision and 

regulation of U.S. operations of large, complex FBOs consistent with those for U.S. BHCs of a 

similar size and structure. Generally, IHCs must meet the same risk-based capital, capital planning, 

and leverage standards that are applicable to U.S. BHCs with $50 billion or more in total assets, 

though U.S. IHCs of FBOs do not have to comply with the U.S. requirements for advanced 

77. See § 12 U.S.C. 5365(a)(1)(B).

78. 12 C.F.R. Part 252.

79. Id.

80. Id.

81. Id.

82. Id.

83. Dodd-Frank §165(d)(8).

84. Fields, Henry, Marc-Alain Galeazzi, Oliver Ireland, and Barbra Mendelson, Summary of Final Rule Imposing 

Enhanced Prudential Standards on FBOs (Feb. 24, 2014), available at: http://media.mofo.com/files/

uploads/Images/140224-Final-Rule-FBO-Standards.pdf.

85. 12 C.F.R. Part 252.
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approaches capital calculations or the U.S. eSLR that apply to U.S. BHCs. In addition, the Federal 

Reserve’s 2016 TLAC and minimum debt rule requires IHCs of FBOs that are G-SIBs to maintain 

a certain amount of internal TLAC (including a certain percentage of debt) issued to their foreign 

parent company.86

Challenges with the Post-Crisis Regulatory Framework

One of the principal concerns raised regarding the post-crisis regulatory framework for FBOs has 

been how it has discouraged FBOs’ appetite to participate in U.S. markets. Some view the requirements for U.S. capital and liquidity as excessive because the FBO’s ultimate parent is already 

supervised and capitalized at the consolidated level, including its U.S. operations, under applicable 

international banking standards. Moreover, requiring such capital and liquidity at the IHC level 

results in requirements that can often exceed what would be required if the U.S. activities were 

treated as part of the IHC’s consolidated parent.

In addition, too many FBOs that have a relatively small U.S. presence are subject to regulatory 

burdens. Approximately110 FBOs exceed the statutory threshold of $50 billion in global total 

consolidated assets and are thus subject to some form of the U.S. enhanced prudential standards.87

Most of these 110 firms are not FBOs with a large U.S. presence, with nearly 80% having less than 

$50 billion in U.S. assets and nearly 60% having less than $10 billion in U.S. assets.88

Recommendations for Regulatory Reform

Treasury supports a regulatory regime for FBOs that addresses the risks that they present to the 

U.S. financial system and promotes a level playing field between domestic and foreign banks operating in the United States. Specifically, Treasury supports the continuation of the Federal Reserve’s 

IHC regime to promote consolidated prudential supervision over FBOs’ U.S. banking and nonbanking activities (including investment banking and securities dealing). Treasury also supports 

application of the Federal Reserve’s long-term debt and TLAC rule to improve the resolvability 

of G-SIBs. However, changes to the current framework should be made to encourage foreign 

banks to continue to participate in U.S. financial markets and provide credit to the U.S. economy. 

Treasury recommends the following changes to address the principal concerns regarding the FBO 

regulatory regime:

Applying enhanced prudential standards for FBOs based upon their U.S. 

footprints rather than global consolidated assets

The application of enhanced prudential standards and living will requirements to FBOs should be 

based on their U.S. risk profile, using the same revised threshold as is used for the application of 

enhanced prudential standards to U.S. bank holding companies, rather than on global consolidated 

86. Id. 

87. See Fields, Summary of Final Rule Imposing Enhanced Prudential Standards on FBOs, at 1.

88. Institute of International Bankers, Executive Order 13772, U.S. Supervision and Regulation of 

International Banks (April 28, 2017), p. 6, available at: http://www.iib.org/news/347089/IIB-submittedrecommendations-to-Treasury-regarding-Executive-Order-13772.htm.
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assets. FBOs’ U.S. regulatory requirements should be proportional to the risks presented by such 

firms to the U.S. financial system.

Recalibrating IHC requirements 

Consistent with the thresholds recommended above for U.S. BHCs, the threshold for IHCs to 

comply with U.S. CCAR should be raised from the current $50 billion level to match the revised 

threshold for the application of enhanced prudential standards, subject to the ability of the Federal 

Reserve to impose these requirements on smaller IHCs in cases where the potential risks posed by 

the firm justify the additional requirements. 

Other IHC regulatory standards, such as resolution planning and liquidity, should also be recalibrated. In considering such a recalibration, greater emphasis should be given to the degree to which 

home country regulations are comparable to the regulations applied to similar U.S. BHCs. Where 

regulations are sufficiently comparable, FBOs should be allowed to meet certain U.S. requirements 

through compliance with home country regimes.

Recalibrating the Federal Reserve’s long-term debt and TLAC rule

Maintaining the Federal Reserve’s internal TLAC requirement for the IHCs of foreign G-SIBs is 

important for improving their resolvability. However, Treasury recommends the Federal Reserve 

consider recalibration of this internal TLAC requirement. In assessing the appropriate calibration, 

the Federal Reserve should consider the foreign parent’s ability to provide capital and liquidity 

resources to the U.S. IHC, provided arrangements are made with home country supervisors for 

deploying unallocated TLAC from the parent, among other factors.

Improving the Volcker Rule 

Section 619 of Dodd-Frank, known as the “Volcker Rule,” generally prohibits insured depository 

institutions from engaging in proprietary trading or investing in hedge funds or private equity 

funds.89 This prohibition also applies to banks’ affiliates and holding companies, as well as certain 

foreign banking organizations with U.S. operations. Banking organizations have been required to 

comply with most provisions of the Volcker Rule since July 2015.90

Banks with access to the federal safety net — FDIC insurance and the Federal Reserve discount 

window — should not engage in speculative trading for their own account. Insured banks that 

engage in proprietary trading enjoy a government-conferred advantage that invites moral hazard.

In its design and implementation, however, the Volcker Rule has far overshot the mark. The rule 

has spawned an extraordinarily complex and burdensome compliance regime due to a combination 

of factors: the scope of firms subject to the rule’s prohibitions, the number of regulators charged 

with enforcement, the ambiguous definitions of key activities under the rule, and the extensive 

compliance programs that the rule requires firms to adopt. Most important, the rule has hindered 

89. 12 U.S.C. § 1851 (2010).

90. Federal Reserve, Order Approving Extension of Conformance Period (Dec. 10, 2013), available at: http://

www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210b1.pdf.
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both market-making functions necessary to ensure a healthy level of market liquidity and hedging 

necessary to mitigate risk.91

The recommendations detailed below would reduce the scope and complexity of the Volcker Rule 

and allow banks more easily to hedge the risks of their activities and conduct the market-making 

activities on which the liquidity of our markets depends. 

Recommendations for Regulatory Reform

Exempt Smaller Institutions from the Volcker Rule

Applying the Volcker Rule to firms whose failure would not pose risks to financial stability, or to 

firms that engage in little or no proprietary trading or covered funds activities, imposes substantial 

regulatory burdens but offers little benefit. Therefore, as described below, firms that are small or do 

not engage in significant proprietary trading should not be subject to the Volcker Rule. We make 

this recommendation with the expectation that any limited proprietary trading conducted by such 

a firm would continue to be subject to supervision and examination by the banking regulators to 

ensure it is conducted in a safe and sound manner.

Banks With $10 Billion or Less in Assets

Most small banks do not engage in proprietary trading or invest in or sponsor private equity funds 

and hedge funds.92 Although the regulations provide banking entities with $10 billion or less in 

assets with accommodations from the rule’s compliance program requirements,93 these banks have 

still been required to expend considerable resources to ensure that their activities do not constitute 

prohibited proprietary trading. In particular, such institutions, even if they do not engage in any 

trading, have had to expend resources to confirm that transactions they engage in for hedging their 

interest rate and other business risks are permitted under the Volcker Rule. The relatively small risk 

that these institutions pose to the financial system does not justify the compliance burden of the 

rule, and the risk posed by the limited amount of trading that banks of this size could engage in 

can easily be addressed through existing prudential regulation and supervision. For these reasons, 

banking organizations with $10 billion or less in total consolidated assets should be entirely exempt 

91. See Jack Bao, Maureen O’Hara, and Xing (Alex) Zhou, The Volcker Rule and Market-Making in Times of 

Stress. Board of Governors of the Federal Reserve System Finance and Economics Discussion Series 

Working Paper No. 2016-102. (Sept. 2016), available at: https://ssrn.com/abstract=2890846 (presenting evidence that the Volcker Rule has a deleterious effect on corporate bond liquidity during times 

of stress). See also Adrian Tobias, Nina Boyarchenko, and Or Shachar, Dealer Balance Sheets and 

Bond Liquidity Provision, Journal of Monetary Economics (2017), available at: https://doi.org/10.1016/j.

jmoneco.2017.03.011 (subscription required) (finding that institutions more impacted by post-crisis regulation are less able to intermediate customer trades).

92. Federal Reserve. The Volcker Rule: Community Bank Applicability (Dec. 10, 2013), available at: https://

www.federalreserve.gov/aboutthefed/boardmeetings/volcker-rule-community-bank-20131210.pdf.

93. See, e.g., 12 C.F.R. 248.20, (e), (f)(2). The regulations promulgated by the five agencies responsible for 

implementing the Volcker Rule are found at 12 C.F.R. part 248 (Federal Reserve), 12 C.F.R. part 44 (OCC), 

12 C.F.R. part 351 (FDIC), 17 C.F.R. part 255 (SEC), and 17 C.F.R. part 75 (CFTC). Citations herein are to 

the Federal Reserve’s regulations, for convenience.
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from all aspects of the Volcker Rule. This exemption would allow these banks to focus on their core 

business of lending to consumers and small and mid-size businesses. 

Banks Over $10 Billion in Assets with Few Trading Assets

Banks with over $10 billion in assets should not be subject to the burdens of complying with the 

Volcker Rule’s proprietary trading prohibition if they do not have substantial trading activity. A 

further exemption from the proprietary trading prohibition should be provided for all consolidated 

banking organizations, regardless of size, that have less than $1 billion in trading assets and trading 

liabilities and whose trading assets and trading liabilities represent 10% or less of total assets. 

Trading conducted in amounts below these thresholds does not warrant the extensive burden of 

compliance with the Volcker Rule but rather can be more efficiently addressed through appropriate 

capital requirements and through prudential supervision and regulation.

These thresholds have already been adopted by the Federal Reserve, OCC, and FDIC for determining which banks have sufficient market exposure to require application of the agencies’ market risk 

capital rules.94 The market risk capital rules require banks with trading assets and trading liabilities 

that exceed these thresholds to adjust their risk-based capital ratios to reflect the market risk in 

their trading activities. Therefore, an added benefit of using the same thresholds to determine 

application of the proprietary trading restrictions—potentially with adjustments to the market risk 

capital definition of trading assets to exclude assets like loans and U.S. Treasury securities that are 

exempt from the Volcker Rule’s proprietary trading restrictions—is that it would avoid subjecting 

banks to an additional calculation requirement to determine whether they fall within the Volcker 

Rule’s scope.

In addition, limiting the application of the Volcker Rule’s proprietary trading restrictions to those 

banks that are subject to the market risk capital rules would, as discussed below, permit the elimination of the purpose test in the current proprietary trading definition.

Under this recommendation, all banking entities with more than $10 billion in assets would remain 

subject to the covered funds provisions of the Volcker Rule. The potential risk to the safety net 

and conflicts of interest presented by covered funds activities apply to all banks. The reforms to the 

covered funds restrictions discussed below would, however, substantially reduce the compliance 

burden of the rules and permit additional activities that pose no significant risks to banks.

Improve Regulatory Coordination

The current framework, in which five different regulators have responsibility for overseeing implementation of the Volcker Rule, results in fragmentation in responsibility and confusion for banks 

subject to the rule. In particular, the CFTC has jurisdiction over futures commission merchants 

and swap dealers; the FDIC over insured nonmember state banks; the SEC over brokers, dealers, 

registered investment companies, investment advisers, and security-based swap dealers; the OCC 

over national banks, federal savings associations, and federal branches of foreign banks; and the 

Federal Reserve over bank holding companies and savings and loan holding companies and their 

subsidiaries not otherwise regulated by the other regulators, state member banks, and foreign 

94. 12 C.F.R. 217.201.
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banking organizations.95 In some cases, two agencies have responsibility for a single banking entity, 

such as a national bank that is a swap dealer, and a single trade and related hedge could be booked 

at two different entities, each of which is regulated by a different agency. This fragmentation of 

responsibility for determining how the rule should be applied to a particular banking entity or 

trading desk is inefficient for both the banks and the regulators.

The regulators’ existing approach to coordination has not worked and, as a result, banks have had 

difficulty obtaining clear, consistent guidance. These agencies should ensure that their interpretive 

guidance and enforcement of the Volcker Rule is consistent and coordinated.

Clarify and Simplify the Proprietary Trading Prohibition and Exemptions

In addition to the reforms to the scope of the Volcker Rule described above, additional changes are 

necessary to clarify the rule’s prohibitions, reduce unnecessary compliance burdens, and promote 

market making and other economically important activities. These concerns and recommendations are described below.

Simplify the Definition of Proprietary Trading

The Volcker Rule’s definition of proprietary trading turns on three tests—two of which are 

relatively straightforward, and one of which has generated undue complexity. Each of the two 

“straightforward” tests has the virtue of being linked to objective determinations that provide 

clarity to regulated entities. Under the “market risk capital rule test,” for any banking entity subject 

to the market risk capital rule described above, the definition includes transactions in certain financial instruments that are covered under those capital rules. Under the “status test,” the definition 

includes transactions in financial instruments by a registered dealer, swap dealer, or security-based 

swap dealer, if the purchase or sale is made in connection with the activity that requires the entity 

to be registered as such.96

The “purpose test,” by contrast, turns on a fact-intensive, subjective inquiry. To evaluate a trade 

under the purpose test, a banking entity is required to determine whether a trade was made principally for the purpose of short-term resale, benefitting from actual or expected short-term price 

movements, realizing short-term arbitrage profits, or hedging such a position.97 A definition that 

centers on the purpose of a purchase or sale effectively requires an inquiry into the trader’s intent 

at the time of the transaction, which introduces considerable complexity and subjectivity into the 

inquiry regarding whether transactions are permitted. Recognizing the difficulty of discerning the 

purpose of a transaction, the regulations create a rebuttable presumption that any position held for 

fewer than 60 days constitutes proprietary trading.98 This presumption, however, simply replaces 

one problem with another—exchanging subjectivity for overbreadth. The 60-day presumption 

places the burden on firms to justify the permissibility of their trading, creating undue pressure on 

compliance programs and leading to excessive conservatism in firms’ trading activities.

95. 12 U.S.C. § 1851(b)(2)(B)(i).

96. 12 C.F.R. 248.3(b)(1)(ii), (iii).

97. 12 C.F.R. 248.3(b)(1)(i); see also 12 U.S.C. 1851(h)(6).

98. 12 C.F.R. 248.3(b)(2).
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The proprietary trading prohibition should be revised by eliminating the regulations’ rebuttable 

presumption that financial positions held for fewer than 60 days constitute proprietary trading. In 

addition, policymakers should assess whether the purpose test should be eliminated altogether, to 

avoid requiring banks to dissect the intent of a trade. As discussed above, only banking organizations subject to the market risk capital rule should be subject to the proprietary trading prohibition. These firms are already required to determine their trading assets and liabilities for purposes 

of the market risk capital rule. Limiting the definition of proprietary trading to the market risk 

capital rule test and the status test would substantially reduce the burden on firms to determine 

whether a particular trade is proprietary trading.

Provide Increased Flexibility for Market-Making 

Concerns have also been raised as to the Volcker Rule’s market-making exemption and the effect 

the conditions currently placed on this activity may have on market liquidity. Market-making is an 

important service provided by banks that does not pose the same risks as speculative proprietary 

trading, but banks must comply with a host of conditions to fit within the market-making exemption under the rule. Banks must, among other things, stand ready to purchase and sell in particular 

markets and abide by limits as to the risk exposure of their market-making activity.99

Under the Volcker Rule, banks conducting market-making activities must also engage in extensive 

analysis to ensure that their market-making inventory does not go beyond what regulators deem 

to be appropriate. Specifically, the amount, types, and risks of the bank’s market-making inventory 

must be designed not to exceed the “reasonably expected near term demand” (the RENTD) of 

the bank’s clients, customers, and counterparties.100 Because a bank is generally not permitted 

to hold securities and derivatives in excess of this amount in its market-making inventory, if the 

RENTD standard is calibrated too tightly for a class of financial instruments, banks will not have 

enough inventory to make markets in those instruments. The difficulties of forecasting demand, 

accompanied by the rule’s requirements for detailed planning regarding the amounts, types, and 

risks of financial instruments that market makers can maintain in their inventory, create considerable hurdles for banking entities to engage in market-making.

To address this problem, regulators should give banks additional flexibility to adjust their determinations of the reasonable amount of inventory. In particular, for illiquid securities, banks should 

be permitted to focus less on predicting with precision the future demands of clients based on 

past patterns and should have greater leeway to anticipate changes in markets that could increase 

demand for such securities. For over-the-counter derivatives, which are less suited to the RENTD 

framework, regulators should focus more on ensuring that banks appropriately hedge the positions 

they maintain. Banks that have not yet established a market-making presence in a particular asset 

class should have more discretion to meet the RENTD condition while they are building up 

customer volume. And block trades should be viewed as an important part of market-making 

activities with banking entities being able to enter into these trades even if they involve a trading 

volume outside of historical averages.

99. 12 C.F.R. 248.4(b)(2).

100. 12 C.F.R. 248.4(b)(2)(ii); see also 12 U.S.C. § 1851(d)(1)(B).
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In addition, policymakers should evaluate the benefits of other potential modifications to the 

RENTD framework. One approach would be to provide banking entities with an ability to opt 

out of the RENTD requirement altogether if they meet certain conditions. For example, a banking 

entity should be able to opt out of the RENTD requirement if the firm adopts and enforces narrowly tailored trader mandates that ensure that its activities constitute market making, provided 

that the firm complies with all the other conditions of the market-making exemption. A more 

targeted RENTD opt-out could also be provided for a firm’s transactions in a particular financial 

instrument if the firm fully hedges all significant risks arising from its inventory of that instrument. 

In either case, a firm that opts out of RENTD would still be required routinely to stand ready 

to purchase and sell the relevant instrument, satisfy the compliance program requirements, and 

maintain compensation arrangements designed not to reward or incentivize prohibited proprietary 

trading. Such an approach would spare both banks and regulators the complex analysis that the 

RENTD requirement entails while ensuring that the risks to the bank from any additional inventory are appropriately mitigated. 

Reduce the Burden of Hedging Business Risks

Hedging that reduces a bank’s interest rate, credit, market, and other risks has become a key way 

for banks of all sizes to manage their risks and allow their capital to be more efficiently deployed 

toward making loans to their customers. The Volcker Rule appropriately exempts risk-mitigating 

hedging transactions from the proprietary trading prohibition.101 However, the compliance program and documentation requirements that banks must comply with under the regulations to avail 

themselves of the exemption are unnecessarily burdensome. In particular, although banks should 

be required to establish policies and procedures to ensure that their hedging activity is designed to 

reduce particular risks to the bank, banks should not be required to maintain ongoing calibration 

of a hedge over time to ensure that it meets regulatory requirements.102 Instead, banks should be 

required to monitor risks as part of their standard business practice and should be responsible 

for taking reasonable action to mitigate material new risks that develop over time including from 

existing positions. Further, the requirement to maintain documentation of the specific assets and 

risks being hedged is overly burdensome and should be eliminated.

Reduce the Burdens of the Volcker Rule’s Compliance Regime

Underlying the Volcker Rule’s restrictions are extensive compliance program and trading metrics 

collection and reporting requirements.103 The agencies provided for progressively more stringent 

requirements based on a banking entity’s size and involvement in covered activities but further 

tailoring would reduce burdens without significantly increasing risks at banking entities.

As stated above, banks with less than $10 billion in assets should be exempted from the rule 

entirely and banking organizations not subject to the market risk capital rules should be exempt 

from the proprietary trading restrictions.

101. 12 C.F.R. 248.5; see also 12 U.S.C. § 1851(d)(1)(C).

102. See 12 C.F.R. 248.5(b)(2)(iv)(C).

103. See 12 C.F.R. 248 Subpart D; 12 C.F.R. 248 Appendix A; 12 C.F.R. 248 Appendix B.
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Further, the existing “enhanced” compliance program under the regulations should be focused 

in application so that it applies only to those banking entities with at least $10 billion in trading 

assets and liabilities on a consolidated basis, rather than the current application to all banking 

entities with over $50 billion in total consolidated assets.104 All banks should be given greater ability to tailor their compliance programs to the particular activities engaged in by the bank and the 

particular risk profile of that activity. In addition, the agencies responsible for implementing the 

Volcker Rule should reevaluate the metrics that the largest firms are currently required to collect 

and eliminate any that are not necessary for effective supervision.

Focus and Simplify Covered Funds Restrictions

In addition to the restrictions on proprietary trading, the Volcker Rule restricts banking entities’ 

ability to make investments in and sponsor certain types of funds referred to as “covered funds.”105

These restrictions are intended to eliminate banks’ ability and incentive to bail out their funds in 

order to protect their reputational risk, guard against conflicts of interest with clients of the bank, 

and prevent banking entities from engaging in proprietary trading indirectly through funds. 

However, the covered funds provisions of the Volcker Rule are not well-tailored to these objectives. 

Treasury believes that changes to the covered fund provisions can greatly assist in the formation of 

venture and other capital that is critical to fund economic growth opportunities. First, the covered 

funds definition is overly broad, including types of entities beyond private equity and hedge funds. 

The current approach of defining covered funds by reference to whether they would be deemed 

investment companies under the Investment Company Act but for certain specific exemptions106

requires banks to go through a highly technical, fact-specific legal analysis. Instead, regulators 

should adopt a simple definition that focuses on the characteristics of hedge funds and private 

equity funds with appropriate additional exemptions as needed.

Other revisions to the covered funds restrictions are necessary to further reduce complexity and 

undue compliance burden. The exemptions in Section 23A of the Federal Reserve Act should be 

restored in the Volcker Rule so that they apply to banking entities’ transactions with their covered 

funds.107 The initial “seeding period” exemption from the covered funds investment restriction 

should be extended to three years, rather than one year, to provide banking entities with additional 

time to stand up new funds and allow them to establish the track records they need to attract 

investors.108 Although the prohibition on depository institutions sharing a name with the funds 

they sponsor is appropriate to avoid customer confusion as to whether the fund is insured, banking 

entities other than depository institutions and their holding companies should be permitted to 

share a name with funds they sponsor provided that the separate identity of the funds is clearly 

disclosed to investors.109

104. See 12 C.F.R. 248.20(c).

105. 12 C.F.R. 248.10(a); see also 12 U.S.C. § 1851(a)(1)(B).

106. 12 C.F.R. 248.10(b); see also 12 U.S.C. § 1851(h)(2).

107. See 12 U.S.C. § 1851(f).

108. See 12 U.S.C. § 1851(d)(4)(B)(ii).

109. See 12 U.S.C. § 1851(d)(1)(G)(vi).
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Finally, under the current rules, some foreign funds that are controlled affiliates of a foreign banking entity are themselves deemed “banking entities” subject to the Volcker Rule’s restrictions even 

when these funds are offered solely outside of the United States. This outcome imposes unreasonable and unnecessary limitations on foreign funds’ activities and should be eliminated. An exemption from the Volcker Rule’s definition of “banking entity” should be provided for foreign funds 

owned or controlled by a foreign affiliate of a U.S. bank or a foreign bank with U.S. operations.

Create an Off-ramp for Highly Capitalized Banks

The above reforms would greatly reduce the scope and complexity of the Volcker Rule, reduce 

the unnecessary burden it has placed on banks, and permit banks to engage in increased marketmaking activities. However, consideration should be given to permitting a banking entity that 

is sufficiently well-capitalized such that the risks posed by its proprietary trading are adequately 

mitigated by its capital, to opt out of the Volcker Rule altogether, as discussed under “Capital 

and Liquidity” above. Such an institution should remain subject to trader mandates and ongoing 

supervision and examination to reduce risks to the safety net.
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PROVIDING CREDIT TO FUND CONSUMER 

AND COMMERCIAL NEEDS

TO DRIVE ECONOMIC GROWTH

Consumer Financial Protection Bureau

Empowering Consumers: Opportunities to Reform the CFPB

Dodd-Frank established the CFPB, an independent agency in the Federal Reserve System, as the 

primary federal regulator of consumer financial products and services.110 Before the CFPB was 

created, responsibility for federal consumer financial protection was spread across multiple regulators, including the OCC, the Federal Reserve, and the Federal Trade Commission (FTC). These 

agencies had varying missions and levels of authority over their regulated entities. The CFPB was 

intended to centralize consumer financial protection regulation in a single agency with a single 

purpose.

Dodd-Frank gives the CFPB the exclusive authority to prescribe rules and issue orders and guidance under federal consumer financial law,111 grants it enforcement and supervisory authority 

over most nonbanks engaged in the provision of consumer financial products and services112 and 

over insured depository institutions and insured credit unions with total assets of more than $10 

billion,113 and requires it to establish a publicly available consumer complaint database.114 As of 

May 2017, the CFPB has publicly announced 185 enforcement actions and issued 62 final and 

interim final rules.115

The CFPB was created to pursue an important mission, but its unaccountable structure and 

unduly broad regulatory powers have led to regulatory abuses and excesses. The CFPB’s approach 

to enforcement and rulemaking has hindered consumer choice and access to credit, limited innovation, and imposed undue compliance burdens, particularly on small institutions. 

110. 12 U.S.C. §§ 5491, 5512.

111. Id. at § 5512.

112. Id. at § 5514.

113. Id. at § 5515. The CFPB has exclusive examination authority over these entities for purposes of assessing compliance with the requirements of Federal consumer financial laws, as well as primary enforcement 

authority.

114. Id. at § 5534.

115. Figures drawn list of publicly available rulemakings and enforcement actions at www.consumerfinance.gov. 

Enforcement Actions are available at: https://www.consumerfinance.gov/policy-compliance/enforcement/

actions; Final and interim final rules are available at: https://www.consumerfinance.gov/policy-compliance/

rulemaking/final-rules.
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Issues Requiring Reform

The CFPB’s structure renders it unaccountable to the American people.

Dodd-Frank vests significant power in the CFPB, with few of the traditional checks and balances 

necessary to restrain regulatory abuses and arbitrary decision-making. The CFPB is led by a single 

Director who wields unilateral authority to enforce 18 enumerated federal consumer financial laws 

affecting major consumer decisions—from buying a home to paying for college. Despite this power, 

the unelected Director does not answer to the President or Congress in any meaningful sense.

Section 1011(b) of Dodd-Frank provides that the President can remove the CFPB Director only 

for “inefficiency, neglect of duty, or malfeasance in office” during his five-year statutory term.116

This limitation severs the line of public accountability created by Presidential oversight.117 The 

CFPB’s status as an independent regulatory agency also exempts it from the regulatory review 

regime including scrutiny of regulatory costs and benefits, administered by the OMB’s Office of 

Information and Regulatory Affairs. 

The Director is further insulated from accountability and oversight by the CFPB’s funding structure. Rather than justify the CFPB’s annual funding needs through the annual Congressional 

appropriations process, the Director has the unilateral power simply to draw the funds he deems 

necessary from the Federal Reserve System’s earnings, subject to an annual cap.118 The CFPB budget is thus not subject to control by Congress through the annual appropriations process nor is it 

subject to OMB apportionment.119 In 2016, the Bureau received $564.9 million in transfers from 

the Federal Reserve System.120 The CFPB’s funding structure also sets a disconcerting precedent 

on the use of the Federal Reserve System for funding federal government programs outside of the 

annual appropriations process.

In addition, the CFPB has access to a civil penalty fund in which it deposits the monetary penalties 

it collects.121 Any funds not used to pay restitution to consumers are available to fund the CFPB’s 

“consumer education and financial literacy programs.”122 Amounts in the civil penalty fund are 

not subject to the annual appropriations process. The GAO has recommended that the CFPB 

take steps to improve transparency in the way it allocates funds used for these communication and 

outreach efforts.123

116. 12 U.S.C. § 5491(c)(3).

117. See Kagan, Elena. Presidential Administration, 1144 Harv. L. Review. 2245, 2332 (2001) (“[P]residential leadership establishes an electoral link between the public and the bureaucracy, increasing the latter’s 

responsiveness to the former....[P]residential control of administration at the least possesses advantages 

over any alternative control device in advancing these core democratic values.”).

118. 12 U.S.C. § 5497. Cf. The Federalist No. 58 (Madison) (describing the appropriations process as “the most 

complete and effectual” method by which the legislature may provide “for carrying into effect every just and 

salutary measure.”).

119. 12 U.S.C. § 5497.

120. CFPB, Report of the CFPB Pursuant to § 1017(E)(4) of the Dodd-Frank Act, at 14 (Dec. 30, 2016). 

121. 12 U.S.C. § 5497.

122. Id.

123. GAO, “Opportunity Exists to Improve Transparency of Civil Penalty Fund Activities,” GAO-14-551 (2014).
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The CFPB’s combination of an unaccountable structure and broad, unchecked regulatory power is 

unprecedented. In a recent decision invalidating the CFPB’s structure as unconstitutional, a panel 

of the U.S. Court of Appeals for the D.C. Circuit observed that “the Director enjoys significantly 

more unilateral power than any single member of any other independent agency.”124 Historically, 

limitations on removal of an agency’s head have been counterbalanced by the use of multi-member 

commissions which provide an internal safeguard against agency abuses and excesses. The CFPB 

has no such check. As the D.C. Circuit explained, “a single, unaccountable, unchecked Director 

not only departs from settled historical practice, but also poses a far greater risk of arbitrary 

decision-making and abuse of power, and a far greater threat to individual liberty, than does a 

multi-member independent agency.”125 This problem is exacerbated by the CFPB’s independence 

from the Congressional power of the purse.126

The CFPB’s substantive authority is unduly broad, ill-defined, and 

susceptible to abuse.

The CFPB has two sets of authorities that, due to their breadth and lack of statutory detail, run the 

risk of depriving regulated parties of fair notice of the rules of conduct to which they must conform. The first is the CFPB’s authority to take enforcement action against any “covered person”127

engaged in “unfair, deceptive, or abusive acts or practices.”128 The statute defines the UDAAP standard only in broad strokes, leaving to the CFPB the authority to decide which specific practices 

fall within this ambiguous prohibition. The lack of clarity is most pronounced with respect to the 

prohibition on “abusive acts or practices,” a relatively undeveloped legal concept. Despite requests 

from Congress and regulated parties, the CFPB has declined to provide additional guidance 

on the abusiveness standard and has instead followed an open-ended “facts and circumstances” 

approach.129 Even in the more defined areas of “unfair” and “deceptive” conduct, the CFPB is not 

required to follow the well-established FTC precedents, but rather is free to pivot and adopt new 

interpretations whenever it identifies a practice it wishes to prohibit.130

124. PHH Corp. v. Consumer Financial Protection Bureau, 839 F.3d 1, 16 (D.C. Cir. 2016), reh’g en banc 

granted, order vacated (Feb. 16, 2017). See also The Bureau of Consumer Financial Protection’s 

Unconstitutional Design: Hearing Before the Subcomm. on Oversight and Investigations, H. Comm. on 

Fin. Serv., 115th Cong. (2017) (written statement of Theodore Olson) (“The CFPB is the product of cherrypicking some of the most democratically unaccountable and power-centralizing features of the federal government’s administrative agencies, and aggregating them into one massive and all-powerful body.”)

125. Id. at 8.

126. See id. at 36 n.16 (“[T]he appropriations process brings at least some measure of oversight by Congress.”)

127. A covered person is any person engaged in offering or providing a consumer financial product or service 

and any affiliate of such person if such affiliate acts as a service provider to such person. 12 U.S.C. § 5481.

128. 12 U.S.C. § 5531.

129. How Will the CFPB Function under Richard Cordray: Hearing Before the Subcommittee on TARP 

Financial Services and Bailouts of Public and Private Programs of the Committee on Oversight and 

Government Reform, 112th Cong. 69 et seq., (2012) (statement of Rep. Patrick McHenry, Chairman, 

Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs); see also Todd 

Zywicki, The Consumer Financial Protection Bureau, Savior or Menace?, George Washington Law Review 

81 (2013), pp. 856, 918-923. 

130. See Todd Zywicki, The Consumer Financial Protection Bureau, Savior or Menace?, George Washington 

Law Review 81 (2013), p. 918.
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The second authority is the transfer to the CFPB of all interpretive authority over federal consumer 

financial law and the resulting judicial deference that CFPB’s interpretation commands.131 The 

contours of many federal consumer financial regulations have been developed over decades by 

agencies with deep subject-matter expertise. Dodd-Frank permits the CFPB to depart from this 

settled precedent without any specific requirements for how the CFPB should promulgate its 

new standards and reversals of past policies on which parties have come to rely. In practice, the 

CFPB has avoided notice-and-comment rulemaking and instead relied to an unusual degree on 

enforcement actions and guidance documents, which the CFPB has consistently issued without 

opportunity for public comment, to announce new standards of conduct.132

The CFPB has exercised its authorities in a manner aimed at maximizing its 

discretion, rather than creating a stable regulatory environment.

The CFPB itself has recognized that “regulatory uncertainty may discourage innovators from 

entering a market, or make it difficult for them to develop suitable products or attract sufficient 

investment or other support.”133 But rather than seeking to provide clear rules on which regulated 

parties can rely as they offer credit to consumers and pursue innovation, the CFPB has exercised 

its authorities in a manner aimed at maximizing its own discretion and power. This approach has 

created confusion among regulated parties concerning their legal obligations, leading to a retrenchment in the provision of consumer financial products and services and erosion of consumer choice. 

Excessive reliance on enforcement actions, rather than rules and guidance, to regulate conduct

This problem has manifested itself most clearly in the CFPB’s habit of effectively announcing 

new prohibitions through enforcement actions. This practice forecloses the opportunity for public 

comment and deprives regulated parties of fair notice concerning the rules to which they must 

conform their conduct. 

The CFPB has brought a range of enforcement actions that allege violations of law for practices 

that are common among financial services providers and that had not previously raised concerns 

among other regulators.134 The CFPB brings such actions despite not having promulgated rules 

banning the targeted practice or issued guidance that it considered the practice contrary to law.135

Remarkably, the CFPB has even sanctioned companies for complying in good faith with an 

interpretation adopted by a previous agency with respect to conduct that pre-dated the CFPB’s 

131. 12 U.S.C. § 5512(b)(4).

132. See Roberta Romano (Yale Law School), Does Agency Structure Affect Agency Decision making? 

Implications of the CFPB’s Design for Administrative Governance (May 18, 2017) (unpublished article) (on 

file with author).

133. CFPB, Notice of Proposed Policy on No-Action Letters, 79 Fed. Reg. 62118, 62120 (Oct. 16, 2014). 

134. Many lenders have identified the CFPB’s enforcement actions alleging disparate impact discrimination 

in the indirect auto lending market as a particular source of concern. See Republican Staff of the House 

Committee on Financial Services, 114th Cong., Unsafe at Any Bureaucracy: CFPB Junk Science and 

Indirect Auto Lending 15 et seq. (2015). 

135. For instance, in one of its first enforcement actions, the CFPB entered into a $210 million settlement with 

Capital One Financial Corp. over allegedly deceptive credit card marketing. The CFPB released only a compliance bulletin about its expectations for other credit card firms in conjunction with the settlement.
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establishment.136 This lack of clear regulatory standards may lead to excessive risk-aversion among 

regulated parties thereby undermining innovation and consumer choice.137

The CFPB’s excessive reliance on case-by-case adjudication over clear rules has been particularly 

problematic with respect to its UDAAP authority. Although the CFPB regularly brings actions 

asserting that a company or person has engaged in prohibited UDAAP conduct, it has failed to 

adopt regulations clearly delineating the reach of the UDAAP prohibition. Instead, it has used 

its UDAAP authority to extend its reach well beyond its enumerated authorities, including by 

initiating actions to effectively enforce state law.138

The failure to issue clear ex ante rules has caused particular concern among regulated parties with 

respect to the authority to ban abusive practices. Indeed, when asked to provide examples of what 

might constitute an abusive practice in testimony before Congress, the CFPB Director declined.139

Without meaningful standards that provide fair notice, many consumer financial firms are reluctant to innovate or offer new financial products or services.140

Ineffective no-action letter policy

The CFPB’s no-action letter policy also reflects its unwillingness to define its authority in the interest of providing fair notice and certainty to regulated parties. No-action letters promote consumer 

choice and innovation by providing businesses some reassurance that they can offer a particular 

product or service without fear of an unexpected enforcement action.141 But the CFPB’s no-action 

letter policy has been hampered by the stringent standards that must be met before the agency will 

even consider a regulated party’s request. For example, the policy permits the issuance of no-action 

letters only for products or services that may provide “substantial” consumer benefits – and then 

only when there is “substantial uncertainty” concerning how the CFPB would apply potentially 

relevant laws or rules. 142 The CFPB itself has stated that it will rarely issue no-action letters, 

136. See, e.g., PHH, 839 F.3d 1 at 16 (describing the CFPB’s reversal of a longstanding HUD interpretation of 

Section 8(a) of the Real Estate Settlement Procedures Act and application of its new interpretation to conduct undertaken before the CFPB had even come into existence); In the Matter of: Lighthouse Title, Inc., 

CFPB Consent Order 2014-CFPB-0015. The CFPB has entered into numerous consent orders addressing 

Section 8(a).

137. Todd Zywicki, The Consumer Financial Protection Bureau, Savior or Menace?, George Washington Law 

Review 81 (2013), p. 922201; Diane Katz, The CFPB in Action: Consumer Bureau Harms Those It Claims 

to Protect, The Heritage Foundation: Report (Jan. 22, 2013), available at: http://www.heritage.org/housing/

report/the-cfpb-action-consumer-bureau-harms-those-it-claims-protect. 

138. See CFPB v. CashCall, Inc., et al., 2016 WL 4820635 (C.D. Cal. Aug. 31, 2016). The Central District of 

California agreed with the CFPB that CashCall’s attempts to collect debt that were in violation of state law 

constituted a deceptive practice under Dodd-Frank.

139. See The Semi-Annual Report of the Bureau of Consumer Financial Protection Before the House 

Committee on Financial Services, 114th Cong. 14-16 (Sept. 20, 2012) (statement of Richard Cordray, 

Director, Bureau of Consumer Financial Protection).

140. Alden Abbott and Todd Zywicki, How Congress Should Protect Consumer’s Finances

(Feb. 28, 2017), available at: http://www.heritage.org/markets-and-finance/report/

how-congress-should-protect-consumers-finances. 

141. CFPB, Final Policy Statement: Policy on No Action Letters, 81 Fed. Reg. 8686 (Feb. 22, 2016).

142. Id. at 8692.
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particularly regarding UDAAP,143 and it has made good on that promise by failing to issue a single 

no-action letter since the policy was adopted in February 2016. Given the severe limitations of the 

CFPB’s approach, regulated entities and lawmakers have frequently complained that the policy has 

failed to mitigate their concerns about regulatory uncertainty.144

Use of administrative adjudication proceedings to avoid procedural protections and the 

statute of limitations

For any enforcement action, the CFPB can choose between bringing suit in federal court and initiating 

an administrative proceeding before an administrative law judge.145 The administrative proceedings 

afford respondents fewer protections than actions brought in federal court. For example, administrative 

proceedings occur on an expedited timeframe with the answer being due within 14 days of service rather 

than the 21 days provided for in federal court.146 Participants in this process observe that “[i]n devising 

its rules for administrative enforcement proceedings, the CFPB seems to have taken the view that speed 

is the overriding goal.”147 In addition, interrogatories and discovery depositions by respondents are not 

permitted in administrative proceedings and document discovery from the CFPB is limited to a narrow 

list of categories. One law firm with significant experience defending CFPB enforcement actions has 

noted “[t]he overall impression of these Rules is to suggest that a respondent subject to a proceeding 

under them will certainly lose many of the procedural protections afforded in a court proceeding....”148

The CFPB has also taken the remarkable position that Dodd-Frank does not impose any statute 

of limitations on administrative enforcement actions, regardless of the limitations period in the 

underlying statute.149 In PHH, the court rejected this interpretation and held that the limitations 

period for the underlying statute applies regardless of forum, noting that the CFPB’s preferred 

outcome “would be absurd” and create a “nonsensical dichotomy between CFPB court actions and 

CFPB administrative actions.”150

143. Id. at 8689.

144. Rep. Patrick McHenry (R-N.C.), CFPB’s ‘project catalyst’ has failed. Fintech deserves better, The American Banker (Apr. 25, 2017), available at: https://www.americanbanker.com/opinion/

cfpbs-project-catalyst-failed-fintech-deserves-better. 

145. John Villa and Ryan Scarborough, The Law of Unintended Consequences: How the CFPB’s 

Unprecedented Legislative Authority and Enforcement Approach Has Invited Increasing Challenges, 

Banking & Financial Services (July 2016); an overview of administrative adjudication proceedings is available 

at https://www.consumerfinance.gov/administrative-adjudication-proceedings. 

146. See Fed. R. Civ. P. 12(a)(1).

147. Ballard Spahr, CFPB’s enforcement rules: a ‘rocket docket’ that looks strangely familiar (Aug. 8, 2011), 

available at: https://www.consumerfinancemonitor.com/2011/08/08/cfpbs-enforcement-rules-a-rocketdocket-that-looks-strangely-familiar. 

148. Id. 

149. John Villa and Ryan Scarborough, The Law of Unintended Consequences: How the CFPB’s 

Unprecedented Legislative Authority and Enforcement Approach Has Invited Increasing Challenges, 

Banking & Financial Services (July 2016); see also Integrity Advance, LLC and James R. Carnes, 2015-

CFPB-0029, Bureau’s Opposition to Respondents’ Motion to Dismiss at 7 (Jan. 15, 2016); see, e.g., PHH, 

839 F.3d 1 at 55 (discussing CFPB attorneys’ reply that administrative enforcement action would not be 

brought 100 years after alleged unlawful conduct due to prosecutorial discretion, not because statute of limitations would have run).

150. PHH, 839 F.3d 1 at 53-55. 
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Inappropriate expansion of scope of jurisdiction via enforcement actions, rulemakings 

and other agency measures

The CFPB has sought to expand its jurisdiction to persons and businesses either not covered or even 

specifically excluded from its jurisdiction by Dodd-Frank. The CFPB has, for example, inappropriately attempted to extend its reach to entities including college accreditors and auto dealers and it 

has taken these actions outside the discipline and transparency of notice-and-comment rulemaking.

In an attempt to expand its authority in the area of higher education, the CFPB issued a civil 

investigative demand (CID) to a national for-profit college accreditor, the Accrediting Council for 

Independent Colleges and Schools (ACICS).151 A federal district court concluded that the CFPB 

had far overstepped its bounds. The court explained that the CFPB’s “investigative authority is 

limited to inquiries to determine whether there has been a violation of any Federal consumer 

financial laws,” and none of those laws “even tangentially implicate the accrediting process of 

for-profit colleges.”152 The court also admonished the CFPB that “[a]lthough it is understandable 

that new agencies like the CFPB will struggle to establish the exact parameters of their authority, 

they must be especially prudent before choosing to plow head long into field not clearly ceded to 

them by Congress.”153

The CFPB has also attempted to regulate the activities of auto dealers despite a lack of jurisdiction. Dodd-Frank gives the CFPB the authority to regulate providers of credit for auto loans but 

specifically excluded auto dealers from the CFPB’s reach.154 In 2013, the CFPB issued guidance 

intended to prevent indirect auto creditors, such as banks, from permitting auto dealers to exercise 

discretion to “mark up” loans.155 The agency argued that this prohibition was necessary to avoid 

distorted economic incentives and because the discretion permitted by these policies created the 

risk of prohibited discriminatory pricing.156 The House Financial Services Committee issued a 

report questioning the legal authority for the CFPB guidance, as well as the CFPB’s reliance on 

disparate impact as a theory of liability for pursuing discrimination cases in this area.157 The report 

noted that in many cases, dealers enter into transactions without financing from indirect auto 

creditors and thus the creditors play no role in making a credit decision about a borrower.158 Based 

on this factor and internal CFPB documents, the report concluded that the CFPB’s objective 

from the beginning had been the elimination of dealer discretion and the “mark up” of loans—an 

attempt to regulate exempt auto dealers through other means.159

151. CFPB v. Accrediting Council for Indep. Colleges & Sch., 183 F. Supp.3d 79 (D.D.C. 2016), aff’d on other 

grounds, 854 F.3d 683 (D.C. Cir. 2017). 

152. Id. at 83.

153. Id. at 84.

154. 12 U.S.C. § 5519.

155. CFPB, Bull. No. 2013-02: Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act 

(2013), available at: http://files.consumerfinance.gov/f/201303_cfpb_march_-Auto-Finance-Bulletin.pdf. 

156. Id. at 2.

157. Republican Staff of the House Committee on Financial Services, 114th Cong., Unsafe at Any Bureaucracy: 

CFPB Junk Science and Indirect Auto Lending (2015). 

158. Id. at 19-20.

159. Id. at 46.
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A civil investigative demand (CID) process lacking in appropriate safeguards 

The CFPB’s process for issuing CIDs, a key enforcement tool, is fraught with risks for abuse. It 

combines a broad authority to seek information with limited procedural safeguards. However, the 

CFPB has failed to comply with even the basic protections required by Dodd-Frank. The D.C. 

Circuit recently concluded in the ACICS case that a CID issued by the agency did not comply with 

the minimum statutory requirements.160 The court found that the CID at issue gave the recipient 

“no description whatsoever of the conduct the CFPB is interested in investigating.”161 Far from 

exceptional, the issues the court identified in the CID invalidated in ACICS are consistently raised 

by CID recipients petitioning to modify or set aside a CFPB CID.162

Compounding this problem, the CID process provides little protection for parties seeking to 

modify or set aside a CID. CIDs issued by the CFPB are confidential but parties who wish to 

question the legality or scope of a CID must be prepared to suffer reputational injury: the CFPB 

publishes its decisions on challenges to CID requests, essentially publicizing that a company is 

under investigation before the agency has even assessed the evidence.163 A person served with a 

CID may petition the CFPB to set aside or modify the demand within 20 days of receiving it 

unless an extension is granted.164 The Director has sole authority to grant or deny such a petition 

even if he participated in the decision to open the investigation or issue a CID.165 Although the 

CFPB has publicly disclosed 28 petitions to modify or set aside a CID on its website, it has not 

publicly granted any of these petitions. It has also denied several requests for confidential treatment 

of petitions challenging a CID.

CFPB’s Retrospective Review of Significant Regulations Could Be Improved.

Retrospective review of agency rules is a valuable process for ensuring that past regulations have 

not outlived their useful life.166 The Administrative Conference of the United States encourages 

all agencies to engage in regular self-review of their regulations.167 Reflecting the importance of 

such review, the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) requires 

the federal banking regulators to conduct a review of all existing regulations not less frequently 

than once every 10 years to identify outdated or otherwise unnecessary regulatory requirements 

imposed on insured depository institutions and to report to Congress on the findings.168

160. CFPB v. Accrediting Council for Indep. Colleges & Sch., 854 F.3d 683 (D.C. Cir. 2017) (ACICS). 

161. Id. at 690.

162. Of the 28 petitions to modify or set aside a CID that are publicly available on the CFPB’s website, more than 

half asserted that the CID failed to identify the nature of the conduct under investigation or the alleged violation of law. The CFPB has denied most of these petitions and has not publicly granted any of them. Petitions 

are available at https://www.consumerfinance.gov/policy-compliance/enforcement/petitions. 

163. Decision and Order on PHH Corporation’s Petition to Modify or Set Aside Civil Investigative Demand, CFPB 

2012-MISC-PHH Corp-0001.

164. 12 U.S.C. § 5562(f).

165. 12 C.F.R. § 1080.6.

166. Administrative Conference of the United States. Retrospective Review of Agency Rules. 9 Dec. 2014, available at www.acus.gov/recommendation/retrospective-review-agency-rule.

167. Id.

168. See 12 U.S.C. § 3311.
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When the banking regulators had rulemaking authority with respect to consumer financial laws, 

regulations adopted under those laws were included in the review process.169 However, the banking 

regulators have concluded that EGRPRA does not require the CFPB to conduct a review of the 

rules it has adopted and the CFPB did not participate in the recent EGRPRA review of regulations by the banking regulators.170 Dodd-Frank requires limited retrospective regulatory review 

by the CFPB,171 but that review process falls short of EGRPRA in both scope and duration. It 

excludes rules deemed to be non-significant and rules administered by the CFPB but adopted 

before the CFPB came into existence. In addition, CFPB’s review regime is limited to a single 

five-year lookback period even though the nature of regulated markets may change and render the 

old rules obsolete.

The Consumer Complaint Database lacks appropriate safeguards.

The CFPB maintains a Consumer Complaint Database on its website that allows consumers to 

submit and view complaints about a wide variety of providers of financial products and services 

including credit cards, mortgage providers, student loans, vehicle loans, payday loans, credit 

reporting, and debt collection.172 The CFPB takes steps to confirm a commercial relationship 

between the consumer submitting a complaint and the company, but does not otherwise attempt 

to verify the complaint submitted.173

Commenters have objected that the database may provide misleading or incomplete information 

to consumers because it does not indicate whether a complaint reflects dissatisfaction with legitimate terms of service, as opposed to actual wrongdoing, and does not provide information on the 

size of the relevant market. As an example of the latter, “a total of 14,000 credit card complaints 

were submitted to the bureau in 2014, but there were 550 million credit cards in circulation that 

year—among just Visa, MasterCard, and American Express. Thus, the complaints represent only 

0.0025 percent of credit card holders.”174 One of the most frequent criticisms of the database 

is that, because it does not verify complaints or provide sufficient context regarding the related 

market and industry practices, it subjects companies to unwarranted reputational risk.175

169. FFIEC. Joint Report to Congress: Economic Growth and Regulatory Paperwork Reduction Act, at 25-28. 

Jul. 2007, available at: egrpra.ffiec.gov/docs/egrpra-joint-report.pdf.

170. FFIEC. Joint Report to Congress: Economic Growth and Regulatory Paperwork Reduction Act, at 1 n.1. 

Mar. 2017, available at: www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.

171. 12 U.S.C. § 5512.

172. CFPB, Consumer Complaint Database, available at https://www.consumerfinance.gov/data-research/

consumer-complaints.

173. Id.

174. See Katz, Consumer Financial Protection Bureau: Limiting Americans’ Credit Choices, The Heritage 

Foundation (April 28, 2016), available at http://www.heritage.org/government-regulation/report/consumer-financial-protection-bureau-limiting-americans-credit-choices#_ftn11. See also CFPB, Disclosure 

of Consumer Complaint Data, 78 FR 21223 (April 10, 2013). (“The Bureau acknowledges, as it did in the 

Proposed Complaint Data Disclosure Policy Statement, that there are significantly varying views among 

stakeholders about whether consumer and company provided data is useful to consumers.”)

175. See Examining the Consumer Financial Protection Bureau’s Mass Data Collection Program Before the H. 

Comm. on Fin. Svcs., 114th Cong. 8 (2015) (statement of Wayne Abernathy, Executive Vice President for 

Financial Institutions Policy and Regulatory Affairs, American Bankers Association). 
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The CFPB’s supervisory authority is duplicative and unnecessary.

Dodd-Frank grants the CFPB supervisory powers that are potentially duplicative as applied to 

banking entities, unjustified as applied to nonbanks, and poorly suited to the mission of a consumer protection enforcement agency.

The CFPB has supervisory authority over banks and credit unions with total assets of more than 

$10 billion for the purpose of assessing compliance with the requirements of federal consumer 

financial laws.176 Many of these entities are subject to supervision in this area by both the CFPB 

and federal prudential regulators. In addition to monitoring compliance with safety and soundness 

regulations, federal prudential regulators monitor compliance with a number of federal consumer 

protection laws substantially similar to those overseen by the CFPB, increasing the potential for 

duplicative or inconsistent oversight by the various regulators.177 In addition, the Federal Reserve 

Inspector General has criticized the CFPB for failing to provide timely examination reports, causing uncertainty among supervised institutions.178 The Inspector General also criticized the CFPB’s 

practice of bringing enforcement attorneys to examinations, a policy it has since discontinued.179

The CFPB’s supervisory authority over nonbanks represents a major shift in regulatory practice – with no 

clear benefits to justify the additional burdens. Federal supervision and examination of financial institutions are invasive regulatory tools that have traditionally been limited to financial institutions that receive 

federal deposit insurance or institutions that receive a federal charter.180 In contrast, the CFPB’s authority 

extends to state-licensed nonbanks that neither have special status nor privileges conferred by federal law 

nor is regulation needed to address moral hazard created by deposit insurance. Before Dodd-Frank, these 

companies were regulated by the states which continue to license them and supervise them in coordination with the CFPB.181 State authorities also coordinate with each other through the Conference of 

State Bank Supervisors to effectively supervise larger companies operating in multiple states. These state 

supervisors were often leaders in identifying consumer protection problems during the financial crisis and 

have a unique perspective into the financial services available and needed in their communities.

176. 12 U.S.C. § 5515.

177. See GAO, Financial Regulation: Complex and Fragmented Structure Could Be Streamlined to Improve 

Effectiveness, GAO-16-175, at 17 (2016), available at: https://www.gao.gov/assets/680/675400.pdf. 

(“Overlap... exists in the consumer protection oversight of depository institutions with more than $10 billion 

in assets. That is, because the primary federal prudential regulator (FDIC, the Federal Reserve, NCUA, or 

OCC) of these institutions retained authority to oversee their compliance with certain consumer protection 

laws, two federal agencies are responsible for reviewing these institutions’ compliance with consumer protection laws.”) The possibility that regulated parties may be subject to duplicative and/or inconsistent supervision by one or more federal prudential regulators and the CFPB is increased by the CFPB’s practice, discussed above, of using UDAAP authority to extend its reach well beyond its enumerated authorities.

178. Federal Reserve OIG, The CFPB Can Improve the Efficiency and Effectiveness of Its Supervisory Activities

(2014), available at: https://oig.federalreserve.gov/reports/CFPB-Supervisory-Activities-Mar2014.pdf. 

179. Federal Reserve OIG, The CFPB Should Reassess Its Approach To Integrating Enforcement Attorneys 

Into Examination And Enhance Associated Safeguards (2013), available at: https://oig.federalreserve.gov/

reports/CFPB_Enforcement_Attorneys_Examinations_full_Dec2013.pdf. 

180. See Howell E. Jackson, The Expanding Obligations of Financial Holding Companies, Harv. L. Rev. 107 

(1994), pp. 507, 563. (“Considerations of safety and soundness have traditionally been the most important 

regulatory justifications for public supervision of financial intermediaries.”)

181. 12 U.S.C. § 5514.
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Recommendations for Regulatory Reform

Adopting structural reforms to make the CFPB more accountable to the 

President, Congress, and the American people.

The CFPB’s structure should be reformed to ensure that it is accountable to elected officials and, 

ultimately, to the American people. The for-cause removal protection for the CFPB Director 

limits the President’s authority, disperses executive power, and renders the CFPB less politically 

accountable than other agencies.182 An agency “headed by a single officer...embodies a quintessentially executive structure” for which for-cause removal protections are inappropriate.183 The 

most straightforward remedy is to make the Director removable at-will by the President.184 As 

an alternative, the CFPB could be restructured as an independent multi-member commission or 

board which would create an internal check on the exercise of agency power.

The CFPB should also be subject to the same degree of accountability to Congress as other regulatory 

enforcement agencies. The CFPB should be funded through the annual appropriations process to 

enable Congress to exercise greater oversight and control over how taxpayer dollars are spent. This 

enhanced accountability is particularly important given CFPB’s broad regulatory and enforcement 

authority which reaches far beyond the banking sector regulated by other prudential regulators. 

In addition, the CFPB should be subject to OMB apportionment. This would require the agency 

to obtain OMB approval for a plan to use its budgetary resources, providing additional transparency regarding agency spending and facilitating additional oversight by the President. 

Finally, the CFPB’s other funding mechanism, the Consumer Financial Civil Penalty Fund, should 

be reformed to permit the CFPB to retain and use only those funds necessary for payments to the 

bona fide victims of activities for which the CFPB has imposed civil money penalties. The CFPB 

should remit to the Treasury any funds in excess of payments to victims, similar to the practice of 

several other agencies with enforcement authority.185 This would ensure that the CFPB does not 

spend unappropriated funds on programs that have not been specifically authorized via the annual 

appropriations process and OMB apportionment. 

Ensuring that regulated entities have adequate notice of CFPB 

interpretations of the law before subjecting them to enforcement actions.

Requiring CFPB to promulgate rules before adopting novel positions in enforcement actions

The CFPB should issue rules or guidance subject to public notice and comment procedures before 

bringing enforcement actions in areas in which clear guidance is lacking or the agency’s position 

departs from the historical interpretation of the law. 

182. See Brief for the United States as Amicus Curiae at 14, PHH Corp. v. Consumer Financial Protection 

Bureau, No. 15-1177 (D.C. Cir. Mar. 17, 2017).

183. Id. at 13.

184. Id. at 19.

185. See, e.g., 12 U.S.C. § 1818(i)(2)(J) (applicable to FDIC, OCC, and Federal Reserve); see also GAO, 

Financial Institutions: Fines, Penalties, and Forfeitures for Violations of Financial Crimes and Sanctions 

Requirements, GAO-16-297, at 20 (2016), available at: http://www.gao.gov/assets/680/675987.pdf. 
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The CFPB wields broad authority to impose monetary sanctions through enforcement actions. 

The CFPB’s excessive reliance on case-by-case enforcement to develop the UDAAP standard, in 

particular, too often deprives regulated parties of fair notice and chills innovation in financial 

products and services. Consumers ultimately pay the price in reduced choices or higher costs.

To create a more stable regulatory environment, the CFPB should adopt regulations that more 

clearly delineate its interpretation of the UDAAP standard. The agency should seek monetary 

sanctions only in cases in which a regulated party had reasonable notice — by virtue of a CFPB 

regulation, judicial precedent, or FTC precedent — that its conduct was unlawful.186 The CFPB 

could implement this reform administratively through issuance of a regulation limiting the application of monetary sanctions to cases that satisfy this notice standard. 

Importantly, this reform would not deprive the CFPB of the ability to target and stop practices 

not previously understood to be prohibited, as the agency would retain the authority to issue a 

cease-and-desist order or initiate an enforcement action seeking injunctive relief. If the CFPB 

concludes a new practice is a problem in the broader market, it should conduct notice and comment rulemaking to prohibit the practice. This reform would give regulated parties the certainty 

and predictability they need to meet diverse consumer financial needs without fear of unexpected 

sanctions, while preserving the CFPB’s flexibility to respond to new risks. 

Making the requirements for CFPB no-action relief less onerous 

The CFPB’s no-action letter policy has been hampered by the stringent standards that must be 

met before the agency will even consider a regulated party’s request. The CFPB should align its 

policies for issuing no-action letters or analogous documents with the more effective policies of 

the SEC, CFTC, and FTC. To make the CFPB no-action letter policy a more useful tool for the 

providers and consumers of financial services, the CFPB should adopt the following changes: (a) 

expand the scope of the policy beyond “new” products; (b) require a consumer benefit, but not a 

“substantial” consumer benefit; (c) require some regulatory uncertainty to issue a no-action letter, 

but not “substantial” uncertainty; (d) address a broader number and range of UDAAP questions; 

and (e) revisit the requirement that applicants be required to share potentially proprietary data 

with CFPB, which the agency may not be able to adequately safeguard.

Adopting procedural reforms to curb excesses and abuses in investigations 

and enforcement actions.

Bringing enforcement actions in federal district court rather than in administrative 

proceedings 

The CFPB should bring enforcement actions in federal district court rather than use administrative 

proceedings, due to (a) the undefined scope of UDAAP and resulting uncertainty for market participants and (b) the lack of procedural protections for respondents in administrative proceedings. 

Because of the added procedural protections available in federal district court, this recommended 

186. Diane Katz, The CFPB in Action: Consumer Bureau Harms Those It Claims to Protect, The 

Heritage Foundation: Report (Jan. 22, 2013), available at: http://www.heritage.org/housing/report/

the-cfpb-action-consumer-bureau-harms-those-it-claims-protect. 
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change would still be appropriate even if the CFPB were to promulgate regulations designed to 

clarify the scope of UDAAP and provide greater certainty for market participants. At a minimum, 

to the extent CFPB continues to pursue some enforcement actions through administrative adjudications, it should promulgate a regulation specifying binding criteria that it will use when deciding 

whether to bring an action in federal court or before an ALJ in the first instance. 

Reforming the CID process 

The CID process should be reformed to ensure subjects of an investigation receive the benefit of 

existing statutory protections, backed by judicial review. The CFPB should adopt guidance to 

ensure that all of its CIDs comply with the standard set forth by the D.C. Circuit in the ACICS

case. Such guidance would ensure that subjects being investigated for a potential violation of 

federal consumer financial laws receive clear notice of the conduct at issue, along with a description of the specific laws the CFPB believes may have been violated. In addition, the CFPB should 

adopt procedures to ensure that review of a CID appeal remains confidential if requested. This 

will prevent the chilling effect arising from the threat of publication of a denial. Finally, Congress 

should amend Dodd-Frank to permit persons who receive a CID to proactively file a motion in 

federal district court to modify or set aside a CID, rather than limiting recourse to an appeal to the 

Director.187 This would bring the CFPB’s procedures in line with the protections provided under 

the Department of Justice’s authority to issue CIDs related to False Claims Act violations.188

Expanding retrospective regulatory review.

The CFPB should promulgate a regulation committing it to regularly reviewing all regulations 

that it administers to identify outdated or otherwise unnecessary regulatory requirements imposed 

on regulated entities. Such review should occur no less frequently than once every 10 years for 

all regulations that the CFPB administers and should include solicitation of public comment on 

regulations that are outdated, unnecessary or unduly burdensome. The regulations should also 

provide for a public report summarizing any significant issues raised by public comments and a 

discussion of how the CFPB will address regulatory burdens associated with such issues. The CFPB 

should eliminate any regulations it concludes are outdated, unnecessary, or unduly burdensome as 

a result of such review.

Improving safeguards for Consumer Complaint Database.

The CFPB’s Consumer Complaint Database should be reformed to make the underlying data 

available only to federal and state agencies, and not to the general public. The FTC also maintains 

a complaint database, known as Consumer Sentinel,189 that is available only to local, state and 

federal law enforcement organizations that have entered into confidentiality and data security 

187. See Financial CHOICE Act of 2017, H.R. 10, 115th Cong. § 716 (2017).

188. See 31 U.S.C. § 3733(j).

189. FTC, Consumer Sentinel Network, available at: https://www.ftc.gov/enforcement/consumer-sentinel-network.
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agreements.190 This confidentiality allows organizations that need the information to make use of 

it, while avoiding the serious costs and concerns expressed by critics. Indeed, the CFPB already 

contributes its data to the Consumer Sentinel network, meaning that law enforcement officials 

would have CFPB complaint information available even without publication to the CFPB 

Consumer Complaint Database.191

Eliminating CFPB’s duplicative and unnecessary supervisory authority.

To reduce needless duplication and regulatory burdens, Congress should repeal the CFPB’s 

supervisory authority. The responsibility to supervise banks should be entrusted to the prudential 

regulators. The Federal Reserve and OCC have deep expertise in supervision and examinations 

and they are best equipped to monitor compliance risks related to federal consumer financial laws. 

Supervision of nonbanks should be returned to state regulators, who have proven experience in this 

field and an existing process for interstate regulatory cooperation.

Residential Mortgage Lending

Overview

Housing contributes approximately 18% to U.S. GDP192 and also satisfies one of the most basic 

needs of all families. Today, national home prices have recovered to their pre-financial crisis levels193

and interest rates remain near historic lows.194 Outstanding residential mortgages have a balance of 

over $10 trillion195 on a total estimated value of housing stock of over $23 trillion,196 making it a 

debt market second in size only to the U.S. Treasury market.197

The present conditions of continued tight mortgage lending in the private sector warrant a careful 

study of regulations and the extent to which they may be holding back the supply of mortgage credit. 

190. FTC, Consumer Sentinel Network Members, available at https://www.ftc.gov/enforcement/consumersentinel-network/members. See also An Examination of Wells Fargo’s Unauthorized Accounts and the 

Regulatory Response Before the S. Banking Comm. 114th Cong. (2016) (testimony of Michael Feuer, Los 

Angeles City Attorney, asserting that that the Los Angeles County Attorney used Consumer Sentinel data as 

well), available at https://www.banking.senate.gov/public/_cache/files/e5c17a33-d8b0-4e07-8913-a7aaa1e

a334c/506BE968E3DBC0673D2DB0B731F45E61.092016-feuer-testimony.pdf.

191. FTC, Consumer Sentinel Network Data Contributors, available at https://www.ftc.gov/enforcement/

consumer-sentinel-network/data-contributors.

192. Internal Treasury Analysis. Data from Haver Analytics and U.S. Bureau of Economic Analysis News Release, 

Table 3 (May 26, 2017) available at: www.bea.gov/newsreleases/national/gdp/2017/pdf/gdp1q17_2nd.pdf. 

193. S&P Dow Jones Indices LLC. S&P/Case-Shiller U.S. National Home Price Index. May 2017, available at fred.

stlouisfed.org/series/CSUSHPINSA.

194. Federal Reserve Bank of St. Louis. 30-Year Fixed Rate Mortgage Average in the United States. May 2017, 

available at: fred.stlouisfed.org/series/MORTGAGE30US.

195. Federal Reserve Bank of St. Louis. Mortgage Debt Outstanding by Type of Property: One- to Four-Family 

Residences. Mar. 2017, available at: fred.stlouisfed.org/series/MDOTP1T4FR.

196. Federal Reserve Bank of St. Louis. Households; Owner-Occupied Real Estate including Vacant Land and 

Mobile Homes at Market Value. Mar. 2017, available at: fred.stlouisfed.org/series/HOOREVLMHMV.

197. SIFMA. US Bond Market Issuance and Outstanding. May 2017, available at: www.sifma.org/research/statistics.aspx.
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Excessive regulation can unnecessarily drive up the cost of lending and restrict borrower access to 

credit. Given the passage of time since the financial crisis, incremental experience under the revised 

regulatory regime, and the widespread recovery of national housing indicators, it is timely to review 

these standards. In accordance with the Core Principles, proper calibration of regulations governing 

mortgage lending will empower Americans to make independent financial decisions and informed 

choices in the marketplace and make regulation more efficient, effective, and appropriately tailored.

In its review of the residential mortgage lending market, Treasury has made the following findings:

• The revised regulatory regime disproportionately discourages private capital from taking mortgage credit risk, instead encouraging lenders to channel loans through federal 

insurance or guarantee programs, or Fannie Mae or Freddie Mac;

• Regulatory requirements have significantly and unnecessarily tightened the credit box for 

new mortgage originations, denying many qualified Americans access to mortgages;

• Increased regulatory requirements have significantly increased the cost of origination and 

servicing activities, which, when passed on to borrowers in the form of higher mortgage 

rates, have decreased the number of Americans that can qualify for mortgages;

• Some regulatory regimes or approaches are viewed by industry participants as having 

inadequate transparency and mutual accountability, thus creating uncertainty and riskaversion among lenders in serving certain market and client segments; and

• Capital, liquidity, and other prudential standards, in combination with a wide range of 

capital market regulations, have inhibited both private originate-to-hold lenders as well as 

lenders focused on origination and secondary sale in the private-label securitization market.

The financial crisis germinated in the U.S. residential mortgage market and was precipitated by 

years of reckless lending practices, poorly designed products with terms consumers may not have 

fully understood, weak underwriting, ill-designed public policies, inadequate oversight, and other 

practices that were not sustainable for consumers. This phenomenon arose from weak regulation 

and deteriorating credit and underwriting practices in the industry, including at the GSEs. These 

practices contributed to a rapid expansion of mortgage credit that, when it collapsed, led to precipitous home price declines that set back the financial security of households across the country. 

Furthermore, billions of dollars in losses for financial institutions jeopardized America’s financial 

system and inhibited new mortgage lending.198 All recommendations to revise the regulatory environment and expand mortgage credit should also serve the goal of avoiding any recurrence of the 

aforementioned patterns, particularly in-perpetuity subsidies in government-related programs that 

make private lenders uncompetitive.

Mortgage Loan Origination

For mortgage originators, the regulatory burdens and compliance costs from new regulations contribute to the current tight lending environment. The cost to originate a mortgage has increased 

198. Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Report: Final Report of the National 

Commission on the Causes of the Financial and Economic Crisis in the United States. Jan. 2011.
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from approximately $4,400 in 2009 to over $7,500 in 2016, according to the Mortgage Bankers 

Association (MBA) Performance Report.199 Borrowers end up paying for these higher costs in the 

form of higher mortgage rates. We explore below a number of rules and regulations that may be 

driving these higher costs and contributing to a more restrictive credit environment.

The most significant post-crisis regulation impacting loan originations is the ATR/QM rule, which 

was promulgated and implemented by the CFPB.200 This rule is intended to ensure that lenders 

make loans to people who have the ability to repay them and to define loans that are considered 

presumptively “safe” for borrowers. The ATR/QM rule offers a legal “safe harbor” for loans that 

meet CFPB’s definition of a QM and a “rebuttable presumption” of compliance for certain higherpriced mortgage loans that otherwise meet the QM standards. 

While Dodd-Frank and the ATR/QM rule were not intended to eliminate markets for loans that 

did not meet the QM standards, the reality is that the vast majority of lenders remain unwilling 

to make loans that do not meet those standards, eliminating access to mortgages for many creditworthy borrowers. 

The ATR/QM rule’s Appendix Q governs the determination of a borrower’s debt and income levels 

for purposes of satisfying the ATR/QM rule.201 For a mortgage to be a QM, the borrower’s total 

debt-to-income (DTI) ratio cannot exceed 43%, as determined under Appendix Q. However, 

Appendix Q requirements are complicated and opaque and offer inadequate guidance for borrowers with non-traditional income sources. Furthermore, as Appendix Q is written to focus on 

borrower cash flow, it ignores borrower assets, which restricts lending to borrowers whose income 

is low and fixed. It is likely that the rigidity and opacity associated with Appendix Q is contributing 

to the tighter lending environment.

Under the current rule, loans that are eligible for purchase by the GSEs are QM loans.202 This 

temporary GSE exemption is colloquially known as the “QM Patch” and expands the types of 

loans that can be considered QM beyond those where a borrower has a 43% or lower DTI ratio. 

Loans eligible for other federal insurance or guarantee programs (e.g., FHA and VA) are QM if 

they meet the QM standards promulgated by those programs. This relief creates an asymmetry, and 

regulatory burden, for privately originated mortgages.

Another feature of the ATR/QM rule that may limit originations is a cap on the points and 

fees that can be charged based on the loan size,203 a limitation that may impact the feasibility of 

originating low balance loans.

The CFPB adopted rules governing the status of loans made by a lender with less than $2 billion 

in assets and fewer than 2,000 first-lien originations in the last calendar year (Small Creditor QM). 

Loans made by lenders meeting these criteria, and all other criteria for a loan to be a QM loan, 

199. Mortgage Bankers Association (MBA). Quarterly Mortgage Bankers Performance Report; available at: www.

mba.org/performancereport.

200. 12 C.F.R. pt. 1026.

201. 12 C.F.R. pt. 1026, App. Q. 

202. 12 C.F.R. § 1026.43(e)(4).

203. 12 C.F.R. § 1026.43(e)(3).
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are QM loans as long as the lender retains the loan in its portfolio for at least 3 years, even if the 

borrower’s DTI ratio exceeds 43%.204

The TILA-RESPA Integrated Mortgage Disclosures (TRID) rule, also referred to as “Know 

Before You Owe,” was implemented by the CFPB to consolidate the complicated web of regulations intended to ensure that borrowers receive accurate information about their mortgage and 

understand the documents that they are signing when they close a mortgage loan. The TRID rule 

introduced new disclosure forms for mortgage application and settlement. These forms, known 

as the Loan Estimate and the Closing Disclosure, combined multiple detailed forms and were 

designed to facilitate borrower understanding of the information being provided by the lender. 

In addition to the disclosure forms, TRID also implemented substantive new rules governing real 

estate transactions.205

While the new forms provide increased clarity to borrowers, the TRID rules have generated significant confusion among lenders. Implementing these rules has increased compliance costs and raised 

questions about lender liability.206 The CFPB has provided only limited guidance in response to 

lender questions, and routinely advises that the guidance is not binding.

Loan originator compensation requirements under Regulation Z were updated by the CFPB in 

2013 with the intention of protecting borrowers by reducing incentives for loan originators to 

steer borrowers into loans with specific terms and to ensure that loan originators are adequately 

qualified.207 The changes to loan originator compensation requirements were designed to deter 

the practices used by loan originators prior to the financial crisis to increase their compensation 

by steering borrowers to loans with higher interest rates or other terms that may not have been 

in the borrower’s best interests. First-time homebuyers or those with poor or no credit history 

were particularly vulnerable to these practices. The Loan Originator Compensation rule prohibits 

compensation arrangements for loan originators that vary by product type. However, affordable 

loans may require different compensation structures than other loans, with the result that it is 

difficult for loan originators to offer affordable loans in compliance with this requirement of the 

loan originator compensation rules.

The Home Mortgage Disclosure Act (HMDA) was enacted in the 1970s to help combat redlining 

and racial profiling by requiring lenders to report data on the type of loan and demographic information about the borrower to whom the loan was made.208 HMDA continues to be an important 

resource today to identify lenders who engage in discriminatory activity. HMDA data also helps 

lenders identify strategies to expand mortgage lending into underserved communities. Dodd-Frank 

expanded HMDA by providing for additional data reporting requirements. The CFPB’s amendments to the HMDA rule increases the loan-level data collected and reported to the government 

about applications from and loans to individual borrowers. The new rule goes into effect in 2018 

204. 12 C.F.R. § 1026.43(e)(5).

205. 12 C.F.R. §§ 1024, 1026.

206. Brandy A. Hood and Benjamin K. Olson, “TRID Liability Will Be A Dominant Issue In 2016,” Law360. Jan. 12 

2016, available at: www.law360.com/articles/743518/trid-liability-will-be-a-dominant-issue-in-2016.

207. See 12 C.F.R. § 1026.36.

208. FFIEC, HMDA Background and Purpose. Sep. 2016, available at: https://www.ffiec.gov/hmda/history.htm.
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and includes 10 new fields required by statute in Dodd-Frank, plus 15 new fields added by the 

CFPB in its amendments.209

The new reporting requirements have created two concerns among market participants, both 

related to the public disclosure of the data. The new fields include additional borrower-specific 

data, which taken with existing HMDA fields and publicly available information, could be used to 

determine the specific identity of a borrower, raising privacy concerns. Additionally, the new fields 

contain loan-specific features, including mortgage note rate and fees. The new HMDA loan level 

data could help competitors re-engineer a lender’s pricing models, which could cause competitive 

harm to the lender.

Mortgage Loan Servicing

While loan origination costs have increased since the financial crisis, servicing costs have also 

increased dramatically. The cost to service a performing loan has increased approximately fourfold, 

from approximately $59 per annum in 2008 to approximately $228 per annum by the first half 

of 2016, while the cost of servicing a delinquent loan has ballooned from approximately $482 to 

more than $2,500 per annum over the same period, according to the MBA.210

Substantial opportunities exist to reduce the burden of regulation, which will decrease the costs of 

servicing and improve mortgage loan pricing to borrowers. Certain reforms would also promote 

a better national standard and help rejuvenate the private label mortgage-backed securities (PLS) 

market, helping to level the playing field between private sector mortgage lending and governmentsupported mortgage lending.

The financial crisis exposed fundamental deficiencies in mortgage servicing practices. The precrisis mortgage servicing industry, accustomed to minimal default rates and reliable MSA income, 

lacked the personnel and systems to effectively deal with the number of homeowners in need of 

assistance during the crisis. Post-financial crisis, oversight and regulation of the mortgage servicing 

industry increased significantly at both the federal and state level. At the federal level, the passage of Dodd-Frank provided authority to the CFPB to implement detailed regulations affecting 

mortgage servicing.211

The increased oversight and regulation has led to an increase in compliance costs, some of which 

are reflected in higher servicing costs today compared to prior to the financial crisis. Further, 

servicers indicate that they are forced to devote resources to complying with the new rules as 

opposed to spending those resources on developing more effective mortgage servicing platforms 

and technology or focusing on the borrower experience—particularly for delinquent borrowers. 

209. Home Mortgage Disclosure (Regulation C), 80 Fed. Reg. 66127 (proposed Oct. 15, 2015).

210. See MBA’s Servicing Operations Study and Forum for Prime and Specialty Servicers, available at: www.

mba.org/sosf.

211. See 12 U.S.C. § 5538.
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Private Sector Secondary Market Activities 

It is important to establish a legal and regulatory framework that is conducive to a variety of 

private sector sources of funding, including private label securitization. In the post-financial crisis 

years, PLS issuance has been extremely small and mostly concentrated in securitizations of nonperforming and re-performing loans as well as prime jumbo loans. According to Inside Mortgage 

Finance and the Urban Institute, the total non-agency share of new mortgage securitizations was 

1.81% in 2016. This figure is tiny compared to a peak non-agency share of approximately 50% 

in 2005-2007 and approximately 20% in 2001-2003. While the GSEs’ credit risk transfer (CRT) 

securities have provided an avenue for mortgage credit exposure for investors, the largest source 

of private capital for residential mortgage credit in recent years has come from bank portfolios.212

In order to revitalize a responsible PLS market, it is important to improve incentives for issuers through reasonable reductions in costs and regulatory burdens (particularly adjusting relative 

economics to the GSEs and federal insurance and guarantee programs), align the interests between 

issuers and investors, and enhance protections for investors in PLS. Treasury supports regulatory 

changes to encourage the emergence of a safe and sound PLS market that accommodates more private capital and provides for more consumer choices in mortgage products. Decreasing the market 

share of government-supported mortgages, while increasing private sector funding of mortgage 

credit, should be a key policy goal consistent with the Core Principle that calls for decreasing the 

risk of taxpayer-funded bailouts. 

The Qualified Residential Mortgage (QRM) definition originated from the Dodd-Frank provision 

that requires securitizers of asset-backed securities to retain not less than 5% of the credit risk of 

the mortgage loans or other assets that back the securitization. For mortgage loans, Dodd-Frank 

specifically provides that a securitizer is not required to retain the 5% credit risk if all of the 

mortgages that collateralize the securitization meet the definition of a QRM. In the final risk 

retention rule, the six rule-writing agencies made the determination to align the QRM definition 

with the QM definition, partly because Dodd-Frank provided that the QRM definition could be 

no broader than the QM definition.213

Securitizers have experienced difficulty in receiving clear guidance on the risk retention rule’s 

implementation because of the Dodd-Frank requirement that it be a joint rule among the six rulewriting agencies. Although the rule provides that the securitizer seek guidance from its primary 

regulator, any significant issue would require consideration by all of the rule-writing agencies.

The financial crisis exposed significant structural deficiencies in private label securitizations, which 

led to substantial losses and litigation, and damaged the trust of market participants. Pre-financial 

crisis, private label securitizations often had conflicts of interest, inadequate investor protections, 

contractual enforcement failures, and a lack of transparency into decisions affecting the value of 

trust assets. Enhanced governance and strong investor protections are necessary for a responsible 

and scalable PLS market, along with adequate economic incentives for all parties in securitization 

trusts. Furthermore, many secondary market investors are reluctant to purchase non-agency loans 

212. See Urban Institute. Housing Finance at a Glance. May. 2017, pp. 8-10.

213. See 12 C.F.R. § 244.
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or PLS due to concerns about potential assignee liability, in which an investor could be liable for 

rule violations committed during the loan origination process. These concerns may affect the cost 

and availability of credit for certain borrowers.

Given the substantial losses realized on private label securitizations during the financial crisis, 

international standard-setting bodies responded by establishing significant risk-weightings on 

structured products as a part of the post-financial crisis response. Under the Basel III capital 

framework, residential mortgage securitization is treated at a disadvantage to retained whole loans. 

Under the U.S. final rule implementing Basel III standards for U.S. banks, single-family residential 

real estate receives a 50% risk weight under the standardized approach. Senior retained tranches 

of residential mortgage-backed securities (RMBS) are risk-weighted at a minimum of 20% with 

mezzanine weightings exceeding 130%, and subordinate weightings of 1,250%.214

A bank that originates a pool of QM loans is placed at a capital disadvantage when it securitizes 

those loans rather than hold them on its balance sheet as individual whole loans, despite the fact 

that the same underlying collateral would be held in both scenarios. In some cases, the capital 

required against an interest in an RMBS is greater than the maximum loss exposure for the security 

itself. Furthermore, the capital required is based on the par value of the security, so an interest that 

is purchased at a discount in the secondary market is treated even more negatively from a capital 

standpoint, further discouraging secondary market activity in these assets.

The Asset-Backed Securities Disclosure and Registration Final Rule (Reg AB II), finalized by the 

SEC in 2014, established asset-level disclosure requirements for registered asset-backed securities 

backed by auto loans, commercial real estate, and residential real estate as required by DoddFrank.215 The securitization market that preceded the financial crisis was characterized by a gross 

lack of adequate disclosures on underlying loan collateral. Dodd-Frank required the SEC to 

promulgate regulations to address this shortcoming in order to help investors make better investment decisions in a securitization based on the quality of the underlying collateral. Most investors welcomed the enhanced disclosure requirements. However, issuers have stated that increased 

compliance burdens, lack of standardized definitions, and ambiguous regulatory guidance have 

had a negative economic impact on issuing new publicly available securitizations. Currently, Reg 

AB II requires 270 reporting fields per mortgage. Furthermore, many industry participants have 

expressed concerns about the rule’s potential application to privately issued 144a securitizations 

and its impact on the viability of the market.

Several regulatory standards promulgated after the financial crisis, including the LCR, the NSFR, 

and the FRTB, have and could further constrain the liquidity of non-agency MBS. The LCR 

assigns different haircuts to classes of assets based on their expected liquidity in a period of economic stress. U.S. Treasury securities and Ginnie Mae MBS are assigned a zero haircut, while other 

assets, including GSE MBS, are assigned a 15% haircut when counting toward the LCR requirement. Non-agency MBS do not count at all toward LCR, effectively signaling that regulators view 

this asset as illiquid during a crisis, regardless of credit rating.216

214. See Regulatory Capital Rules, 78 Fed. Reg. 62017 (Oct. 11, 2013).

215. See 17 C.F.R. §§ 229, 230, 232, 239, 240, 243, and 249.

216. See Liquidity Coverage Ratio, 79 Fed. Reg. 61440 (Oct. 10, 2014).
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The Basel Committee issued its final update on the revised minimum capital standard for market 

risk in January 2016, known as the FRTB. The Federal Reserve has not announced how they might 

implement it for bank holding companies. The revised standard increases capital requirements for 

securitizations by changing the capital calculation under the current trading book capital requirements to a “revised standardized approach” for market risk.217 Under this approach, banks would 

face increased capital requirements depending on bank-specific metrics, asset class, and ratings. 

Increasing the capital on trading activity and reducing the economics of market making for these 

assets could negatively impact liquidity. The secondary market for structured mortgage products 

has already shifted since the financial crisis, with the industry reporting increased concentration 

among the most active market participants, as a number of large participants have exited amidst 

the declining economics of this business.

Recommendations for Regulatory Reform

Treasury has a number of recommendations for regulatory reform of the mortgage origination process, mortgage servicing standards, and private sector secondary market activities that advance the 

Core Principles. If these reforms are appropriately implemented, they may result in a significant 

increase in the availability of mortgage credit, an increase in consumer choice, and a decrease in the 

subsidization and market share of government-supported mortgages. The objective of the reforms 

is to increase the viability of private sector lending so the share of government-sponsored lending 

can decrease. The distortion creates massive moral hazard on the part of borrowers, investors, and 

lenders.

Mortgage Loan Origination

Adjust and Clarify the ATR/QM Rule and Eliminate the “QM Patch”

The QM Patch for GSE-eligible loans creates an unfair advantage for government-supported 

mortgages without providing additional consumer protection, exposes taxpayers to potential 

losses, and inhibits consumer choices by restricting private sector flexibility and participation. 

The CFPB should engage in a review of the ATR/QM rule and work to align QM requirements 

with GSE eligibility requirements, ultimately phasing out the QM Patch and subjecting all market 

participants to the same, transparent set of requirements. These requirements should make ample 

accommodation for compensating factors that should allow a loan to be a QM loan even if one 

particular criterion is deemed to fall outside the bounds of the existing framework—e.g., a higher 

DTI loan with compensating factors. However, QM remains a borrower protection standard, and 

regulatory agencies should make sure that any changes prioritize consumer protection.

Modify Appendix Q of the ATR/QM Rule 

Appendix Q should be simplified and the CFPB should release much clearer, binding guidance 

for its use and application. The CFPB should review Appendix Q standards for determining 

borrower debt and income levels to mitigate overly prescriptive and rigid requirements. Review 

of these requirements should be particularly sensitive to considerations for self-employed and 

217. See Basel Committee on Banking Supervision. Standards: Minimum Capital Requirements for Market Risk. 

Jan. 2016, available at: http://www.bis.org/bcbs/publ/d352.pdf.
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non-traditional borrowers. These issues are particularly acute for the self-employed, small business 

owners, seasonal workers, and retirees.

Revise the Points and Fees Cap for QM Loans 

The CFPB should increase the $103,000 dollar loan amount threshold for application of the 3% 

points and fees cap. This would encourage additional lending in the form of smaller balance loans. 

The CFPB should scale points and fees caps in both dollar and percentage terms for loans that fall 

below the adjusted loan amount threshold for application of the 3% points and fees cap.

Increase Maximum Asset Threshold for Making Small Creditor QM Loans 

Smaller depository institutions, which generally follow conservative underwriting practices and 

are often very familiar with their local market, may be better positioned than larger institutions to 

determine the creditworthiness of local borrowers. Raising the total asset threshold for making Small 

Creditor QM loans from the current $2 billion to a higher asset threshold of between $5 and $10 

billion is recommended to accommodate loans made and retained by small depository institutions.

It is important to maintain a level playing field across institution types in order to encourage competition and generate cost-saving efficiencies for consumers. As a result, an alternative approach to 

the above recommendation would be to undertake a rulemaking to amend the ATR/QM rule and 

related processes for all lenders regardless of type, which in turn could resolve issues experienced 

by smaller lenders.

Clarify and Modify TRID

Lenders are seeking clear, written guidance from the CFPB on the TRID rules to foster a greater 

degree of certainty. Certainty could help mitigate the costs that arise from delays in the process and 

encourage the entrance of additional private capital. Because of the lack of guidance, investors take 

different, often conflicting, positions on what constitutes a violation. This results in delays when 

lenders try to sell loans, and in various cases lenders ultimately cannot sell loans because of minor 

technical errors. The CFPB could resolve these uncertainties through notice and comment rulemaking and/or through the publication of more robust and detailed FAQs in the Federal Register.

Furthermore, with regard to the rules themselves, the CFPB should allow a more streamlined 

waiver for the mandatory waiting periods. Longer transaction timelines can add to costs and are an 

undue burden to participants who understand the terms of the contract and prefer to move more 

quickly in closing their loan. Additionally, the CFPB should allow creditors to cure errors in a loan 

file within a reasonable period after closing. In any adjustment to the mandatory waiting period 

practices, all market participants, including both lenders and realtors, should be considered given 

their central role in the application and closing process.

Improve Flexibility and Accountability of Loan Originator Compensation Rule

The CFPB should improve the flexibility and accountability of the Loan Originator Compensation 

rule, particularly in those instances where an error is discovered post-closing, in order to facilitate 

post-closing corrections of non-material errors. The CFPB should establish clear ex ante standards 

through notice and comment rulemaking, which will clarify its enforcement priorities with respect 

to the Loan Originator Compensation rule.
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Delay Implementation of HMDA Reporting Requirements

Fundamental concerns remain about the efficiency of the HMDA regime, borrower privacy, and 

competitive harm to lenders through disclosure of proprietary information. The CFPB should 

delay the 2018 implementation of the new HMDA requirements until borrower privacy is adequately addressed and the industry is better positioned to implement the new requirements. The 

new requirements should be examined for utility and cost burden, particularly on smaller lending 

institutions. Consideration should be given to moving responsibility for HMDA back to bank 

regulators, discontinuing public use, and revising regulatory applications.

Mortgage Loan Servicing

Place a Moratorium on Additional Mortgage Servicing Rules

The CFPB should place a moratorium on additional rulemaking in mortgage servicing while the 

industry updates its operations to comply with the existing regulations and transitions from HAMP 

to alternative loss mitigation options. In addition, the CFPB should work with prudential regulators and state regulators to improve alignment where possible in both regulation and examinations, 

which could help in decreasing the cost of servicing in general.

Private Sector Secondary Market Activities

Repeal or Revise the Residential Mortgage Risk Retention Requirement

Treasury recommends repealing or substantially revising the residential mortgage risk retention 

requirement. This recommendation is generally aligned with the recommended review of the QM 

standards in general, and is taken in the context of the significant body of other regulatory measures that improve credit standards and provide investor protections. If the residential mortgage 

risk retention requirement is revised rather than repealed, in order to improve regulatory efficiency, 

the legislation should also designate one agency from among the six rule-writing agencies to be 

responsible for the interpretation of the risk retention rule. 

Enhance PLS Investor Protections

Congress should consider legislation providing additional protections for investors in PLS. 

Additionally, market-led and regulatory initiatives that improve transparency as well as standardization of documentation and data should be encouraged.

Clarify Limited Assignee Liability for Secondary Market Investors

The CFPB should clarify assignee liability for secondary market investors related to errors in the 

origination process where such errors are not apparent on the face of the disclosure statement and 

are not asserted as a defense to foreclosure.

Improve the Alignment of the Regulatory Capital Framework for Structured Mortgage Products

Prudential bank regulators should review the regulatory framework for risk-weighting applicable to 

securitizations in order to better align the framework with the risk of the asset and with international 

standards for securitized products. Increased capital and liquidity standards have negatively impacted 

the economic attractiveness of PLS. Additionally, harsh treatment of PLS in DFAST and CCAR 

stress-testing has exacerbated this problem, sometimes resulting in scenarios where a bank is required 
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to hold more capital against a PLS asset than the maximum economic loss on that asset. At a minimum, regulators should calibrate standards to resolve this type of counterintuitive result.

Amend Reg AB II

The SEC should amend Reg AB II as it applies to registered securitizations to reduce the number of 

required reporting fields. It is essential to provide loan-level disclosures on the quality of underlying 

collateral to maintain transparency and promote investor confidence. However, fewer fields and standardized definitions may provide sufficient transparency without placing excessive burden on the issuer.

Evaluate Impact of Liquidity Rules on the PLS Market

U.S. banking regulators should consider the impact that capital and liquidity rules implementing 

Basel III standards would have on secondary market activity and calibrate them to reduce complexity and avoid punitive capital requirements.

Leveraged Lending

Overview

One significant type of lending provided by banks and other financial institutions is leveraged 

loans. Leveraged loans are a type of corporate finance used for mergers and acquisitions, business recapitalization and refinancing, equity buyouts, and business or product line build-outs and 

expansions.218 For companies that do not have an investment-grade credit rating, and therefore 

have limited access to the public capital markets, leveraged loans play a significant role in supporting their business growth and increasing returns to investors. Banks play a critical role in arranging, 

originating, and administering funding for leveraged loans to these borrowers.219

The leveraged loan business has existed since at least the early 1980s, when issuance was less than 

$50 billion. 220 From 2004 to 2007, there was significant leveraged buyout business activity, leading 

to growth in leveraged loans, and a peak in issuance of more than $500 billion in 2007.221 During 

the financial crisis in 2008 and 2009, leveraged loan issuance dried up.222 Since the financial crisis, 

leveraged loan issuance has recovered, reaching record levels in 2013.223 Today, the leveraged loan 

business remains fairly robust.224

218. OCC Leveraged Lending Comptroller’s Handbook (Feb. 2008). 

219. The Clearing House. Submission to the U.S. Treasury Department: Aligning the U.S. Bank Regulatory Framework 

with the Core Principles of Financial Regulation. (May 2, 2017), available at: www.theclearinghouse.org/~/media/

TCH/Documents/TCH%20WEEKLY/2017/20170502_TCH_Submission_to_UST_re_Core_Principles_Study.pdf. 

220. Recent Developments in Corporate Finance, 76 Fed.Res.Bull. 593, 595, 1990 WL 319954, at *2.

221. GAO. Private Equity: Recent Growth in Leveraged Buyouts Exposed Risks That Warrant Continued 

Attention p. 46. Sept. 2008, available at: www.gao.gov/new.items/d08885.pdf. 

222. Ivashina, Victoria, Scharfstein, David, Bank Lending During the Financial Crisis of 2008, Harvard Business 

School (Nov. 5, 2008) at 5, available at: http://www.people.hbs.edu/dscharfstein/Lending_During_the_Crisis.pdf.

223. Doherty, Colm (C.J.), Pereia, Hugo, Leveraged Loan Monthly, Thomson Reuters LPC (Dec. 2016), at 7, available at: http://

lipperalpha.financial.thomsonreuters.com/wp-content/uploads/2017/01/Leveraged-Loan-Monthly-Year-end_2016.pdf.

224. Id.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Findings and Recommendations • Leveraged Lending

103

Regulatory Guidance on Leveraged Lending 

In conjunction with the surge in leveraged lending, standards for credit agreements became murkier, and participation by unregulated investors increased. For example, credit agreements for many 

leveraged loans relied on aggressive estimates of borrower repayment capacity, and they provided 

limited protections for lenders, for example by omitting meaningful maintenance covenants.225

Additionally, many financial institutions lacked satisfactory systems to monitor loan credit exposures, particularly during periods when buyer demand for risky assets weakened.226

Driven by this dynamic, in March 2013, the OCC, the Federal Reserve, and the FDIC issued 

updated supervisory guidance on leveraged lending to banks, which outlined principles for leveraged lending activity.227 In response to additional inquiries, the agencies issued responses to 

frequently asked questions on November 7, 2014.228 Together, the guidance and frequently asked 

225. Maintenance covenants require the borrower to maintain its credit quality by adhering to predetermined 

ratios at specified intervals.

226. Interagency Guidance on Leveraged Lending, 78 Fed. Reg. 17766 (Mar 22, 2013); see also Federal 

Reserve SR 13-3, Interagency Guidance on Leveraged Lending (Mar. 21, 2013), available at: https://www.

federalreserve.gov/supervisionreg/srletters/sr1303a1.pdf.

227. Interagency Guidance on Leveraged Lending, 78 Fed. Reg. 17766 (Mar 22, 2013). 

228. Federal Reserve, FDIC and OCC. Frequently Asked Questions (FAQ) for Implementing March 2013 

Interagency Guidance on Leveraged Lending. November 2014, available at: www.occ.treas.gov/news-issuances/news-releases/2014/nr-ia-2014-153c.pdf.

Billions (in U.S. dollars)

2000 2003 2006 2009 2012 2015

Figure 11: Leveraged Loan Issuance

Source: S&P LCD

700

600

500

400

300

200

100

0

As Of: 2016
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Findings and Recommendations • Leveraged Lending

104

questions outlined expectations on a range of topics related to leveraged lending. Those topics 

included underwriting and valuation standards, loan pipeline management, credit risk ratings, and 

managing problem credit exposures. 

The 2013 guidance attempted to set forth the regulators’ expectations for banks’ risk management 

of leveraged lending. It emphasized the importance of structuring leveraged loans based on a 

sound business premise. It also highlighted the importance of a clear and consistent definition 

of leveraged lending, well-defined underwriting standards, appropriate credit limits and credit 

concentration parameters, sound systems to monitor credit exposures, and coherent guidelines for 

portfolio stress tests. The guidance further stated that leveraged lending credit agreements should 

contain covenant protections, including financial performance covenants such as debt to cash 

flow, interest coverage, or fixed charge coverage. It also stated that the agreements should include 

provisions related to compliance reporting and monitoring.229

Key Issues with Regulatory Guidance

Both experts and market participants have provided mixed feedback on the 2013 leveraged lending 

guidance. One of the primary concerns expressed with the guidance was the level of ambiguity left 

in the definition of leveraged lending. For example, while the guidance specifically expressed concern with loans exceeding six times (6x) leverage (defined as the ratio of total debt to EBITDA), 

the regulators simultaneously said the 6x limit is not a “bright line” so long as other “compensating 

factors” make up for the amount of leverage.230 Additionally, the guidance gave banks the opportunity to adopt their own definitions of leveraged lending – such as to identify leveraged loans based 

on the borrower’s leverage, based on the borrower’s credit rating, based on the purpose of the loan, 

or based on the spread of the loan at origination.231 Notwithstanding subsequent clarifications 

to the guidance, this ambiguity left banks unsure how to satisfy regulatory demands while also 

providing credit to clients. In essence, banks were left to wait until ex post facto regulatory review 

to get clarity on whether a leveraged loan would pass or fail supervisory review.

In addition to the ambiguity around the definition of leveraged lending, the guidance lacked clear 

penalties for noncompliance, which fueled further questions about its usefulness. As a general 

matter, failure to comply with guidance can result in increased supervisory scrutiny and potentially 

even a downgrade in the bank’s supervisory rating. 232 Because the guidance lacked specificity, it led 

to uncertainty in the leveraged lending market, and ultimately, resulted in fewer leveraged loans 

by banks. 233 However, the reduction in leveraged lending by banks did not necessarily lead to a 

reduction in risk in the financial system. Instead, a recent Federal Reserve staff paper found that 

leveraged lending migrated to less regulated nonbanks – a dynamic which makes it far less clear 

229. Interagency Guidance on Leveraged Lending, 78 Fed. Reg. 17766 (Mar 22, 2013).

230. Some industry engagement participants informed Treasury that bank regulators sometimes utilized leverage 

definitions of 3x or 4x senior debt divided by EBITDA.

231. Kim, Sooji, Plosser, Matthew, and Santos, Joao, Macroprudential Policy and the Revolving Door of Risk: 

Lessons from Leveraged Lending Guidance, Federal Reserve Bank of New York Staff Reports, Report No. 

815, May 2017, at 2.

232. Id. 

233. Id at 4.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

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105

that the guidance actually diminished risks to financial stability, since nonbank lenders often originate leveraged loans using more aggressive and riskier credit structures. 234What is clear, however, 

is that the reduction in leveraged loans available from banks reduced access to credit by businesses.

Recommendations for Regulatory Reform

To address the concerns noted above, Treasury recommends the following:

• The 2013 leveraged lending guidance should be re-issued for public comment. Following 

the public comment process, the guidance should be refined with the objective of reducing ambiguity in the definition of leveraged lending and achieving consistency in supervision, examination and enforcement.

• Banks should be encouraged to incorporate a clear but robust set of metrics when 

underwriting a leveraged loan, instead of solely relying on a 6x leverage ratio discussed in 

the 2013 leveraged lending guidance. Encouraging banks to do so will help maximize the 

role that leveraged lending plays in the provision of capital to business.

Small Business Lending

Overview

Small businesses are an integral engine of economic growth and job creation in the United States.235

They employ almost half of the private sector workforce and create three out of five net new jobs 

in the United States as small businesses are typically more labor intensive than their larger peers.236

Ensuring adequate access to capital for this segment of the economy is critical to supporting robust 

and lasting growth.

Unlike large and medium-sized businesses, small businesses typically do not have access to capital 

markets to attract retail or institutional investors. As a result, small businesses rely heavily on 

personal savings, business profits, home equity loans, and friends and family as initial sources of 

capital. Financial institutions are the primary source of outside credit to small businesses. Among 

financial institutions, community banks issue 43% of small business loans.237

234. Sooji Kim, Matthew Plosser and João Santos, “Did the Supervisory Guidance on Leveraged Lending 

Work?” Liberty Street Economics. May 16, 2016, available at http://libertystreeteconomics.newyorkfed.org/2016/05/did-the-supervisory-guidance-on-leveraged-lending-work.html. See also: Kim, Sooji, 

“Macroprudential Policy and the Revolving Door of Risk: Lessons from Leveraged Lending Guidance,” at 4.

235. Traditionally, a small business is defined as an enterprise with fewer than 500 employees. Financial institutions tend to define small businesses as a client which produces between less than $10-$50 million in revenues per year.

236. Karen Mills & Brayden McCarthy. The State of Small Business Lending: Credit Access During the Recovery 

and How Technology May Change the Game (State of Small Business Lending), Working Paper 15-004. 

Harvard Business School, (June 22, 2014) available at: http://www.hbs.edu/faculty/Publication%20

Files/17-042_30393d52-3c61-41cb-a78a-ebbe3e040e55.pdf.

237. FDIC Quarterly 2017. Vol. 11. No. 1. available at: www.fdic.gov/bank/analytical/quarterly. (FDIC Quarterly)
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Findings and Recommendations • Small Business Lending

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Small businesses were adversely affected by the contraction in the overall supply of credit during 

the financial crisis. Stricter lending standards, loans rates, and increased collateral requirements 

all deterred borrowing by small businesses. Deteriorating economic conditions, falling real estate 

values, and lethargic demand for small business products and services simultaneously impacted the 

creditworthiness of small business borrowers.

Structural Challenges with Small Business Credit and Credit Markets

Small business lending poses unique challenges to lenders and certain aspects of the business will 

not be remedied by changes to existing regulation. Given the high transaction costs, the often 

incomplete data on small business loan performance, and extreme heterogeneity of small businesses, underwriting small dollar loans is inherently expensive. Given the relatively higher due 

diligence and loan review costs for small business loans, they are less attractive for lenders than 

loans to larger, well-established businesses.238 As a result, underwriting costs associated with small 

business borrowers can be seen as outsized given the potential returns.

Due in part to their size and scale, large financial institutions generally maintain highly structured 

credit evaluation processes to ensure consistency across the institution. These assessment methods 

tend to focus on quantitative methods of analysis, frequently placing great emphasis on evaluating 

the collateral securing the loan. Credit assessment methods employed by large financial institutions 

favor more automated products for small business borrowers, such as business credit cards, which 

require lower upfront transaction costs to deploy. Unfortunately, these automated products may 

not always meet the credit needs of the borrower.

Increased Regulatory Scrutiny 

Additional regulatory scrutiny in the wake of the financial crisis has limited the willingness or ability of some banks—large and small—to make loans to small businesses. Regulatory developments, 

such as increased capital requirements and a larger focus by the banking agencies on concentration risk, have increased the “cost of doing business” with small businesses for regulated banks.239

Increased regulatory focus on pricing has also challenged the ability of banks to price additional risk 

for lower credit loans, further reducing the availability of bank credit to small business borrowers.

The Ultimate Cost of Small Business Credit

Certain structural aspects inherent in lending to small businesses and in the banking sector more 

broadly continue to affect the cost and availability of small business credit. A recent study concluded that, in general, “low income consumers and small businesses, which generally have fewer 

or less effective alternatives to bank credit, have paid the largest price for increased bank regulation” 

in the years following the passage of Dodd-Frank. This same analysis went on to state that funding 

costs for small businesses have increased by approximately 175 basis points more than for larger 

238. Mills, State of Small Business Lending.

239. Ryan Nash & Eric Beardsley. The Future of Finance: Part 1, The Rise of the New Shadow Bank. Goldman 

Sachs Equity Research. (Mar. 3, 2015).
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

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107

businesses when compared with the pre-crisis period.240 These facts suggest that heightened regulatory and compliance costs in the wake of recent financial regulatory reform have had a direct and 

adverse impact on small business lending.

Recommendations for Regulatory Reform

Minimizing the adverse impact of financial regulation on small business lending is not necessarily 

a function of changing a few specific regulations but rather reducing the aggregate burden of 

regulatory compliance on those institutions serving the financing needs of small businesses.

Predominantly, the nature of lending to small businesses—which often lack established and 

consistent cash flow, access to worthy collateral, diversified sources of revenue, and sophisticated 

operations and controls—is riskier than lending to their larger counterparts. The banking agencies 

should be mindful of this reality.

Simplify, adjust, or change certain financial regulations for community 

financial institutions serving small businesses

The cost of doing business for community banks, which provide approximately 43% of small business loans and 90% of agricultural loans, has increased under the current regulatory framework.

241 The section in this report on community financial institutions discusses ways that existing 

regulations can be better tailored for community banks and credit unions. Many of these recommendations would also alleviate burdens to small business lending by these institutions, including improvements to complex capital requirements and reducing the examination and reporting 

burdens. Moreover, additional changes to leverage lending guidance could help promote capital 

access for small and mid-sized businesses.

Reduce regulation and reconsider guidance regarding real estate collateral

Real estate is often the most useful collateral to leverage to gain access to business and start-up 

credit. This is particularly true for small business owners where personal and business finances are 

highly intertwined and retaining full equity and management control is a high priority. Alleviating 

regulatory burdens that directly impact access to credit collateralized by property would directly 

contribute to closing critical gaps in credit that supports small businesses.

In particular, as businesses grow and expand, commercial real estate (CRE) owned by small businesses often becomes the collateral pledged to obtain credit. CRE lending is a highly bank-intensive 

business that has historically been a key source of risk for banks during periods of distress.

Over the past few years, prudential regulators have increasingly warned financial institutions that 

there will be a renewed focus on the management of concentration risk in CRE lending. Prudential 

regulators focus on three measures of CRE exposure: (1) total loans reported for construction, 

land development, and other land representing 100% or more of the institution’s total capital; 

240. Steve Strongin & Sandra Lawson et. al. Who Pays for Bank Regulation? Goldman Sachs Market Institute 

(June 2014), available at: http://www.goldmansachs.com/our-thinking/public-policy/regulatory-reform/whopays-for-bank-regulation-pdf.pdf.

241. FDIC Quarterly 2017. This was also regularly voiced during Treasury’s consultation with stakeholders. 
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Findings and Recommendations • Small Business Lending

108

(2) total CRE loans representing 300% or more of the institution’s total capital; and (3) whether 

the outstanding balance of the institution’s CRE loan portfolio has increased by 50% or more 

during the prior 36 months. This elevated regulatory scrutiny combined with a renewed focus on 

concentration risk has had the greatest impact on small business loans secured by CRE.242

CRE guidance, such as that discussed above, does not provide for sufficient flexibility where there 

may be very strong collateral. Regulators should consider alternatives to assessing concentration 

risk to allow banks engaged in CRE lending to maximize access to credit for small businesses and 

optimize balance sheet usage while still maintaining safety and soundness.

Consider addressing the calibration of the SLR for lines of credit to small 

and mid-sized businesses

Small, unrated corporate loans (commercial and industrial, or C&I, loans) are almost entirely 

underwritten by banks. The SLR has a direct effect on the cost of working capital loans and specifically unfunded lines of credit. Recalibrating the leverage ratio requirement would likely help banks 

to provide additional access to working capital lines for small businesses.

Repeal the Application of Section 1071 of Dodd-Frank to Small Business Lending

Section 1071 of Dodd-Frank requires the CFPB to establish regulations and issue guidance for 

small business loan data collection. The purposes of section 1071 include enabling creditors to 

identify the needs of small, minority-owned, and women-owned businesses, and to facilitate 

enforcement of fair lending laws.243 Although financial institutions are not currently required to 

gather such information, many lenders have expressed concern that this requirement will be costly 

to implement, will directly contribute to higher small business borrowing costs, and reduce access 

to small business loans. The provisions in this section of Dodd-Frank pertaining to small businesses 

should be repealed to ensure that the intended benefits do not inadvertently reduce the ability of 

small businesses to access credit at a reasonable cost.

242. FDIC. Managing Commercial Real Estate Concentrations. 7 Dec. 2007, available at: www.fdic.gov/regulations/examinations/supervisory/insights/siwin07/article02_real_estate.html.

243. 15 U.S.C. § 1691c-2(a).
Appendix A

Participants in the Executive Order 

Engagement Process
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Appendix A • Participants in the Executive Order Engagement Process

111

Many organizations and individuals participated in the engagement process in connection with 

this report, including the following list as of June 12, 2017.

Government Entities, Offices, and Related Entities

California Public Employees’

Retirement System

Conference of

State Bank Supervisors

Consumer Financial

Protection Bureau

Delegation of the European Union 

to the United States of America

Federal Deposit Insurance 

Corporation

Federal Housing

Finance Agency

Federal Reserve

Bank of Chicago

Federal Reserve

Bank of New York

Federal Reserve

Board

Financial Services Agency,

Japan

Independent Member with 

Insurance Expertise, FSOC

National Credit Union 

Administration

New York State

Common Fund

Office of

Financial Research

Office of the Comptroller of the 

Currency

Teacher Retirement

System of Texas

U.S. Commodity Futures Trading 

Commission

U.S. Securities and Exchange 

Commission
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Appendix A • Participants in the Executive Order Engagement Process

112

Consumer Advocates

AARP

Americans for Financial Reform

Center for Responsible Lending

Consumer Action

Consumer Federation of America

Consumers Union

Leadership Conference on Civil

 and Human Rights

National Association for the 

Advancement of Colored People

National Community

Reinvestment Coalition

National Consumer

Law Center

National Council

of La Raza

National

Disability Institute

National

Urban League

U.S. Public Interest

Research Group

Academics

Adi Sunderam

Harvard Business School

Anat Admati

Stanford University

Arnold Kling

Independent Scholar

Arthur Wilmarth

George Washington University

David Skeel

University of Pennsylvania Law School

Jay Rosengard

Harvard Kennedy School

John Taylor Stanford University

Lawrence White

New York University

Mark Willis

New York University

Richard Herring

University of Pennsylvania

Roberta Romano

Yale University

Robin Greenwood

Harvard Business School

Sanjai Bhagat

University of Colorado
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

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113

Think Tanks

American Enterprise Institute

Aspen Institute

Better

Markets

Bipartisan Policy Center

Brookings Institution

CATO Institute

Committee on Capital Markets 

Regulation

Competitive Enterprise Institute

Heritage Foundation

Hoover Institution

Mercatus Center at

George Mason University

New America

Pew Charitable Trust

R Street Institute

Urban

Institute

Industry and Trade Groups

1st University

Credit Union

Aegon N.V.

(Transamerica)

Aflac Inc.

Allegacy Federal Credit Union

AllianceBernstein L.P.

Allstate Corporation

American Airlines

Federal Credit Union

American Bankers Association

American Council of Life Insurers

American Express Company

American Institute of Certified 

Public Accountants

American International Group, Inc.

American Investment Council

Amerifirst Financial, Inc.

Angel Oak Home Loans

AQR Capital Management

Arlington Community

Federal Credit Union

Association for Enterprise 

Opportunity
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Appendix A • Participants in the Executive Order Engagement Process

114

Association for Financial 

Professionals

Association of Institutional 

Investors

Association of Mortgage Investors

Autonomous Research

AXA

Bank of America Corporation

Bank of America

 Merrill Lynch

Bank of Bennington

Bank of Montreal

Bank of New York Mellon 

Corporation

Bank of the West

Barclays US LLC

Barksdale Federal Credit Union

Bayview Asset Management

BB&T Corporation

BBVA Compass Bancshares, Inc.

BlackRock

Blackstone Group L.P.

BNP Paribas SA

Boeing Credit Union

BOK Financial Corporation

Boston Consulting Group

Bridgewater Associates, LP

Caliber Home Loans

Cape Cod

Five Mutual Company

Capital Group Companies, Inc.

Capital One Financial Corporation

Cardinal Bank

Carnegie Cyber Policy Initiative

Cedar Rapids Bank and Trust 

Company

Center for Financial Services 

Innovation

Central Bank of Kansas City

Centric Financial Corporation

Centris Federal Credit Union

Century Bank and Trust Company

Chiropractic Federal

Credit Union

Chubb

CIT Group Inc.

Citadel LLC

Citigroup Inc.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

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115

Citizens Financial Group, Inc.

City First Bank of DC

City National Bank of New Jersey

Clayton Holdings, LLC

Cleary Gottlieb

Steen & Hamilton LLP

CLS Group Holdings AG

CME Group Inc.

CMG Financial Inc.

Columbia Investment Management

Comerica, Inc.

Community Development Bankers 

Association

Consumer Bankers

Association

Credit Suisse Group AG

Credit Union National Association

Cullen/Frost Bankers,

Inc.

Cypress Group

Davis Polk & Wardwell LLP

Depository Trust & Clearing 

Corporation

Deutsche Bank AG

Discover Financial Services

District Government Employees 

Credit Union

Dupont Community

Federal Credit Union

EagleBank

Eastern Bank

Eby-Brown

EKap Strategies LLC

Emergent Biosolutions

Equipment Leasing and Finance 

Association

Equity Prime Mortgage, LLC

Fairfax County Federal Credit 

Union

Fifth Third Bank

Financial Executives International

Financial Industry Regulatory 

Authority, Inc.

Financial Services Roundtable

First National Bank of Elkhart

First State Bank

First Tech

Federal Credit Union

FirstCapital Bank of Texas
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

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116

Fitch Ratings Inc.

Flagstar Bank

FMR LLC

Ford Foundation

Franklin Templeton Investments

Futures Industry Association

GEICO Corporation

German American Bancorp

Goldman Sachs Group, Inc.

Goldstein Policy

Grand Rapids State Bank

Guaranteed Rate, Inc.

Hancock Whitney Bank

HomeBridge

Financial Services Inc.

HSBC North America Holdings

Hunt Consolidated, Inc.

Huntington Bancshares, Inc.

IBERIABANK Corporation

ICF International, Inc.

Independent Community Bankers 

of America

Industrial Bank of DC

Institute of International Bankers

Institute of International Finance

Intercontinental Exchange

International Council of Shopping 

Centers

International Franchise Association

International Swaps and Derivatives 

Association

Invesco Ltd.

Investment Company Institute

Jones Walker

JPMorgan Chase & Co.

Keefe, Bruyette & Woods

KeyCorp

Latham & Watkins

Law Office of William J. Donovan

LCH.Clearnet Group Ltd

Levy Group

Liberty Mutual Group, Inc.

Lincoln Financial Bancorp, Inc.

LivWell

Loan Syndications & Trading 

Association
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Appendix A • Participants in the Executive Order Engagement Process

117

Loomis, Sayles & Co

Lower East Side People’s Federal 

Credit Union

M&T Bank

MainStreet Bancshares, Inc.

Managed Funds Association

Manulife Financial Corporation

Marvin F. Poer and Company

Massachusetts Mutual Life 

Insurance Company

MB Financial, Inc.

McGuireWoods LLP

McKinsey & Company

MetLife, Inc.

MidFirst Bank

Mid-Size Bank Coalition of America

Moody’s Corporation

Morgan Stanley

Mortgage Bankers Association

Municipal Employees Credit Union

National Association of FederallyInsured Credit Unions

National Association of Home 

Builders

National Bankers Association

National Conference of Insurance 

Guaranty Funds

National Federation of Community 

Development Credit Unions

National Federation of Independent 

Business

National Organization of Life and 

Health Guaranty Associations

National Restaurant

Association

National Retail Federation

Nationstar

Mortgage Holdings Inc.

Nationwide Mutual Insurance 

Company

Navy Federal Credit Union

New York

Life Insurance Company

New York University

Federal Credit Union

Northern Trust Corporation

Northwest Bancshares, Inc.

Northwestern Mutual

Life Insurance Company

Och-Ziff Capital

Management Group
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

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118

Old National Bancorp

Oliver Wyman Group

Options Clearing Corporation

Patelco Credit Union

PennyMac

Financial Services, Inc.

PentAlpha Capital,

 LLC

People’s United Bank, NA

PHH

Mortgage Corporation

PIMCO

Investments LLC

PNC Financial Services Group, Inc.

Primary Residential Mortgage, Inc.

Progressive Corporation

Property Casualty Insurers 

Association of America

Prudential Financial, Inc.

Pulte Mortgage LLC

Quicken Loans Inc.

Redwood Trust Inc.

Regions Financial Corporation

Rock Financial Corporation

Roosevelt Management Company

Royal Bank of Canada

Runbeck Election Services

Sandler O'Neill + Partners, L.P.

Santander

Securities Industry and Financial 

Markets Association

Security Bancorp, Inc.

Service Credit Union

Small Business & Entrepreneurship 

Council

Small Business Majority

SMW 104 Federal Credit Union

Standard & Poor’s Financial 

Services LLC

State Employees' Credit Union

State Farm Mutual Automobile 

Insurance Company

State Street Corporation

Stearns Lending, LLC

Sterling Bancorp

Structured Finance Industry Group

Sullivan & Cromwell LLP

Sunrise Banks, NA
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Appendix A • Participants in the Executive Order Engagement Process

119

SunTrust Banks, Inc.

SVB Financial Group

SWBC Mortgage Corporation

Swiss Re Ltd.

TCF

Financial Corporation

TD Group US Holdings

Teachers Credit Union

Teachers Insurance and Annuity 

Association of America

The Clearing House

The Peoples Bank Co.

Travelers Companies, Inc.

U.S. Bancorp

U.S. Chamber of Commerce

UBS Group AG

UMB Financial Corporation

Union Home Mortgage Corporation

Union State Bank of Everest

United Bank

United Community Bank

United States Automobile 

Association

Vanguard Group

VantageScore Solutions, LLC

Venable LLP

Virtu Financial Inc.

Waddell & Reed

Wellington Management Company

Wells Fargo & Company

Wilmington Trust Corporation

Windsor

Federal Savings Bank

Wintrust Financial Corporation

Wright-Patt Credit Union, Inc.

Zions Bancorporation
Appendix B

Table of Recommendations
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Appendix B • Table of Recommendations

123

Regulatory Structure

Recommendation Policy Responsibility Core 

Principle Congress Regulator

REGULATORY OVERLAP AND DUPLICATION

• Congress should take action to reduce regulatory fragmentation, overlap, 

and duplication.

Congress F, G

• FSOC’s statutory mandate should be broadened so that it can assign a lead 

regulator as primary regulator on issues where agencies have conflicting or 

overlapping jurisdiction.

• FSOC should be reformed to further facilitate information sharing and 

coordination among member agencies.

Congress B, F

• Congress should reform the structure and mission of the Office of Financial 

Research to improve its effectiveness and to ensure greater accountability.

• OFR should become part of the Treasury, with its Director subject to 

appointment by the Secretary, without a fixed term and subject to removal 

at will, and that the budget of the OFR come under the control of the 

Treasury appropriations and budget process.

Congress F, G

CYBER SECURITY

• Treasury recommends that federal and state financial regulatory agencies 

establish processes for coordinating regulatory tools and examinations 

across sub-sectors.

• Financial regulatory agencies should work to harmonize regulations, 

including using a common lexicon.

• Financial regulators should work to harmonize interpretations and 

implementation of specific rules and guidance around cybersecurity.

Federal 

and State 

Financial 

Regulatory 

Agencies

F, G

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Appendix B • Table of Recommendations

124

Capital and Liquidity

Recommendation Policy Responsibility Core 

Principle Congress Regulator

APPROPRIATELY TAILORED RULES FOR BANKS

• Appropriate tailoring of DFAST, CCAR, LCR, and SCCL

• DFAST Threshold: The threshold for participation for company-run 

DFAST should be raised to $50 billion in total assets (from the 

current threshold of more than $10 billion). The banking regulators 

should be granted authority to further calibrate this threshold on an 

upward basis by reference to factors related to the degree of risks and 

complexity of the institution.

Congress FRB, OCC, 

FDIC 

Regulation

C, D, F

• DFAST Process: The mid-year DFAST cycle should be eliminated, 

and the number of supervisory scenarios should be reduced from 

three to two—the baseline and severely adverse scenario. Further, 

as a company-led process, leeway should be granted for banks to 

determine the appropriate number of models that are sufficient 

to develop appropriate output results, aligned with the scale and 

complexity of the banking organization and nature of its asset mix.

Congress FRB, OCC, 

FDIC 

Regulation

C, D, F

• Enhanced Prudential Standards and CCAR Thresholds: The 

threshold in Section 165 of Dodd-Frank for enhanced prudential 

standards should be raised to be better tailored to the complexity 

of bank holding companies. The Federal Reserve should also revise 

the threshold for the application of CCAR to match the revised 

threshold for the application of the enhanced prudential standards.

Congress FRB 

Regulation

C, D, F

• LCR: The scope of application of the LCR should be narrowed to 

apply only to internationally active banks: the U.S. LCR should be 

limited to G-SIBs and a less stringent standard (i.e., an LCR that is 

not “super-compliant”) should be applied to internationally active 

bank holding companies that are not G-SIBs.

FRB, OCC, 

FDIC 

Regulation

C, D, F

• SCCL: The scope of application of the SCCL should apply only to 

banks that are subject to the revised threshold for the application of 

the enhanced prudential standards.

FRB

Regulation 

with

FSOC

C, D, F

• Creating an “off-ramp” for well-capitalized banks: Consider 

establishing a “regulatory off-ramp” from all capital and liquidity 

requirements, nearly all aspects of Dodd-Frank’s enhanced prudential 

standards, and the Volcker Rule for depository institution holding 

companies and IDIs. This approach would require the institution to elect 

to maintain a sufficiently high level of capital, such as a 10% non-riskweighted leverage ratio.

Congress C, D, F

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
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125

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.

Recommendation Policy Responsibility Core 

Principle Congress Regulator

REDUCE UNNECESSARY BURDENS AND IMPROVE TRANSPARENCY

• Improve capital and liquidity supervisory process and guidance

• CCAR: The Federal Reserve should (i) reassess assumptions in the 

CCAR process that create unrealistically conservative results, such 

as the assumption that firms continue to make capital distributions 

and grow their balance sheets and risk-weighted asset exposure in 

severely adverse scenarios; (ii) improve its modeling practices by 

better recognizing firms’ unique risk profiles; and (iii) consider 

changing the CCAR process to a two-year cycle (with more frequent 

reviews permitted to allow revisions to capital plans in the case of 

extraordinary events).

FRB 

Supervisory 

and 

Regulation

C, D, 

F, G

• Pending Rules: U.S. banking regulators should delay adoption of the 

Net Stable Funding Ratio and Fundamental Review of the Trading 

Book standards until U.S. regulators can appropriately assess and 

calibrate them.

FRB, OCC, 

FDIC 

Supervisory

C, D, 

F, G

• Simplifying the capital regime: Treasury recommends keeping 

the standardized approaches for calculating risk-weighted assets but 

reducing reliance upon the advanced approaches for calculating firms’ 

overall risk-based capital requirements. However, U.S. regulators 

should consider where it would be appropriate to introduce more 

appropriate risk sensitivity such as in the measurement of derivative 

and securities lending exposures for the standardized approaches and 

the proposed SCCL.

FRB, OCC, 

FDIC 

Regulation

C, D, 

F, G

• CECL: U.S. prudential regulators should review the potential 

impact of the CECL standard on banks’ capital levels and formulate 

recommendations to harmonize the application of the standard with 

regulators’ supervisory efforts.

FRB, 

FDIC, 

OCC 

Supervisory

C, D, F

• Improving the transparency of the CCAR and other supervisory processes

• Improving CCAR transparency: The Federal Reserve should subject 

its stress-testing and capital planning review frameworks to public 

notice and comment, including with respect to its models, economic 

scenarios, and other material parameters and methodologies.

FRB 

Regulation

C, F, G

• CCAR qualitative assessment: The qualitative CCAR element should 

no longer be the sole basis for the Federal Reserve’s objection to capital 

plans for all banks subject to CCAR. The qualitative assessment 

should be adjusted to the horizontal capital review for all banking 

organizations (as the Federal Reserve has already implemented for 

non-complex banks with less than $250 billion in assets).

FRB 

Regulation

C, D, F

• Other CCAR transparency modifications: The CCAR process could 

also be modified to provide management with greater control of capital 

distribution planning by providing firms an accurate understanding 

of the capital buffers they would have after considering the projected 

results of the Federal Reserve’s supervisory models under the severely 

adverse scenario. This additional certainty about the size of a firm’s capital 

cushion could be achieved through (i) changing the sequence of the 

CCAR process; or (ii) integrating the risk-based capital and CCAR stress 

testing regimes, without increasing post-stress capital requirements.

FRB 

Supervisory

C, D, F
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126

Recommendation Policy Responsibility Core 

Principle Congress Regulator

• Countercyclical capital: Any countercyclical capital measures should 

be implemented through the existing CCAR and DFAST stress 

testing processes rather than through the countercyclical capital 

buffer (currently included in the risk-based capital rules).

FRB 

Supervisory 

and 

Regulation

C, D, F

• Operational risk capital requirements: The method of calculating 

operational risk capital requirements under the advanced approaches 

should be made more transparent as compared to the current 

approach.

FRB, FDIC, 

OCC, 

Supervisory 

and 

Regulation

C, D, F

IMPROVING REGULATORY COHERENCE TO IMPROVE THE FUNCTIONING

OF CAPITAL MARKETS

• Addressing the impact of the SLR: Significant adjustments should be 

made to the calculation of the SLR. In particular, deductions from the 

leverage exposure denominator should be made, including for: (i) cash on 

deposit with central banks; (ii) U.S. Treasury securities; and (iii) initial 

margin for centrally cleared derivatives.

FRB, 

FDIC, 

OCC 

Regulation

B, C, 

D, F

• Changing liquidity requirements: There should be expanded treatment 

of certain qualifying instruments as HQLA. This would include 

categorizing high-grade municipal bonds as Level 2B liquid assets (rather 

than generally not being counted as HQLA currently). In addition, 

improvements should be made to the degree of conservatism in cash flow 

assumptions incorporated into calculations of the LCR to more fully 

reflect banks’ historical experience with calculation methodologies.

FRB, 

FDIC, 

OCC 

Regulation

C, D, F

RECALIBRATING U.S. IMPLEMENTATION OF CERTAIN INTERNATIONAL

FINANCIAL REGULATORY STANDARDS

• U.S. rules implementing international standards that should be revisited 

include (i) the G-SIB risk-based surcharge for U.S. G-SIBs, including the 

short-term wholesale funding component; (ii) the mandatory minimum 

debt ratio included in the Federal Reserve’s TLAC and minimum debt 

rule; and (iii) the calibration of the eSLR for G-SIBs.

FRB, 

FDIC, 

OCC 

Regulation

C, D, F

APPROACH TO INTERNATIONAL STANDARD SETTING PROCESSES

• Treasury generally supports efforts to finalize remaining elements of the 

international reforms at the Basel Committee, including establishing a global 

risk-based capital floor to promote a more level playing field for U.S. firms 

and strengthen the capital adequacy of global banks. The banking agencies 

should carefully consider the implications on U.S. credit intermediation 

and systemic risk from the implementation in the United States of a revised 

standardized approach for credit risk under the Basel III capital framework.

FRB, 

FDIC, 

OCC 

Supervisory

B, C, 

D, E, F

• Treasury recommends that the United States lead efforts to narrow the scope 

of SSBs’ initiatives, specifically by streamlining their mandates and eliminating 

existing overlapping objectives. In addition, Treasury recommends increased 

transparency and accountability, so that the views and concerns of external 

stakeholders are appropriately and timely considered and accounted for. 

Finally, Treasury recommends that the U.S. members continue to advocate 

for and shape international regulatory standards that are in alignment with 

domestic financial regulatory objectives.

FRB, 

FDIC, 

OCC, SEC, 

CFTC 

Supervisory

C, D, 

E, F

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

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127

Community Financial Institutions

Recommendation Policy Responsibility Core 

Principle Congress Regulator

RECOMMENDATIONS FOR COMMUNITY BANKS

• Simplifying the capital regime for community banks: Treasury 

recommends that bank regulators explore exempting community banks 

from the risk-based capital regime implementing the Basel III standards. 

In addition, if required, Dodd-Frank’s Collins Amendment should be 

amended (Dodd-Frank Section 171). Regulators should simplify and 

improve the calculation of capital requirements for MSAs, as well as 

simplify and clarify the definition of HVCRE loans to avoid the application 

of higher risk-weights for loans where it would be unnecessary.

Congress FRB, 

FDIC,

OCC 

Regulation

A, C, F

• Raising the Small Bank Holding Company Policy Statement asset 

threshold: Treasury recommends raising the asset threshold of the Federal 

Reserve’s Small Bank Holding Company and Savings and Loan Holding 

Company Policy Statement to $2 billion (from the current $1 billion).

Congress FRB 

Regulation

A, C, F

RECOMMENDATIONS FOR COMMUNITY DEVELOPMENT

FINANCIAL INSTITUTIONS AND MINORITY DEPOSITORY INSTITUTIONS

• It may be appropriate to grant CDFI banks and MDIs additional 

flexibility in utilizing subordinated debt or capital, particularly capital 

that is borrowed by the holding company and injected into the bank. 

Such capital may include program-related investments received from 

foundations or impact investors.

FRB, 

FDIC, 

OCC 

Regulation

A, C, F

RECOMMENDATIONS FOR FEDERALLY-INSURED CREDIT UNIONS

• Easing the NCUA regulations relating to credit union capital and 

stress-testing requirements: NCUA should revise the risk-based capital 

requirements to only apply to credit unions with total assets in excess of 

$10 billion or eliminate altogether risk-based capital requirements for 

credit unions satisfying a 10% simple leverage (net worth) test.

NCUA 

Regulation

A, C, F

• Raising the scope of application for stress-testing requirements 

for credit unions to $50 billion: In line with the tailoring of capital 

regulations for banks, Treasury recommends generally raising the scope 

of application for stress testing of federally-insured credit unions to $50 

billion in assets (from the current $10 billion threshold).

NCUA 

Regulation

A, C, F

• Allowing appropriate supplemental capital: Treasury supports allowing 

credit unions to rely in part on appropriately designed supplemental 

capital to meet a portion of their risk-based capital requirements. Such 

supplemental capital instruments, if required to have essential prudential 

features (e.g., noncumulative perpetual preferred stock and subordinated 

debt with long-maturity and lack of early event acceleration) will allow 

credit unions to increase their capital from investors rather than relying 

solely on retained earnings.

Congress NCUA 

Regulation

A, C, F

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
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128

Recommendation Policy Responsibility Core 

Principle Congress Regulator

ENCOURAGING DE NOVO ACTIVITY

• Treasury recommends implementing changes to the existing regulatory 

capital requirements and other burdensome rules for community banks 

and a critical review of capital requirements applicable to de novo 

banks. The application process of obtaining deposit insurance should be 

significantly streamlined, and Treasury supports the FDIC’s recent efforts 

to encourage de novo charters.

FDIC 

Regulation

A, C, F

REGULATORY REPORTING

• Treasury recommends that the regulators continue to streamline 

current regulatory reporting requirements for all community financial 

institutions. Treasury recommends that the regulators focus their efforts 

on applicability of each line item.

FRB, 

FDIC, 

OCC 

Supervisory 

and 

Regulation

A ,F, G

EXAMINATIONS

• Reviewing examination overlap and duplication: Treasury recommends 

that: (i) Congress consider raising the current asset threshold for smaller 

banks eligible for an 18 month examination cycle; (ii) the NCUA 

implements parallel changes to extend examination cycles for smaller 

credit unions; and (iii) all regulators expand upon current efforts to 

further coordinate and rationalize their examination and data collection 

procedures to promote accountability and clarity.

Congress FRB, 

FDIC, 

OCC, 

NCUA, 

CFPB 

Supervisory

A, F, G

AGRICULTURAL AND RURAL CREDIT

• Minimizing compliance burdens for rural and agriculture lenders: 

Providing banking services in rural areas is particularly difficult given 

the scarcity of key service providers, such as appraisers and other legal 

and compliance staff. As such, the regulators need to recognize these 

circumstances and provide special consideration to agriculture and rural 

banks’ compliance challenges.

FRB, 

FDIC, 

OCC 

Supervisory

A, F, G

INCREASING THRESHOLD FOR MAKING SMALL CREDITOR QUALIFIED

MORTGAGE (QM) LOANS

• Reforming mortgage requirements: A detailed evaluation of mortgage 

requirements is addressed in the Residential Mortgage section.

FRB, 

FDIC, 

OCC, 

CFPB 

Regulation

A, F, G

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
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129

Improving the Regulatory Engagement Model

Recommendation Policy Responsibility Core 

Principle Congress Regulator

REASSESSING REGULATORY REQUIREMENTS ON A BANKING

ORGANIZATION’S BOARD OF DIRECTORS

• Treasury recommends an inter-agency review of the collective 

requirements imposed on Boards in order to reassess and better tailor 

these aggregate expectations and restore balance in the relationship 

between regulators, Boards, and bank management.

Interagency 

regulators

C, F, G

ENHANCED USE OF REGULATORY COST-BENEFIT ANALYSIS

• Federal financial regulatory agencies should follow the principles 

of transparency and public accountability by conducting rigorous 

cost-benefit analyses and making greater use of notices of proposed 

rulemakings to solicit public comment. In particular, Treasury 

recommends that financial regulatory agencies perform and make 

available for public comment a cost-benefit analysis with respect to at 

least all “economically significant” proposed regulations, as such term is 

used in Executive Order 12866. Such analysis should be included in the 

administrative record of the final rule.

Federal 

Financial 

Regulatory 

Agencies

F, G

IMPROVING THE PROCESS FOR REMEDIATING IDENTIFIED REGULATORY ISSUES

• Treasury recommends an interagency reassessment of the volume 

and nature of matters requiring attention (MRAs), matters requiring 

immediate attention (MRIAs), and consent orders (COs) to evaluate 

impact, consistency and overlap and to establish consistent interagency 

standards.

Interagency 

regulators

C, F, G

• Treasury recommends that regulators and banking organizations develop 

an improved approach to addressing and clearing regulatory actions.

Interagency 

regulators

C, F, G

COMMUNITY REINVESTMENT ACT

• It is very important to have the benefits arising from banks’ CRA 

investments better align with the interest and needs of the communities 

that they serve and to improve the current supervisory and regulatory 

framework for CRA. Treasury expects to comprehensively assess 

how the CRA could be improved to achieve these goals, which will 

include soliciting input from individual consumer advocates and other 

stakeholders. Aligning the regulatory oversight of CRA activities with a 

heightened focus on community investments will become a high priority 

for the Secretary.

Congress Treasury, 

Interagency

A, F

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
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130

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.

Living Wills

Recommendation Policy Responsibility Core 

Principle Congress Regulator

RAISE THRESHOLD FOR LIVING WILL REQUIREMENTS

• Treasury recommends changing the threshold for compliance with living 

will requirements from current level of $50 billion to match the revised 

threshold for application of enhanced prudential standards.

Congress FRB 

Regulation 

with FSOC

B, C, 

D, F

ADJUST LIVING WILL SUBMISSION FREQUENCY

• Agencies should formalize a change of the living will process to a two-year 

cycle. The agencies could require firms to provide notice of material events 

that occur between living will submissions.

FRB, FDIC

Regulation

B, F

IMPROVE LIVING WILL GUIDANCE

• The agencies should be held accountable to develop specific, clear, and 

accountable guidance for living will submissions as well as the assessment 

framework for determining deficiencies in living will submissions 

(including remediation procedures). All assessment framework and 

guidance should be subject to a public notice and comment process.

FRB, FDIC

Supervisory 

and 

Regulation

B, C, 

F, G

CONSOLIDATE REGULATORY OVERSIGHT AND IMPROVE TIMELINESS OF FEEDBACK

• Treasury recommends that section 165(d) of Dodd-Frank be amended to 

remove the FDIC from the living wills process.

• The Federal Reserve should be required to complete its review and give 

feedback to firms on their living wills within six months.

Congress FRB 

Supervisory

B, F, G
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131

Foreign Banking Organizations

Recommendation Policy Responsibility Core 

Principle Congress Regulator

APPLYING ENHANCED PRUDENTIAL STANDARDS FOR FBOS BASED UPON 

THEIR U.S. FOOTPRINTS RATHER THAN GLOBAL CONSOLIDATED ASSETS

• The application of enhanced prudential standards and living will 

requirements to FBOs should be based on their U.S. risk profile (using 

the same revised threshold as is used for the application of enhanced 

prudential standards to U.S. bank holding companies) and should not be 

based on global consolidated assets.

Congress FRB 

Regulation

C, D, F

RECALIBRATING IHC REQUIREMENTS

• Consistent with the thresholds recommended for U.S. BHCs, the 

threshold for IHCs to comply with U.S. CCAR should be raised from 

the current $50 billion level to match the revised threshold for enhanced 

prudential standards, subject to the ability of the Federal Reserve to 

impose these requirements on smaller IHCs in cases where the potential 

risks posed by the firm justify the additional requirements.

FRB 

Regulation

B, D, F

• Other IHC regulatory standards, such as resolution planning and 

liquidity, should also be recalibrated. In considering such a recalibration, 

greater emphasis should be given to the degree to which home country 

regulations are comparable to the regulations applied to similar U.S. 

BHCs. Where regulations are sufficiently comparable, FBOs should be 

allowed to meet certain U.S. requirements through compliance with 

home country regimes.

FRB 

Regulation

B, D, F

RECALIBRATING THE FEDERAL RESERVE’S LONG-TERM DEBT AND TLAC RULE

• Treasury recommends the Federal Reserve consider recalibration of the 

internal TLAC requirement. In assessing the appropriate calibration, the 

Federal Reserve should consider the foreign parent’s ability to provide 

capital and liquidity resources to the U.S. IHC, provided arrangements 

are made with home country supervisors for deploying unallocated TLAC 

from the parent, among other factors.

FRB 

Regulation

B, C, 

D, F

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
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132

Improving the Volcker Rule

Recommendation Policy Responsibility Core 

Principle Congress Regulator

EXEMPT SMALLER INSTITUTIONS FROM THE VOLCKER RULE

• Exempt banking entities with $10 billion or less in assets from the

Volcker Rule.

• Exempt banking entities with over $10 billion in assets that are not 

subject to the market risk capital rules from the proprietary trading 

prohibitions of the Volcker Rule.

Congress D, F

IMPROVE REGULATORY COORDINATION

• Agencies should ensure their guidance and enforcement of the Volcker 

Rule is consistent and coordinated.

FRB, 

FDIC, 

OCC, SEC, 

CFTC 

Supervisory

C, F, G

SIMPLIFY THE DEFINITION OF PROPRIETARY TRADING

• Eliminate the 60-day rebuttable presumption from the definition of 

proprietary trading.

FRB, 

FDIC, 

OCC, SEC, 

CFTC 

Regulation

F

• Assess whether to eliminate the purpose test from the definition of 

proprietary trading.

Congress C, D, F

PROVIDE INCREASED FLEXIBILITY FOR MARKET-MAKING

• Regulators should give banks additional flexibility to adjust their 

determinations of the reasonable amount of market-making inventory: for 

illiquid securities, banks should have greater leeway to anticipate changes 

in markets; for over-the-counter derivatives, regulators should focus more 

on ensuring that banks appropriately hedge the positions they maintain; 

banks that have not yet established a market-making presence in a 

particular asset class should have more discretion to meet the RENTD 

condition; banking entities should be able to enter into block trades even 

if they involve a trading volume outside of historical averages.

FRB, FDIC, 

OCC, SEC, 

CFTC 

Supervisory/ 

Regulation

D, F

• Policymakers should evaluate the benefits of other potential modifications 

to the RENTD framework, including an ability for banking entities to 

opt out of the RENTD requirement altogether if they adopt enhanced 

trader mandates or hedge all significant risks.

Congress D, F

REDUCE THE BURDEN OF HEDGING BUSINESS RISKS

• Banks should not be required to maintain ongoing calibration of a hedge 

over time.

FRB, 

FDIC, 

OCC, SEC, 

CFTC 

Regulation

D, F

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

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133

Recommendation Policy Responsibility Core 

Principle Congress Regulator

• Eliminate the requirement to maintain documentation of the specific 

assets and risks being hedged.

FRB, FDIC, 

OCC, SEC, 

CFTC 

Regulation

D, F

REDUCE THE BURDENS OF THE VOLCKER RULE’S COMPLIANCE REGIME

• The existing “enhanced” compliance program under the regulations 

should apply only to those banking entities with at least $10 billion in 

trading assets and liabilities on a consolidated basis (current application is to 

all banking entities with over $50 billion in total consolidated assets).

FRB, FDIC, 

OCC, SEC, 

CFTC 

Regulation

C, D, F

• Banks should be given greater ability to tailor their compliance programs 

to the particular activities engaged in by the bank and the particular risk 

profile of that activity.

FRB, FDIC, 

OCC, SEC, 

CFTC 

Regulation

C, D, F

• Agencies should eliminate any required metrics for reporting that are not 

necessary for effective supervision.

FRB, FDIC, 

OCC, SEC, 

CFTC 

Regulation

C, D, F

FOCUS AND SIMPLIFY COVERED FUNDS RESTRICTIONS

• Regulators should adopt a simple definition of covered funds that focuses 

on the characteristics of hedge funds and private equity funds with 

appropriate additional exemptions as needed.

FRB, FDIC, 

OCC, SEC, 

CFTC 

Regulation

D, F

• The exemptions in Section 23A of the Federal Reserve Act should be 

restored in the Volcker Rule so that they apply to banking entities’ 

transactions with their covered funds.

Congress FRB, FDIC, 

OCC, SEC, 

CFTC 

Regulation

D, F

• The initial “seeding period” exemption from the covered funds investment 

restriction should be extended to three years, rather than one year, to 

provide banking entities with additional time to stand up new funds and 

allow them to establish the track records they need to attract investors.

Congress D, F

• Banking entities other than depository institutions and their holding 

companies should be permitted to share a name with funds they sponsor, 

provided that the separate identity of the funds is clearly disclosed to investors.

Congress D, F

• An exemption of the Volcker Rule’s definition of “banking entity” should 

be provided for foreign funds owned or controlled by a foreign affiliate of 

a U.S. bank or a foreign bank with U.S. operations.

Congress FRB, FDIC, 

OCC, SEC, 

CFTC 

Regulation

D, F

CREATE AN OFF-RAMP FOR HIGHLY CAPITALIZED BANKS

• Consideration should be given to permitting a banking entity that is 

sufficiently well-capitalized, such that the risks posed by its proprietary 

trading are adequately mitigated by its capital, to opt out of the Volcker 

Rule altogether, if the institution remains subject to trader mandates and 

ongoing supervision and examination to reduce risks to the safety net.

Congress D, F

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

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134

Consumer Financial Protection Bureau

Recommendation Policy Responsibility Core 

Principle Congress Regulator

ADOPTING STRUCTURAL REFORMS TO MAKE THE CFPB MORE ACCOUNTABLE 

TO THE PRESIDENT, CONGRESS AND THE AMERICAN PEOPLE

• The for-cause removal protection for the CFPB Director impermissibly 

limits the President’s authority, disperses executive power, and renders 

the CFPB less politically accountable than other agencies. The most 

straightforward remedy is to make the Director removable at-will by 

the President. As an alternative, the CFPB could be restructured as an 

independent multi-member commission or board, which would create an 

internal check on the exercise of agency power.

Congress A,G

• The CFPB should be funded through the annual congressional 

appropriations process to enable Congress to exercise greater oversight and 

control over how taxpayer dollars are spent.

Congress A,G

• The CFPB should be subject to OMB apportionment. Congress A,G

• CFPB’s other funding mechanism, the Consumer Financial Civil Penalty 

Fund, should be reformed to permit the CFPB to retain and use only those 

funds necessary for payments to the bona fide victims of activities for which 

the CFPB has imposed civil money penalties. The CFPB should remit to 

the Treasury any funds in excess of payments to victims.

Congress A,G

ENSURING THAT REGULATED ENTITIES HAVE CERTAINTY 

REGARDING CFPB INTERPRETATIONS OF THE LAW BEFORE 

SUBJECTING THEM TO ENFORCEMENT ACTIONS

• The CFPB should issue rules or guidance subject to public notice and 

comment procedures before bringing enforcement actions in areas in 

which clear guidance is lacking or the CFPB’s position departs from the 

historical interpretation of the law.

CFPB 

Regulation

A, C, 

F, G

• The CFPB should adopt regulations that more clearly delineate its 

interpretation of the UDAAP standard. The agency should seek monetary 

sanctions only in cases in which a regulated party had reasonable notice—

by virtue of a CFPB regulation, judicial precedent, or FTC precedent—

that its conduct was unlawful. The CFPB could implement this reform 

administratively through issuance of a regulation limiting the application 

of monetary sanctions to cases that satisfy this notice standard.

CFPB 

Supervisory 

and 

Regulation

A, C, 

F, G

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
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135

Recommendation Policy Responsibility Core 

Principle Congress Regulator

• The CFPB should make the requirements for CFPB no-action relief less 

onerous. The CFPB should align its policies for issuing no-action letters or 

analogous documents with the more effective policies of the SEC, CFTC, 

and FTC. To make the CFPB no-action letter policy a more useful tool for 

the providers and consumers of financial services, the CFPB should adopt 

the following changes: (a) expand the scope of the policy beyond “new” 

products; (b) require a consumer benefit, but not a “substantial” consumer 

benefit; (c) require some regulatory uncertainty to issue a no-action letter, 

but not “substantial” uncertainty; (d) address a broader number and range 

of UDAAP questions; and (e) revisit the requirement that applicants be 

required to share potentially proprietary data with CFPB, which the agency 

may not be able to adequately safeguard.

CFPB 

Supervisory 

and 

Regulation

A, F, G

ADOPTING PROCEDURAL REFORMS TO CURB EXCESSES AND 

ABUSES IN INVESTIGATIONS AND ENFORCEMENT ACTIONS

• The CFPB should bring enforcement actions in federal district court 

rather than use administrative proceedings. To the extent CFPB continues 

to pursue some enforcement actions through administrative adjudications, 

it should promulgate a regulation specifying binding criteria that it will 

use when deciding whether to bring an action in federal court or before 

an ALJ in the first instance.

CFPB 

Supervisory 

and 

Regulation

A, F, G

• The CID process should be reformed to ensure subjects of an investigation 

receive the benefit of existing statutory protections, backed by judicial 

review. The CFPB should adopt guidance to ensure that all CIDs comply 

with the standard set forth by the D.C. Circuit in the ACICS case. In 

addition, the CFPB should adopt procedures to ensure that review of a 

CID appeal remains confidential if requested. Congress should amend the 

Dodd-Frank Act to permit persons who receive a CID to proactively file a 

motion in federal district court to modify or set aside a CID, rather than 

limiting recourse to an appeal to the Director.

Congress CFPB 

Supervisory

A, F, G

EXPANDING REGULATORY REVIEW REQUIREMENT

• The CFPB should promulgate a regulation committing it to regularly 

reviewing all regulations that it administers to identify outdated or 

otherwise unnecessary regulatory requirements imposed on regulated 

entities.

CFPB 

Regulation

A, C, 

F, G

IMPROVING SAFEGUARDS FOR CONSUMER COMPLAINT DATABASE

• The CFPB’s Consumer Complaint Database should be reformed to make 

the underlying data available only to federal and state agencies, and not to 

the general public.

Congress CFPB 

Supervisory 

and 

Regulation

A, F, G

ELIMINATING CFPB’S DUPLICATIVE AND UNNECESSARY SUPERVISORY AUTHORITY

• Congress should repeal the CFPB’s supervisory authority. The responsibility 

to supervise banks should be entrusted to the prudential regulators. 

Supervision of nonbanks should be returned to state regulators.

Congress A, D, F

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

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136

Residential Mortgage Lending

Recommendation Policy Responsibility Core 

Principle Congress Regulator

MORTGAGE LOAN ORIGINATION

• Adjust and Clarify the ATR Rule and Eliminate the “QM Patch”: The 

CFPB should engage in a review of the ATR/QM rule and work to align 

QM requirements with GSE eligibility requirements, ultimately phasing 

out the QM Patch and subjecting all market participants to the same 

transparent set of requirements. These requirements should make ample 

accommodation for compensating factors that should allow a loan to be 

a QM loan even if one particular criterion is deemed to fall outside the 

bounds of the existing framework, such as when a borrower has a high DTI 

ratio with compensating factors.

CFPB 

Regulation

A, F

• Modify Appendix Q of the ATR Rule: Appendix Q should be simplified 

and the CFPB should make much clearer, binding guidance for use 

and application. The CFPB should review Appendix Q standards for 

determining borrower debt and income levels to mitigate overly prescriptive 

and rigid requirements. Review of these requirements should be particularly 

sensitive to considerations for self-employed and non-traditional borrowers.

CFPB 

Regulation

A, F

• Revise the Points and Fees Cap for QM Loans: The CFPB should 

increase the $103,000 loan threshold for application of the 3% points and 

fees cap, which would encourage additional lending in the form of smaller 

balance loans. The CFPB should scale points and fees caps in both dollar 

and percentage terms for loans that fall below the adjusted loan amount 

threshold for application of the 3% points and fees cap.

CFPB 

Regulation

A, F

• Increase the Threshold for Making Small Creditor QM Loans: Raising 

the total asset threshold for making Small Creditor QM loans from the 

current $2 billion to a higher asset threshold of between $5 and $10 

billion is recommended to accommodate loans made and retained by small 

depository institutions. In order to maintain a level playing field across 

institution types, an alternative approach to this recommendation would be 

to undertake a rulemaking to amend the QM rule and related processes for 

all lenders regardless of type.

CFPB 

Regulation

A, F

• Clarify and Modify TRID: The CFPB could resolve uncertainty 

regarding what constitutes a TRID violation through notice and comment 

rulemaking and/or through the publication of more robust and detailed 

FAQs in the Federal Register. The CFPB should allow a more streamlined 

waiver for the mandatory waiting periods, in consultation with all market 

participants, including both lenders and realtors. The CFPB should allow 

creditors to cure errors in a loan file within a reasonable period after closing.

CFPB 

Regulation

A, F

• Improve Flexibility and Accountability of Loan Originator 

Compensation Rule: The CFPB should improve flexibility and 

accountability of the Loan Originator Compensation Rule, particularly 

in those instances where an error is discovered post-closing, in order to 

facilitate post-closing corrections of non-material errors. The CFPB should 

establish clear ex ante standards through notice and comment rulemaking, 

which will clarify its enforcement priorities with respect to the Loan 

Originator Compensation Rule.

CFPB 

Regulation

A, F

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
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137

Recommendation Policy Responsibility Core 

Principle Congress Regulator

• Delay Implementation of HMDA Reporting Requirements: The CFPB 

should delay the 2018 implementation of the new HMDA requirements 

until borrower privacy is adequately addressed and the industry is better 

positioned to implement the new requirements. The new requirements 

should be examined for utility and cost burden, particularly on 

smaller lending institutions. Consideration should be given to moving 

responsibility for HMDA back to bank regulators, discontinuing public 

use, and revising regulatory applications.

Congress CFPB 

Regulation F

MORTGAGE LOAN SERVICING

• Place a Moratorium on Additional Mortgage Servicing Rules: The 

CFPB should place a moratorium on additional rulemaking in mortgage 

servicing while the industry updates its operations to comply with the 

existing regulations and transitions from HAMP to alternative loss 

mitigation options. In addition, the CFPB should work with prudential 

regulators and state regulators to improve alignment where possible in 

both regulation and examinations.

CFPB, 

FRB, OCC, 

FDIC, 

CSBS 

Regulation

F

PRIVATE SECTOR SECONDARY MARKET ACTIVITIES

• Repeal or Revise Residential Mortgage Risk Retention Requirement: 

Repeal or substantially revise the residential mortgage risk retention 

requirement. If the requirement is revised rather than repealed, the 

legislation should designate one agency from among the six rule-writing 

agencies to be responsible for the interpretation of the risk retention rule.

Congress FRB, FDIC, 

HUD, 

FHFA, 

OCC, SEC 

Regulation

F

• Enhance PLS Investor Protections: Congress should consider legislation 

providing additional protections for investors in PLS.

Congress C

• Clarify Limited Assignee Liability for Secondary Market Investors: 

Secondary market investors, who do not exercise control over the loan 

origination process, should receive clear, authoritative guidance on their 

assignee liability under existing rules.

CFPB 

Regulation

F

• Improve the Alignment of the Regulatory Capital Framework for 

Structured Mortgage Products: Prudential bank regulators should review 

the regulatory framework for risk-weighting and stress-testing applicable 

to securitization in order to better align the framework with the risk of 

the asset and with international standards for securitized products.

FRB, OCC, 

FDIC 

Regulation

F

• Amend Reg AB II: The SEC should amend Reg AB II as it applies to 

registered securitizations to reduce the number of required reporting fields.

SEC 

Regulation

F

• Evaluate Impact of Liquidity Rules on the PLS Market: U.S. banking 

regulators should consider the impact that capital and liquidity rules 

implementing Basel III standards would have on secondary market 

activity, and calibrate them to reduce complexity and avoid punitive 

capital requirements.

FRB, 

FDIC, 

OCC 

Regulation

F

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
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138

Leveraged Lending

Recommendation Policy Responsibility Core 

Principle Congress Regulator

• The banking regulators should re-issue the 2013 leveraged lending 

guidance for public comment.

FRB, 

FDIC, 

OCC 

Supervisory

C, F

• Banks should be encouraged to incorporate a clear but robust set of 

metrics when underwriting a leveraged loan, instead of solely relying on a 

6x leverage ratio discussed in the 2013 leveraged lending guidance.

FRB, 

FDIC, 

OCC 

Supervisory

D, F

Small Business Lending

Recommendation Policy Responsibility Core 

Principle Congress Regulator

• Simplify, adjust, or change certain financial regulations for financial 

institutions serving small businesses (as noted elsewhere in this report).

Congress FRB, 

FDIC, 

OCC 

Supervisory 

and 

Regulation

C, D, F

• Reduce regulation and reconsider guidance regarding real estate collateral. 

Regulators should consider alternatives to assessing concentration risk 

to allow banks engaged in CRE lending to maximize access to credit for 

small businesses and optimize balance sheet usage while still maintaining 

safety and soundness.

FRB, 

FDIC, 

OCC 

Supervisory 

and 

Regulation

C, D, F

• Consider re-calibration of the SLR for lines of credit to small and midsized businesses.FRB, 

FDIC, 

OCC 

Regulation

C, D, F

• Repeal the provisions of Section 1071 of Dodd-Frank pertaining to small 

businesses to ensure that the intended benefits of Section 1071 do not 

inadvertently reduce the ability of small businesses to access credit at a 

reasonable cost.

Congress C, F

Note: each “policy responsibility” above is a preliminary assessment and is not intended to indicate 

whether other authorities may exist to implement the relevant recommendation.
A Financial System That Creates Economic Opportunities • Banks and Credit Unions 139

Appendix C

Capital and Liquidity
A Financial System That Creates Economic Opportunities • Banks and Credit Unions

Appendix C • Capital and Liquidity

141

Capital and Liquidity

Introduction

In the wake of the financial crisis, U.S. regulators implemented significant changes to the capital 

and liquidity regulatory framework for U.S. banking organizations, particularly for the largest, 

most globally active banks. Higher capital and liquidity standards decrease the likelihood of the 

insolvency of a bank and the likely loss-given insolvency, and thus help to avoid the need for 

extraordinary government support or taxpayer assistance.

Capital Regime

DFAST and CCAR stress tests

The Dodd-Frank Act Stress Test and the Comprehensive Capital Analysis and Review are used by 

the Federal Reserve to determine whether financial institutions subject to these tests have adequate 

capital to continue to operate through times of economic or financial stress. Though complementary, the two exercises are distinct.

CCAR is an annual supervisory assessment of the capital adequacy of the largest consolidated 

BHCs and their plans to distribute capital, primarily through dividend payments and stock repurchases. CCAR currently applies to the 34 largest U.S. BHCs (i.e., those with more than $50 

billion in assets). The CCAR exercise includes both (i) a quantitative “stress test” that evaluates a 

BHC’s capital levels over a nine-quarter, forward-looking horizon under three sets of assumptions 

of economic and financial stress ranging from a baseline set of assumptions to severely adverse 

assumptions; and (ii) a qualitative assessment of a BHC’s capital planning abilities. The Federal 

Reserve uses CCAR to review and approve a BHC’s capital plan, including planned distributions 

to shareholders (e.g., dividend payments or stock repurchases).1 As of the 2017 CCAR cycle, the 

qualitative assessment no longer applies to 21 BHCs that have less complex operations.2 These 

institutions, those with less than $250 billion in assets and less than $75 billion in nonbank assets, 

will now be subject to a horizontal capital review (HCR). Unlike with the qualitative assessment of 

CCAR, the HCR outcome is not a factor in the Federal Reserve’s approval of capital plans. Instead, 

matters arising from the HCR are reviewed as part of the normal supervisory process, with findings 

or concerns addressed through supervisory communications.

DFAST is a forward-looking exercise conducted by both the Federal Reserve and financial companies (i.e., company-run) to determine whether they have sufficient capital to absorb losses and 

support operations during adverse economic conditions.

The DFAST company-run stress tests apply to BHCs with more than $10 billion in assets. The 

DFAST also is required of all financial companies that have assets greater than $10 billion and are 

regulated by a primary financial regulatory agency. As a result, the OCC and FDIC also have a role 

1. 12 C.F.R. § 225.8.

2. 82 Fed. Reg. 9308 (Mar. 6, 2017) (exempting 21 firms with less complex operations from complying with 

the qualitative requirements of CCAR), available at: www.federalreserve.gov/newsevents/pressreleases/

bcreg20170130a.htm.
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in issuing guidance and examining the company-run DFAST stress tests that are required of banks 

and savings associations of which they are the primary prudential regulator.

The Federal Reserve conducts the DFAST supervisory-run stress tests, which are required for BHCs 

with assets of $50 billion or more. The quantitative methodologies, data, and processes used in the 

supervisory-run DFAST and CCAR are largely the same. However, in conducting the supervisoryrun DFAST, each BHC and the Federal Reserve must assume capital distributions (e.g., dividends, 

stock buybacks) that are consistent with a BHC’s prior capital distributions, which differ from the 

CCAR incorporation of a BHC’s forward-looking capital plans.3

Supplementary Leverage Ratio (SLR) and Enhanced Supplementary Leverage Ratio (eSLR)

The Basel III capital standards that become effective in 2018 include a leverage ratio. The U.S. 

has implemented this Basel standard under the supplementary leverage ratio framework, which 

requires advanced approaches firms to hold a minimum SLR of 3%, calculated with a numerator 

of Tier 1 Capital and denominator of on-balance sheet assets and off-balance sheet exposures. 

This is referred to as a “supplementary” leverage ratio because U.S. banking regulators have long 

required U.S. banks to meet a U.S. leverage ratio, calculated with a numerator of Tier 1 Capital 

and a denominator of total on-balance sheet assets (reported on a GAAP basis).

In addition, U.S. G-SIBs and their insured depository institution subsidiaries are subject to an 

enhanced supplementary leverage ratio rule that also becomes effective in 2018.4 BHCs subject 

to the eSLR must maintain a leverage capital buffer greater than 2 percentage points above the 

minimum SLR requirement of 3%, for a total of more than 5%, to avoid restrictions on capital 

distributions and discretionary bonus payments. Insured depository institution subsidiaries of 

these BHCs must maintain at least a 6% SLR to be considered “well capitalized” under regulatory 

prompt corrective action frameworks.

Leverage capital requirements are not intended to adjust for real or perceived differences in the 

risk profile of different types of exposures. The Federal Reserve, OCC, and FDIC adopted the 

SLR and eSLR recognizing that the systemic impact of distress or failure of a global systemically 

important bank is in part a product of the volume of the firm’s activities. As such, the leverage ratio 

requirements complement the risk-based capital requirements that are based on the composition 

of a firm’s exposures.

Global Systemically Important Bank Surcharges: U.S. Methodology

In 2015, the Federal Reserve adopted a final rule establishing U.S. global systemically important 

bank capital surcharges for the eight U.S. BHCs qualifying as G-SIBs under the Federal Reserve’s 

rule. The U.S. rule requires these G-SIBs to hold additional capital to account for the higher risk 

profile of these firms. The final rule resulted in estimated risk-based capital requirements that 

are higher than what would be required under the internationally-applicable Basel III surcharge 

 3. 12 C.F.R. Part 252, Subparts B, E, and F (Federal Reserve).

 4. When issued, these standards applied to BHCs with more than $700 billion in total consolidated assets or 

more than $10 trillion in assets under custody and insured depository institution subsidiaries of the BHCs. 

When the Federal Reserve issued the G-SIB surcharge rule, it amended the eSLR standards to apply to 

G-SIBs and insured depository institution subsidiaries of G-SIBs.
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143

methodology. The G-SIB capital surcharges are being phased in over a three-year period that began 

on January 1, 2016, and become fully effective on January 1, 2019.

The final U.S. rule requires G-SIBs to calculate their capital surcharges under two methods and 

use the higher of the two. The first is based on the Basel Committee’s assessment methodology, 

which considers a firm’s size, interconnectedness, cross-jurisdictional activity, substitutability, and 

complexity (method 1). The second uses similar inputs, but is generally calibrated to result in a 

higher capital requirement, and replaces the substitutability category with a measure of the firm’s 

reliance on short-term wholesale funding (method 2).5 While as many as 30 or more U.S. BHCs 

are required to calculate a G-SIB score each year, only eight currently meet the qualifying score 

of 130 or more to be considered a U.S. G-SIB subject to the Federal Reserve’s G-SIB surcharge. 

Moreover, there is a clear separation in scores between the top eight G-SIBs and the remaining 

BHCs. The U.S. G-SIB risk-based capital surcharge was designed to have U.S. G-SIBs internalize 

the systemic costs of their activities in different ways, with the risk-based surcharge focusing on the 

type of activities and the leverage ratio focusing on their volume.

Total Loss-Absorbing Capacity

In December 2016, the Federal Reserve issued a final rule requiring that the eight U.S. G-SIBs 

and the U.S. operations of foreign G-SIBs meet a new long-term debt requirement and a new 

“total loss-absorbing capacity,” or TLAC, requirement. The Federal Reserve’s final rule is largely 

consistent with the international FSB TLAC standard. The Federal Reserve TLAC and long-term 

debt requirements, like the FSB TLAC standard, are designed to increase the loss-absorbing capacity of G-SIBs and reduce the systemic impact of the failure of a G-SIB. TLAC is defined as the sum 

of Tier 1 capital (other than minority interests) and the unpaid principal of eligible debt securities 

(which are subject to haircuts for amounts due to be paid within 2 years).

The Federal Reserve’s rule requires that covered institutions hold TLAC in an amount that is 

the greater of (1) 18% of risk-weighted assets plus certain buffers and (2) 7.5% of total leverage 

exposure (as defined in the Federal Reserve’s Basel III capital rule), plus a 2% buffer. In addition 

to the TLAC ratio, the rule requires that covered institutions issue eligible long-term debt in an 

amount that is the greater of (1) 6% of risk-weighted assets plus the G-SIB surcharge and/or (2) 

4.5% of total leverage exposure (as defined in the Fed’s Basel III capital rule). Eligible long-term 

debt includes the unpaid principal of eligible debt securities, subject to haircuts for amounts due 

to be paid within 2 years. Compliance with the rule is required by June 1, 2019.6

The U.S. TLAC and long-term debt requirement differs from the FSB standard in that it (1) 

requires a higher minimum amount of long-term debt and (2) sets stricter criteria for such longterm debt. The Federal Reserve’s rationale for requiring long-term debt is that it can be used to help 

recapitalize the BHC’s operating subsidiaries in a resolution.

 5. Press Release, Federal Reserve Board, Federal Reserve Board approves final rule requiring the largest, most 

systemically important U.S. bank holding companies to further strengthen their capital positions (July 20, 

2015), available at: www.federalreserve.gov/newsevents/pressreleases/bcreg20150720a.htm.

 6. 12 C.F.R. part 252, subpart G.
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Basel III Risk-Based Capital

On July 2, 2013, the Federal Reserve issued a final rule implementing the U.S. Basel III regulatory 

reforms and certain changes required by Dodd-Frank.7 The U.S. adopted three final rules at this 

time: rules implementing Basel III capital standards and revisions to the standardized approaches 

(regulator-determined method of calculating risk-weighted assets) and advanced approaches (internal models based method of calculating risk-weighted assets) rules for risk-weighting of certain 

assets when calculating capital.

The U.S. rules implementing Basel III standards raised the quality and quantity of capital required 

of banking organizations in the United States. The provisions require banking organizations to 

hold more common equity tier 1 capital relative to risk-weighted assets, limit the qualifying instruments that can be included in additional tier 1 capital, and increase the deduction of certain assets 

(e.g., mortgage servicing assets) when calculating capital.

The revisions to the standardized approach rule generally increased the risk-weighting of certain 

assets (the denominator of the risk-based capital rule) to address asset exposures that created 

problems in the financial crisis (e.g., securitizations, commercial real estate) and improved the 

consistency and risk sensitivity of the capital rules.

The revisions to the advanced approaches rule apply to less than twenty internationally-active 

banks (i.e., those with assets of at least $250 billion or on-balance sheet foreign exposures of at least 

$10 billion) in the U.S. that use internal models to set risk weights.

Section 171 of Dodd-Frank, often referred to as the Collins Amendment, requires all banking 

organizations and nonbank financial companies designated by the FSOC to satisfy the “generally 

applicable” risk based and leverage capital requirements applicable to banking organizations of 

all sizes. In practical effect, this means that large banking organizations subject to the advanced 

approaches rule and relying on internal models must calculate their risk-based capital ratios and 

meet regulatory minimum capital requirements under the higher of requirements calculated using: 

(1) risk weighted assets as calculated under Advanced Approaches (models) and (2) risk weighted 

assets under Standardized Approaches (regulator determined).

Countercyclical Capital Buffer

The countercyclical capital buffer (CCyB) is a risk-based capital buffer that applies to internationally-active banks included in the revised capital rules the U.S. banking regulators adopted in 2013. 

The CCyB provides for an increase in such banks’ risk-based capital requirements by as much as 

2.5% of risk-weighted assets when the risk of above-normal losses is elevated, as determined by the 

Federal Reserve. In September 2016, the Federal Reserve finalized a policy statement that detailed 

the framework it would use to determine the amount of the CCyB, which is currently set at zero.8

The Federal Reserve said it expects that it will activate the CCyB gradually when systemic 

 7. Press Release, Federal Reserve Board, Federal Reserve Board approves final rule to help ensure banks 

maintain strong capital positions (July 2, 2013), available at: www.federalreserve.gov/newsevents/pressreleases/bcreg20130702a.htm.

 8. 12 C.F.R.§ 217.
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vulnerabilities are meaningfully above normal and will remove or reduce the CCyB when conditions abate or lessen and such action would support financial stability.9

Operational Risk Capital

Operational risk describes the potential for losses from inadequate or failed internal processes, 

people and systems, including legal risks, and from external events.10 The current Basel standard 

sets out three different approaches for institutions to calculate their required capital for operational 

risk.11 These include a basic indicator approach based on a firm’s gross income; a standardized 

approach based on the business units of a firm; and an “advanced measurement approach” which 

allows for the use of internal models subject to supervisory approval. In 2007, the U.S. banking 

regulators adopted only the advanced measurement approach for application to banks that utilize 

the advanced approaches.12

Because of the nature of modeling events that are rare and uncertain, the current advanced measurement approach can lead to excessive variability, and therefore is being revisited by the Basel 

Committee. On March 4, 2016, the Basel Committee released for comment a paper recommending that the advanced measurement approach be removed from the regulatory framework and be 

replaced with a non-model-based estimation of operational risk capital needs.13 The comment 

period for this revision ended June 3, 2016, and a final standard has not been issued.

Fundamental Review of the Trading Book (FRTB)

After six years of work to improve market-risk-modeling practices and eliminate inconsistencies 

in the measurement of trading risk capital, the Basel Committee finalized the FRTB standard in 

2016. The FRTB is comprised of two components: (i) a new standardized approach for measuring 

trading book capital requirements for banks’ trading activities, which would serve as a credible 

fallback to internal models and (ii) new standards to strengthen internal modeling practices. Based 

upon a Basel Committee study, the final FRTB results in a trading book minimum capital requirement that may be as much as 40% higher than the current capital requirements for such trading 

book exposures on a weighted-average basis and 22% higher for the median bank (about two 

dozen U.S. banks are subject to the trading book standard).14

Current Expected Credit Losses (CECL)

The Financial Accounting Standards Board (FASB) has finalized new accounting standards that 

will substantially affect how banks reserve for credit losses. FASB replaced the current accounting 

 9. 12 C.F.R. § 217, App. A §4.

 10. 12 C.F.R. §3.101(b).

 11. Basel Committee on Banking Supervision. Basel II: International Convergence of Capital Measurement and 

Capital Standards: A Revised Framework. Nov. 2005. available at: http://www.bis.org/publ/bcbs107b.pdf

 12. Risk-Based Capital Standards: Advanced Capital Adequacy Framework – Basel II, 72 Fed. Reg. 69287 

(Dec. 7, 2007).

 13. Basel Committee on Banking Supervision. Standardised Measurement Approach for operational risk - consultative document. Mar. 2016, available at: http://www.bis.org/bcbs/publ/d355.htm.

 14. Basel Committee on Banking Supervision. Fundamental review of the trading book – interim impact analysis. 

Nov. 2015, available at: http://www.bis.org/bcbs/publ/d346.htm.
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model for bank loans known as the “incurred loss model,” which recognizes losses only generally as 

they are incurred, with an alternative “current expected credit loss model,” or CECL. This model 

aims to recognize expected lifetime losses upon the underwriting or purchase of loans. FASB’s 

old incurred loss model was criticized during the crisis as being pro-cyclical and leading banks to 

understate losses in good times and overstate them in bad times. The new CECL standard is set to 

become effective in 2020 for SEC-registered banks and 2021 for all other banks.

Liquidity Regime

Liquidity Coverage Ratio

The FDIC, OCC, and Federal Reserve jointly issued a final Liquidity Coverage Ratio rule in 

September 2014 that was designed to strengthen the ability of U.S. banking organizations to 

withstand short-term liquidity stress. The final rule, which constituted the U.S. adoption of the 

international Basel III liquidity standard, requires firms to hold high-quality liquid assets to cover 

net cash outflows over a 30-day stressed scenario. There are three categories of such high-quality 

liquid assets defined by regulators: Level 1, which is the most liquid and includes assets such as 

U.S. Treasury securities, central bank reserves, certain debt issued by foreign entities that meets 

certain requirements and cash; Level 2A, which includes assets such as agency MBS and securities 

or foreign entity debt not included in Level 1; and Level 2B, which includes certain qualifying 

corporate equity and debt. Banks with $250 billion or more in assets or $10 billion or more of 

on balance sheet foreign exposure and their depository institution subsidiaries with $10 billion or 

more in assets are subject to the final LCR rule, while bank holding companies with assets in excess 

of $50 billion are subject to a modified, less stringent version of the rule.15

U.S. banks have generally met the LCR through a combination of increasing the amount of high 

quality liquid assets held (e.g., by adding cash or U.S. Treasury securities) or changing their funding mix (e.g., by extending their funding maturities, which would reduce the amount of cash 

needed to withstand a 30-day stress scenario).

Net Stable Funding Ratio

In October 2014, the Basel Committee finalized another key liquidity standard, the Net Stable 

Funding Ratio. In 2016 the FDIC, OCC, and Federal Reserve proposed a U.S. rule implementing 

the international standard. The objective of the NSFR is to mitigate the potential effects of a firm’s 

loss of funding and create strong incentives for a firm to lengthen the maturity of its funding 

sources. The proposed U.S. NSFR is tailored to the size of the organization, with more stringent 

requirements for holding companies with $250 billion or more in assets or $10 billion or more in 

foreign exposure and their depository institution subsidiaries with $10 billion or more in assets, 

and less stringent requirements for holding companies with less than $250 billion in assets and less 

than $10 billion in total on-balance sheet foreign exposure but in excess of $50 billion in assets. As 

proposed, the rule does not apply to institutions with less than $50 billion in assets. The proposed 

U.S. NSFR would require covered institutions to maintain a sufficient level of “available stable 

funding” (e.g., regulatory capital and long-term debt) to meet their “required stable funding” 

 15. 12 C.F.R. part 249.
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(based on a calculation that accounts for its mix of assets, derivative exposures, and lending commitments) over a one-year time horizon. Less liquid positions (e.g., exposures with weaker credit 

quality and/or shorter maturities, and derivatives generally) would require greater accompanying 

levels of stable funding than more liquid positions such as cash and U.S. Treasury holdings.16

Comprehensive Liquidity Assessment Review (CLAR) and Internal Liquidity Stress Testing

In 2012 the Federal Reserve launched the Comprehensive Liquidity Assessment and Review process 

for firms in the Large Institution Supervision Coordinating Committee (LISCC) portfolio.17 Like 

CCAR, CLAR is an annual horizontal forward-looking assessment, with quantitative and qualitative 

elements, overseen by a multidisciplinary committee of liquidity experts from across the Federal 

Reserve System.18 This team assesses the adequacy of LISCC portfolio firms’ liquidity positions 

relative to each company’s unique risks and tests the reliability of each firm’s approach to managing 

liquidity risk. Unlike CCAR, CLAR does not include a specific quantitative post-stress minimum.

In addition, as part of the enhanced prudential standards framework, U.S. BHCs that have in 

excess of $50 billion in assets and FBOs that have over $50 billion in U.S. assets are subject to 

internal liquidity stress testing and liquidity buffer requirements.19

Single-Counterparty Credit Limits

In March 2016, the Federal Reserve, as required by section 165 of Dodd-Frank, proposed a singlecounterparty credit limit rule to address risks associated with excessive credit exposures of banking 

organizations to a single counterparty.20 The rule would apply to bank holding companies with 

assets of $50 billion or more, and the rule’s credit limits increase in stringency with a firm’s systemic 

importance. For internationally active banks (i.e., those with $250 billion or more in assets or $10 

billion or more in on balance sheet foreign exposure), the proposal would limit aggregate net credit 

exposure to a single-counterparty and its subsidiaries on a consolidated basis to 25% of a bank’s 

tier 1 capital. G-SIBs would also be subject to a limit of 15% of tier 1 capital if the counterparty 

is another systemically important financial institution. Non-internationally active banks with $50 

billion or more in total assets would be subject to a 25% limit against the bank’s regulatory capital, 

which is a larger measure than tier 1 capital. The proposed rule is similar to the Basel Committee’s 

large exposure standard.

 16. Proposed Rule: Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure 

Requirements, 81 Fed. Reg. 35123 (June 1, 2016).

 17. OFR, Financial Stability Report (Dec, 2015) at 98, available at: https://www.financialresearch.gov/financialstability-reports/files/OFR_2015-Financial-Stability-Report_12-15-2015.pdf. The current list of the firms in 

the LISCC portfolio is provided at: www.federalreserve.gov/bankinforeg/large-institution-supervision.htm.

 18. Id.

 19. 12 CFR §§ 252.35, 252.157.

 20. Proposed Rule: Single-Counterparty Credit Limits for Large Banking Organizations, 81 Fed. Reg. 14328 

(Mar. 16, 2016).
THE

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2017-04151 (Rev. 1) • Department of the Treasury • Departmental Offices • www.treasury.gov