Big Banks Push Regulators to Cement Looser Oversight Rules

Wall Street lenders are reportedly lobbying the Federal Reserve to solidify its regulatory regime.

That’s according to a report Tuesday (May 26) by Reuters, which says the thinking behind these banks is to cement changes that cannot be easily overturned by Democratic administrations in the future.

According to the report, regulators are cutting back on the use of “matters requiring attention” (MRAs), a way bank examiners to force banks to repair their risk management deficiencies and control weaknesses.

The report adds that MRAs are a confidential way for examiners to identify problems they uncover at banks and direct the lenders to fix them.

Banks that fail to comply could face enforcement action and monetary penalties, Reuters added, with most big banks typically dealing with multiple MRAs at any given moment.

In October, the Fed said it would reserve MRAs for material financial risks, and begin relying more on “observations” to informally flag issues, returning to a tool the central bank scrapped in 2013, the report said.

Then in February, the Fed said it might also downgrade some existing MRAs to observations, which are nonbinding. While banks are in favor of this approach, sources said, they worry observations are legally ambiguous and it is not clear how supervisors will react if banks don’t act on them.

There is also the concern that a future Democratic-led Fed could pounce on that ambiguity to turn observations they believe have not been fixed into more serious MRAs. Banks want the Fed to put it in writing that supervisors will not do that, and only escalate observations to MRAs if the facts around the issue change, the sources said.

In other banking regulation news, a new report shows that U.S. and U.K. lenders are gaining additional asset capacity due to bank deregulation, while those in the European Union and Switzerland face increasing capital requirements.

For U.S. banks, deregulation could open up $2.5 trillion in additional asset capacity and support a 6% increase in return on tangible common equity (ROTCE), Alvarez & Marsal said in the latest edition of its Bank Deregulation Primer.

“What we are seeing now is U.S. banks using the deregulatory agenda to their competitive advantage,” Fernando de la Mora, co-head of Alvarez & Marsal’s EMEA Financial Services practice, said in announcing the report. “U.S. banks are already deploying substantial amounts of newly available capital into lending growth, acquisitions, shareholder distributions and technology investment.”