Consumer Finance Insights
March 1, 2018

House Passes Bill to Lessen Financial Institutions’ Capital Requirements

On February 27, 2018, the U.S. House of Representatives passed H.R. 4296, which would reduce the operational capital requirements imposed on financial institutions.  The bill passed with a 245-169 vote.  As could be expected from such deregulatory legislation, only 19 Democrats voted in favor of the bill and only 3 Republicans voted against it.

Specifically, the legislation tightens the circumstances under which Federal banking agencies can establish operational risk capital requirements for banking organizations.  Agencies may only do so if the requirement “(1) is based primarily on the risks posed by a banking organization’s current activities and businesses; (2) is appropriately sensitive to the risks posed by such current activities and businesses; (3) is determined under a forward-looking assessment of potential losses that may arise of out of a banking organization’s current activities, businesses, and exposures, which is not solely based on a banking organization’s historical losses; and (4) permits adjustments based on qualifying operational risk mitigants.”  H.R. 4296, 115th Cong. § 1(a) (as passed by the House of Representatives, Feb. 27, 2018).  “Banking organizations” are defined under the bill to include insured depository institutions, insured credit unions, depository institution holding companies, bank holding companies and U.S. intermediate holding companies established by foreign banking organizations.  Id. at § 1(b)(2).

The bill also amends Section 7(a)(3)(A) of the Federal Reserve Act, 12 U.S.C. § 289(a)(3)(A), to further reduce the maximum aggregate amount of surplus funds Federal reserve banks can maintain from $7,500,000,000 to $7,468,571,428.  H.R. 4296, 115th Cong. § 2(a).  Not even one month prior, this amount was reduced to $7,500,000,000 from $10,000,000,000 by the February 9, 2018 Bipartisan Budget Act of 2018, H.R. 1892, 115th Cong. § 30205 (2018).

House Financial Services Committee Chairman Jeb Hensarling (R-TX) explained the mindset behind the bill: “Hundreds of billions of dollars are currently sitting in banks across the country not being utilized to fund mortgage loans, car loans, and other day-to-day financing that American individuals and small business owners need. … H.R. 4296 simply amends the method of how reserve capital is calculated by establishing standards based on an organization’s current business activities, making the requirements more accurate and tailored to a bank’s current risk profile.  This means banks would still retain sufficient reserves to weather an economic storm, but they would also be able to put the billions of dollars currently sitting on the sidelines to work to help fuel the economy.”

The sponsor of the bill, Blaine Luetkemeyer (R-MO), Chairman of the Subcommittee on Financial Institutions and Consumer Credit, further expounded: “The implementation of the Basel Committee’s operational risk requirements has forced American banks to hold billions of dollars in reserve to account for activities they no longer practice.  That means billions of dollars are currently sitting in banks across the nation instead of being lent to help businesses grow and create jobs in their communities.”

Opponents to the bill view it as a benefit to Wall Street, leaving consumers with any associated risk.  There is also the belief that the bill is premature and that Congress should wait to see whether regulators act to refine operational capital requirements before imposing legislation.  It remains to be seen how the bill progresses, and LenderLaw Watch will provide updates.

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