What We Talk About When We Talk About ‘Deregulation’

A casual observer might be forgiven for thinking that when Congress passed—and President Trump signed—the Economic Growth, Regulatory Relief and Consumer Protection Act, or S. 2155, in 2018, that financial institutions were being “deregulated.”

That’s what hundreds of news headlines and ledes said.

Even the neutral C-SPAN network followed suit; when it showed the Senate vote on the bill, the chyron at the bottom of the screen described S. 2155 as a “financial deregulation” bill.

Moreover, advocacy groups and lawmakers that opposed S. 2155—such as Better Markets, Allied Progress and Public Citizen—frequently described it as deregulation. “The bill would deregulate 25 of the largest 38 banks in the United States,” said an article from the Center for American Progress, when it would do no such thing. “What problem are we trying to solve with ‘deregulation’?” Sen. Brian Schatz (D-Hawaii), an S. 2155 opponent, asked Federal Reserve Chairman Jerome Powell during a recent hearing.

“I don’t want to characterize what we’re doing as deregulation,” Powell replied.

So then: is it accurate to call S. 2155 a “deregulation” bill? The way we think about deregulation suggests not that some regulations are being updated or provisions of them repealed, but rather that a whole regulatory regime is being taken away. Consider the round of actual deregulation that took place in the airline industry more than four decades ago.

Prior to 1978, airlines faced stringent regulations about which interstate and international routes they could fly, as well as how much they could charge—in addition to safety regulation. After deregulation, the Civil Aeronautics Board was shut down. Airlines could fly more or less where they wanted and charge whatever they wanted. The safety regime remained in place, overseen by the Federal Aviation Administration, but the industry-specific regulation of the airlines’ business strategy disappeared.

Now that’s deregulation.

‘False sense of security’

What happened in S. 2155 is best described as a readjustment, says ABA EVP Wayne Abernathy. “The provisions in the law are meaningful reforms that tailor regulatory requirements in helpful ways,” he says. “S. 2155 is a good first step, but there is much more Congress and the agencies can do.”

Abernathy points out how S. 2155 is genuinely helpful. It reduces the time and expense of stress tests for many institutions for which the tests were ill-suited. It allows many community banks to opt out of complex documentation exercises and calculations for regimes like Basel III and the Volcker Rule that were never meant to apply to them. It helps more community banks finance growth.

And yet, the widespread language of deregulation by the media and S. 2155 opponents may have oversold to some bank leaders just how sweeping the bill actually is. “There may be a misperception about what the reg reform means from a true compliance management perspective,” says ABA SVP Ryan Rasske. “While some banks may benefit from automatic Qualified Mortgage status for certain mortgages, the exemption from new HMDA data fields and an 18-month exam cycle, the expectations with regard to the alphabet soup of compliance regulations have not changed.”

Wolters Kluwer’s annual regulatory and risk management indicator showed that risk and compliance concerns dropped by 18 percent from 2017 to 2018. However, Wolters Kluwer Senior Adviser Tim Burniston points out that nearly two-thirds of survey respondents still rank their concern levels as high. “The level of concern is still way up there.”

Sometimes bank management teams and boards of directors—not always in the weeds of regulatory compliance—can be where the disconnect is, observers say. “You’ve got a board composition that may lack either the expertise or capacity, the capability or the skill sets to exercise appropriate oversight and they’re trying to exercise that oversight in a regulatory environment where they have been lulled into a false sense of security by this word ‘deregulation,’ which isn’t really true,” says Pam Perdue, EVP and chief regulatory officer at Continuity. “We’re going to see the highest volume of regulatory activity in 2018 than we have ever seen numerically.”

Some compliance officers are feeling a pinch from above. Richard Harvey is a former community bank compliance officer who now serves as general counsel for a cryptocurrency firm. With the change in administration, he says, “no one should be surprised that folks on the boards of directors and in executive management thought that we’re not going to have to have as much of a robust compliance function as we have had in the past.”

With national media talking about financial deregulation, he says, “they look at the headlines.” Harvey’s management team asked him “Why isn’t this a good time for us to scale back on our compliance staffing? Can’t we reduce the number of FTEs within the compliance function?”

Regulatory relief: still a job for compliance risk management

However, Carrie Connell, a senior manager at Porter Keadle Moore, points out that even beneficial regulatory calibration still requires careful attention by compliance risk managers. “I’m sure if you talk to any compliance officer right now, they’re just trying to keep their head above water with the changes that are constantly occurring,” she notes. “One change has this huge effect: changing in systems, changing in policies and procedures.”

In fact, financial regulatory reforms made over the past five decades have rarely resulted in fewer regulations. Stephen Matteo Miller, a senior research fellow at the Mercatus Center at George Mason University, recently analyzed words like “shall,” “must,” “may not,” “required” and “prohibited” that create requirements or restrictions in the Code of Federal Regulations. Since 1970, these terms—which are the ones that catch the eye of compliance officers—have risen each year on average 1.4 percent for the OCC, 2.5 percent for the Fed, and 2.6 percent for the FDIC. “If anything, the results here suggest that rather than deregulation, there’s been an increase in regulatory complexity,” writes Miller.

It’s also important for compliance and risk professionals to provide education that counters the false “deregulation” narrative, experts say. “The bank needs to push that information and put it in front of their board and their executive team members so that they are constantly getting that education on top of internal resources that they bring in to educate the board,” says Dave Daniel, VP at Banc Intranets.

And an educated board needs to turn that right back around, adds Faith Wray, a senior risk and compliance consultant at ProfitStars. “They really have to start asking questions and hold management’s feet to the fire to understand what the risks are and how they’re being mitigated,” she says.

Ultimately, recalibration in regulation may streamline some cumbersome operations or remove some illogical impediments to growth—but it’s not intended for banks to scale back their compliance risk management efforts. “That should have no significant bearing on whatever you develop [in] a compliance infrastructure to support the business model you have established and want to maintain,” says Richard Harvey. “Your compliance infrastructure should be as dynamic as your bank.”

Burniston agrees. “This is not the time to take your foot off the pedal,” he says. “If the industry isn’t able to stay on top of what’s out there, the likelihood that they’ll end up with more responsibilities becomes higher.”

This article originally appeared in the March/April 2019 issue of the ABA Banking Journal and is reproduced here with permission.