By Monica C. MeinertWith a Congress and administration united in their commitment to regulatory reform, 2018 was a landmark year for banking policy.
Years of banker advocacy finally paid off when President Trump signed into law the first significant and bipartisan regulatory reform bill in nearly a decade. Changes in the highest echelons of the regulatory agencies brought fresh perspectives to Washington and a renewed commitment to tailoring banking rules. Spurred by a new tax reform law, the economy had an overall strong year of falling unemployment, healthy wage growth and job creation. Alongside all that, the financial industry was stronger and better capitalized than ever before.
Throughout this momentous year, the American Bankers Association was a strong, consistent advocate for policies that would grow the economy and ensure that the nation’s banks were well positioned to serve their customers and communities. And though congressional dynamics have since shifted—with Democrats regaining control of the House in November, prompting key leadership changes at the House Financial Services Committee—ABA’s message and advocacy priorities for 2019 remain the same.
“We might use different tactics, we might use different strategies, but our priorities going forward don’t change,” says ABA President and CEO Rob Nichols. He is quick to point out that historically, crafting banking policy has typically been a bipartisan exercise—Dodd-Frank was a notable exception. “With S. 2155, we went back to having a bipartisan conversation about banking,” Nichols says. Moving ahead in 2019 with a divided Congress, “any bill that makes it to the president’s desk will be bipartisan by definition.”
That’s a good thing. ABA EVP James Ballentine—who spearheads much of ABA’s congressional relations effort—points out that the association has a long history of working with members of both parties to develop commonsense solutions to the challenges facing the industry. The key, Ballentine says, is to “stay focused on our agenda. It does not matter who is in Congress, it does not matter who is leading the committees. We will continue to push it from a policy perspective, not a political perspective. That’s served us well over the years, and that’s what we’ll continue to do.”
As ABA continues to have constructive conversations with members on both sides of the aisle on everything from housing finance reform to data privacy, there are also significant opportunities for changes on the regulatory side. “We have a great group of stakeholders to work with over the next several years,” Nichols says of the Trump administration’s regulatory team, now fully in place. “They view in a different light the important role that the banking sector plays.”
With that in mind, persistent interaction with the agencies will be central to ABA’s advocacy strategy in the year ahead. “It’s a roll-up-your-sleeves kind of time,” according to ABA EVP Wayne Abernathy, who emphasizes the importance of providing regulators with concrete examples of how regulation affects banks’ ability to serve their customers and using hard data wherever possible. This will be especially critical in a year that’s likely to bring—at least in the House—more congressional oversight hearings where regulators will be called upon to defend any recent changes. “The facts are on our side,” Abernathy adds. “It’s our job to marshal those facts and put them in the hands of policymakers who are eager for them and want to use them to do the right things.”
While there are several issues ABA will be actively engaged in throughout the year, what follows is a preview of four areas primed for action in 2019.
Cannabis: A high priority for the banking industry
A critical issue that’s certain to arise both in Congress and the regulatory agencies is the ongoing conflict between federal and state laws regarding cannabis. With cannabis now legal in 33 states, banks are struggling with whether and how to serve marijuana growers, dispensaries and other marijuana-related businesses, given the potential for liability while cannabis remains illegal under federal law.
“We know that this is an increasingly urgent problem to solve,” says ABA Chief Policy Officer Naomi Camper. “Banks whether they like it or not are caught in the middle.” She adds that greater clarity and more prescriptive measures are needed to address all the challenges banks face in this area.
Ballentine expects any movement on cannabis this year to begin in the House Financial Services Committee. To that end, ABA is currently working with lawmakers interested in drafting legislative language that would allow banks to serve MRBs in states where that activity is legal and provide certainty that handling proceeds from legitimate cannabis transactions do not violate any provisions of federal law. He adds that “we are trying to stay squarely in our lane and focus on the banking issues and not get into the other legality issues of marijuana on the federal level.”
Continuing the CECL conversation
Another important conversation happening in both the halls of the U.S. Capitol and the regulatory agencies focuses on the Financial Accounting Standards Board’s Current Expected Credit Loss standard, which takes effect for some institutions as early as 2020.
As the implementation date nears, ABA has alerted lawmakers and regulators to the potential negative effects the standard could have on bank capital requirements and product offerings. “The outcome here is uncertain,” warns ABA SVP Jess Sharp. “The implementation is difficult. Consumers can be harmed if suddenly product offerings—like 30-year mortgages—are affected by this.”
Gathering enough data to paint an accurate picture of what CECL will look like when fully implemented is challenging, ABA staff experts note, but preliminary studies have suggested that hundreds of community banks could be forced to immediately raise capital in order to remain compliant as a result of the new standard. Accordingly, ABA continues to push for a delay in CECL’s implementation until a thorough quantitative impact study can be undertaken.
Spotlight on CRA reform
Regulators took a significant step toward reforming the decades-old Community Reinvestment Act regulations last year when the OCC issued its advanced notice of proposed rulemaking seeking feedback on how the rules could be updated. ABA VP Krista Shonk—who led the banker working group on this issue—notes that hundreds of comment letters were filed, including nearly 300 from bankers. These comments will play a critical role as the regulators prepare to issue a formal proposal.
Shonk points to three key themes around CRA reform that bankers should watch closely as the reform process moves forward, including CRA assessment areas; the “primary purpose test” banks must pass when determining which activities count for CRA credit; and the idea of creating a CRA metric.
Reforming CRA is a top priority for Comptroller of the Currency Joseph Otting, and the other regulators have signaled willingness to work together to make substantive reforms. “The regulators understand that this is a once-in-a-generation opportunity,” Shonk says. “Given the changes in technology, they know they need to update CRA not just for today, but with an eye toward the bank of the future. They know that just tweaking around the edges is not going to be sufficient.”
A second look at BSA/AML
Like the CRA, many of the rules and regulations regarding anti-money laundering efforts are also in need of a facelift, and ABA will continue working in 2019 to help lawmakers and regulators update the Bank Secrecy Act framework.
“Banks want to work with the law enforcement community to go after bad actors, but that system can be improved,” says Nichols. “Everyone on both sides knows it can be more efficient and effective.”
On the legislative side, BSA/AML reform could be an area where bipartisan compromise could be reached in both the House and Senate, as there is growing agreement about revisiting certain reporting thresholds and making further modifications to customer due diligence rules. And regulators have in recent months signaled a renewed openness to innovative solutions to address BSA/AML challenges. In fall 2017, for example, regulators gave the greenlight to banks to share anti-money laundering information to increase the overall effectiveness of their programs. Regulators also issued a formal statement encouraging banks to pursue innovative solutions to anti-money laundering challenges and noting their openness to bank pilot programs in this area.
Along with these priorities, the industry must also keep its eyes on the horizon, where a sure-to-be high stakes election is looming next year. Nichols anticipates that banking issues will inevitably come into play as the next election season ramps up. While it’s unclear exactly what weight they’ll carry a year from now, the time is now to lay the groundwork for a positive dialogue about banking policy in the future.
“In addition to all the public policy work, we need to keep in mind what the reputation of the industry looks like,” Nichols says. Bankers can help by working to spread the positive story of how banks support their communities by meeting customers’ credit needs, increasing financial capability and making philanthropic contributions.
With a focus on what’s achievable in the near-term and a longer eye toward the future election season, the industry is well-positioned and ready to continue its steady progress toward pro-growth banking policy, Nichols adds. “We’re 10 years past the crisis. We just had a bipartisan victory. We have regulators who are willing to work with us. This is the right time to have a positive set of messages about what we want to do as an industry.”