The Treasury Department has released the first in what it describes as a series of reports to the President looking at the country's financial regulatory system.  The report, titled A Financial System That Creates Economic Opportunities, was mandated by Executive Order 13772 which instructs the Treasury Secretary to report the extent to which the existing financial regulatory system promote the Administration's "Core Principles" of financial regulation.  Among its recommendations are substantial changes to the form and funding of the Consumer Financial Protection Bureau.

The Core Principals specified in the report

  • Empower Americans to make independent and informed choices in the marketplace, save for retirement, and build individual wealth.
  • Prevent taxpayer-funded bailouts.
  • Foster economic growth and healthy financial markets through more rigorous regulatory impact analysis.
  • Enable American firms to complete in domestic and foreign markets.
  • Advance American interests in international negotiations and meetings.
  • Make regulation efficient, effective, and appropriately tailored.
  • Restore public accountability to federal financial regulatory agencies.

The initial report is focused on the depository system. Subsequent reports will look at:

  • Capital markets: debt, equity commodities, and derivatives markets, central clearing and other operational functions;
  • Asset management and insurance industries; retail and institutional investment products and vehicles; and
  • Non-bank financial institutions, financial technology, and financial innovation.

Recommendations contained in the 147-page report include the following.

Addressing the Regulatory Structure

Treasury recommends that Congress move to reduce fragmentation, overlap, and duplication in the U.S. regulatory structure.  This could include consolidation of regulators with similar missions and more clearly defining regulatory mandates.  The authority of the Financial Stability Oversight Council should be expanded to a larger role in the coordination of regulatory and supervisory policies and the structure and mission of the Office of Financial Research reformed, perhaps making it a functional part of the Treasury.  Agencies should increase their coordination and including enforcement actions.

Refining Capital, Liquidity, and Leverage Standards

There are numerous recommendations for reducing the size and complexity of stress tests and raising the threshold for institutions that are subject to them.

Providing Credit to Consumers and Businesses to Drive Economic Growth

The recommendations for revising capital and liquidity regulatory regimes are aimed at increasing the banks' lending capacity while maintaining safety and soundness standards.  The report calls for significant restructuring in the authority and its execution by CFPB.  It says the Bureau "has hindered consumer access to credit, limited innovation, and imposed unduly high compliance burdens, particularly on small institutions." 

Suggested changes include making the Director removable by a President at will or alternatively structuring it as an independent, multi-member commission and funding the agency through the annual appropriations process.  There are also recommendations to improve and reduce the costs of lending flows from the banking system across a range of product types, including residential mortgages, leveraged and small business lending.

Improving Market Liquidity

The report alleges that regulations implementing the Dodd-Frank Welfare Report and Consumer Protection Act could be limiting market liquidity.  It recommends considering adjustments to the Supplementary and enhanced Supplementary Leverage Ratio and significant changes to the Volker Rule's statute, regulations, supervision, and thresholds.

Allowing Community Banks and Credit Unions to Thrive

The capital regime for community banks with less than $10 billion in assets should be simplified, with possible exemptions from the Dodd-Frank Collins Amendment and Basel III requirements.  Both small banks and credit unions should be granted relief from the current level, design, lack of notice, and transparency of the supervision and examination processes. Procedures that are redundant between regulators should be streamlined.

Additional recommendations were made under the headings of Advancing American Interests and Global Competitiveness, Enhanced Use of Regulatory Cost-Benefit Analysis, Encouraging Foreign Investment in the Banking System, and Improving the Regulatory Engagement Model which includes reforming regulators' expectations of financial institutions' boards of directors.

"Properly structuring regulation of the U.S. financial system is critical to achieve the administration's goal of sustained economic growth and to create opportunities for all Americans to benefit from a stronger economy," said U.S. Treasury Secretary Steven T. Mnuchin. "We are focused on encouraging a market environment where consumers have more choices, access to capital and safe loan products - while ensuring taxpayer-funded bailouts are truly a thing of the past."

The Treasury Department said its next step will be to join the Administration in working with Congress, independent regulators, the financial industry, and trade groups to implement the report's recommendations through changes to statutes, regulations and supervisory guidance.