February 15, 2017
Authored by: Robert Klingler
A key component of the proposed roadmap for Republican efforts to provide regulatory relief is based on reduced regulatory burdens in exchange for holding higher capital levels. Specifically, Title I of the proposed Financial Choice Act, as modified by Representative Hensarling’s “Choice Act 2.0 Changes” memo of February 7, 2017, proposes to provide significant regulatory relief for institutions that maintain an average leverage ratio of at least 10 percent.
The principal concepts of this “regulatory off-ramp” have, so far, remained relatively constant since first published by the House Financial Services Committee in June of 2016; any institution that elects to maintain elevated capital ratios (set at a 10% leverage ratio) would enjoy exemptions from the need to comply with certain other bank regulatory requirements.
In February 2017, Jeb Hensarling, Chairman of the Financial Services Committee, indicated that the “regulatory off-ramp” included in the proposed 2017 legislation would differ in two critical aspects from the 2016 proposed legislation.
First, the regulatory off-ramp would be based solely on the banking organization’s leverage ratio and would not consider the organization’s composite CAMELS rating. Originally, the legislation limited eligible institutions to those that possessed a composite two CAMELS rating. This change eliminates a subjective element to the regulatory off-ramp, but may also highlight that banking regulators would retain a wide array of tools to address institutions with substandard CAMELS ratings, regardless of their capital levels.