The only newsletter that scans and analyzes the full breadth of regulatory developments every day. Written and curated by Rob Garver for SourceMedia.

10.10.17 - Amid the daily Twitter outbursts and the public sparring between the president and the members of his own party, it’s easy to lose sight of the fact that there is some serious policy making under consideration behind the scenes of the Trump administration. A good example is a lengthy report from the Department of the Treasury, largely lost in the shuffle of last week, that explores major changes to the post Dodd-Frank regulatory structure for capital markets.

The document touches on multiple sectors of the financial world, including the market for Treasury securities, equity markets, financial market utilities and more. Of particular interest to many in the banking and investment management worlds will be sections on access to capital and the securitization markets.

The recent trend away from initial public listings in the US, the report argues, is “unusual compared to the trends in other developed countries with similar institutions and economic development.”

In the years following the financial crisis there has been an average of 188 IPOs in the US each year, down from 325 in a comparable period prior. While some may argue that the changes are at least partly cyclical, the Treasury report casts it as bad news for both public companies and for investors.

For the companies, it argues, it means more expensive capital and fewer sources of it. For investors, it means missed opportunities.

“If a company decides not to go public and instead raises capital in the private market or as an exempt offering, it could be subject to investor qualification requirements and/or offering limitations. This could result in the average investor being deprived of an opportunity to consider investing in that enterprise. Instead, those investment opportunities and potential wealth gains, along with their attendant risks, might be made available only to a relatively small group of investors.”

Among other things, the administration offers a number of recommendations designed to make it easier and more attractive for new, smaller firms to come to market. This includes a relaxation of some of the pre-IPO disclosure requirements and communications restrictions, and the elimination of “duplicative” filings with the Securities and Exchange Commission.

The report dedicates one section to the dubious suggestion that the threat of class action lawsuits is a substantial barrier to companies going public, though it offers no actual evidence that is the case.

On the question of securitization, the report notes that the financial instruments that earned a bad reputation for their role in the financial crisis and Great Recession are still a vital tool in creating and maintaining liquidity in the lending markets.

Among other things, Treasury recommends that regulators lower the capital that banks are required to hold against securitized products.

“Capital requirements should be set such that they neither encourage nor discourage funding through securitization, thereby allowing the economics of securitization relative to other funding sources to drive decision making,” the report finds, implicitly criticizing the status quo in which US institutions face higher capital requirements than international competitors.

“Rationalizing banking and trading book capital requirements may encourage additional bank participation in this asset class.”

Whether these kinds of policy debates get an airing beyond their inclusion in a report from the Treasury Department is anybody’s guess. But it’s a worthwhile reminder that beneath the headlines, big changes are under consideration in Washington.

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Today’s Key Reads

What happens now after CFPB payday rule?
American Banker - For all the anticipation that preceded the Consumer Financial Protection Bureau's final small-dollar lending rule, a picture of how the rule will affect banks and credit unions is still quite hazy. The regulation opens the door for depository institutions to offer certain installment loans, with terms of over 45 days, as a result of the CFPB's exclusion of those loans from tough underwriting requirements targeted at shorter-term payday loans. But now the onus falls on banks and credit unions to structure products that get the exemption.

Civista can return to M&A after receiving upgraded CRA rating
American Banker - Civista Bancshares in Sandusky, Ohio, has received an upgraded Community Reinvestment Act rating. The $1.5 billion-asset company said in a press release Thursday that its CRA rating was increased to “satisfactory” from “needs to improve,” which opens up the possibility of pursuing acquisitions. Civista had been “disappointed” with its prior rating, Dennis Shaffer, the company’s president, said in the filing, adding that the issue stemmed from an “inadvertent programming error.”

How the Trump administration wants to dial back capital market regs
Asset Securitization Report - The Treasury Department is expanding its calls for overhauling regulation of the financial services sector, this time focusing on changes to the most significant rules surrounding securitization and derivatives enacted since the crisis. In a report quietly released on Friday, the second in a series requested by President Trump in a February executive order, calls primarily on market and banking regulators to dial back their post-crisis regulations in an effort to help economic growth.

NCUA's proposed budget up slightly as agency plans staff reductions
Credit Union Journal - The National Credit Union Administration is projecting budget increases for 2018 and 2019, according to a proposed budget released Friday. The proposal’s release comes less than two weeks before the agency’s Oct. 18 budget briefing, and is notable in that it includes a net decrease of 42 full-time positions for 2018, along with an operating budget of $289.2 million. For 2019, the regulator is projecting a $302.8 million operating budget and a net decrease of 14 positions.

State-level fines and penalties hit 5-year high at nearly $1B
Financial Planning - Fines and restitution from state-level enforcement actions rose almost 20% year-over-year to top $900 million in 2016 , according to regulators. The five-year high comes as authorities report better coordination with their counterparts in the SEC and FINRA, as well as the FBI, the IRS and state and federal prosecutors. Refunds shrank by 57% to $231 million due to fewer investors losing money in the bull market economy, but penalties soared by nearly 200% to $682 million in 2016, according to the North American Securities Administrators Association’s annual enforcement report.

Will fixed index annuities stay ahead of fiduciary concerns?
Financial Planning - Debate over the fiduciary rule cast annuities in a harsh light, resulting in a recent sales slump, but fixed index annuity issuers and distributors remain optimistic. Few firms have slammed the Department of Labor rule more vocally than annuity firms and their advocates. The Trump administration pushed back full implementation of the rule by 18 months, but experts have predicted gloom for all annuities amid downward pressure on fees and commissions.

AI, cybersecurity two biggest trends shaping the CIO role
Health Data Management - The role of the chief information officer will change significantly in the next few years, driven by the growing adoption of artificial intelligence and by demands from cybersecurity. IT leaders are rapidly scaling their digital businesses, making the remainder of this year and 2018 a defining moment for CIOs who don’t want to be left behind, say Gartner researchers.

FHA lenders may need to vet water quality issues
National Mortgage News - Lenders could be responsible for water quality issues affecting borrowers and properties if the Federal Housing Administration follows through with its response to an inspector general's report. "Single-family will leverage its strong training program for both lenders and appraisers to ensure the topic of safe and potable water is given appropriate attention in FHA-related lender and appraiser training," said Gisele Roget, deputy assistant secretary for single-family housing, in a written response to the IG's report.

Extra Credit

European CLO volumes on course for post-crisis record
Financial Times - After years spent in the post-financial crisis wilderness, collateralized loan obligations have come roaring back in Europe, as low funding costs have issuers competing fiercely for loans to roll into their increasingly popular securitization vehicles.

ECB Still Concerned About Existing Stock of Bank Bad Loans-Mersch
Reuters - European regulators remain worried by the fact that banks in the EU are still carrying large numbers of non-performing loans on their books. European Central Bank Executive Board member Yves Mersch said on Monday that members “need to bring their own house in order.”

The Economy Is Humming. Bankers Are Cheering. What Could Go Wrong?
New York Times - Rarely over the past two decades has the economic news been as good as it is today. But instead of celebrating, many experts are looking nervously over their collective shoulder, wondering what may be coming next.

A Warning Shot on Equifax: Index Provider Flagged Security Issues Last Year
Wall Street Journal - As stunning as the Equifax data breach was to many in the markets, not everyone was surprised. MSCI, a firm that creates stock indices, issued a brutal report on the company’s lax data security back in August of 2016.

ECB: Banks’ Capital Buffers Are Big Enough to Cope With Higher Interest Rates
Wall Street Journal - EU regulators’ stress test of the region’s banks found that, by and large, institutions are holding enough capital to cope with any changes that an increase ininterest rates might bring.

Rob Garver

Rob Garver has been covering the intersection of public policy and the private sector for more than 20 years.