Banks Grapple with Unintended Consequences of Deregulation

Over the last few months, regulators have made changes that banks have long sought. For instance, the Consumer Financial Protection Bureau has been in limbo after its headquarters was closed temporarily and its workforce told to stop their work, though those issues are being litigated. The agency seems poised to be less active in enforcement actions. In addition to that, regulators have pledged in exams to focus more on core risks and not on areas such as reputational risk, says Sarah Billington, an attorney at the law firm Howard & Howard. 

The supervisory efforts will be less focused on process, says Billington, who gave Bank Director an interview after recently speaking at Bank Director’s Bank C-Suite Summit in Nashville, Tennessee. “Some of the regulatory leadership has already come out and said that,” she says. 

But all of this has led to some unexpected consequences. For instance, some banks have reported more stringent regulatory exams, and the weakening of enforcement by the CFPB could also mean the agency focuses less on the industry’s nonbank competitors. 

Billington discussed these issues and the current regulatory environment with Bank Director. The following is a transcript of that conversation that has been edited for clarity, brevity and flow. 

BD: How would you describe the regulatory environment right now?

Billington: Completely uncertain and up in the air. 

BD: Why do you say that? 

Billington: Because the new administration has been completely flipped on its head. It’s just very unclear where they’re going.

BD: When Trump took office for his second term, it seemed like there was hope that he would deregulate. Do you think what has happened so far is what banks expected?

Billington: I do think that’s what people expected, but I don’t think that they expected things to be so completely up in the air as they are right now. And I think another thing too is, even though we’ve expected some deregulation, we’re actually seeing a little bit more scrutiny in these bank examinations.

BD: Why is that happening? What are regulators looking for? 

Billington: For our clients, the big focus has been liquidity, which isn’t surprising. That’s a pretty big focus. It’s always been. One of our theories is that with the push for closing all these agencies and reducing the workforce, our regulators are trying to justify their jobs. I think that’s a big part of it. They are imposing more scrutiny to say, “Hey, look, we’re here, we’re doing our jobs, don’t fire us.” We’ve seen with the CFPB that there were massive layoffs and everything, and I think probably the other regulators are looking at that and thinking, “We don’t want that to be us.”

BD: It seems like overall the administration is pro crypto. Are the regulators going to be more willing to allow banks to get into the crypto space because of that?

Billington: I think they will. All three of the big regulators have come out and revisited their approach to these crypto and digital asset related activities. You’re going to see more authorization to provide these sorts of services with less push back on it. However, one of the main things is that banks need to be aware of how these activities are conducted. It must be in a safe, sound and fair manner. They still need to have these sound risk management processes or practices when they are conducting those sorts of activities.

BD: Do you think we’ll see a lot of banks enter into the crypto space then?  

Billington: We may see a little more crypto or digital asset related activity. I think maybe community banks will be a little more hesitant to get into that space. It depends on the bank. Those with maybe a younger leadership team or a younger customer base might be a little more willing to get into that. But if you’re in a rural area, most of your customers are farmers or something like that. There may be a little more hesitation.

BD: You mentioned during your presentation at the Bank C-Suite Summit that the gutting of the CFPB could lead to nonbank entities being less regulated. What will that mean for the industry?

Billington: I think banks are going to see increased competition depending upon what happens with the CFPB. Right now, some of this is on hold with court cases. We’ll see if the CFPB’s truly gutted, which I don’t think is going to happen. It just means that these nonbank players are going to come into the picture, and it’s quite possible the banks will face increased competition from them because banks will still be subject to their examinations, even if those are less process-based and more focused on risks. They’re still going to have these examinations, whereas these fintechs or other entities, like payday lenders, may not have that same scrutiny, so it’s possible that there will be a lot more competition.

BD: During the Bank C-Suite Summit, you discussed that reputational risk was no longer going to be part of the bank exams. Can you talk about that? What’s driving that change?

Billington: I think that’s part of the deregulation and part of that is let’s focus less on process versus more on core risk. I think that’s what’s driving it. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have basically said that “we’re done with reputational risk.” And I think, again, this is more focused on the core risks versus process-based examinations. That’s not to say that there’s no longer risk with your bank’s reputation. But at the same time, that’s something that’s largely out of a bank’s control too.

BD: Do you think we’ll see practical changes from banks given this change? Could we see more banks engage with some of the vice industries, such as the gun industry? 

Billington: Personally, I don’t think so, because even if we’re not being examined for reputational risk, you still don’t want your reputation at risk. Even if it’s not part of an examination anymore, you don’t want to lose customers by engaging with, like you said, the vice industries. You may see it more in different parts of the country. In Illinois, you are probably not going to see a lot of changes with that, but maybe our neighbor, Indiana, will engage more with something like the firearms industry. I think that’ll be largely dependent upon the part of the country.