The Minneapolis Plan

How will Fed Bank's policy options square with Congress' reg-relief efforts?.The Minneapolis Fed's edgiest recommendations for resolving Too Big to Fail appear headed for strong opposition in Congress and possibly the White House..The Federal Reserve Bank of Minneapolis' high-profile, year-long initiative explored ways to lower the likelihood of a new financial crisis. Its plan, designed to protect taxpayers from needing to fund another bailout, would subject large banks to much higher capital requirements and impose a new tax on shadow banking entities. Both recommendations are being tossed into the public forum just as a more bank-friendly regulatory environment settles in, surprisingly, in the wake of the November election..Community bankers are cheering the new climate, which raises the prospects for rollbacks in regulation. Hillary Clinton strongly supported the Dodd-Frank Act, the sweeping and complex reform of financial regulation passed in 2010 to prevent another financial crisis. Trump has backed "dismantling" the law. His pick for U.S. Treasury secretary, Steven Mnuchin, hasn't gone that far, but has said the law's main problems are its complexity and that it restricts bank lending activity. "So we want to strip back parts of Dodd-Frank that prevent banks from lending," Munchin said, "and that will be the No. 1 priority on the regulatory side.".The Minneapolis Fed laid out a near-final version of its recommendations a week after the election. The bank will accept comments or suggestions about them until Jan. 17. It expects to incorporate any revisions into its final recommendations by mid-February..Minneapolis Fed President Neel Kashkari launched the initiative with much fanfare last February. In one respect, it was a marriage made in heaven. Kashkari brought to the project his penchant for the limelight and his experience in overseeing the Treasury Department's TARP program. The bank's researchers pushed forward with their long-standing work on how to curb the potential turmoil caused by financial institutions so important that their failure would imperil the entire financial system..Kashkari brought in a raft of big-name scholars, regulators and private sector players including former Fed Chairman Ben Bernanke for four symposiums widely covered by the financial press. He unveiled the bank's recommendations — dressed up as "The Minneapolis Plan" — at a breakfast meeting Nov. 16 in Manhattan convened by the Economic Club of New York..Easing up on community banks .The plan generally avoids recommending specific changes in the Dodd-Frank Act, but it assumes the law has not gone far enough to rein in too-big-to-fail banks. One recommendation, which lacked details, suggests "right-sizing" supervision and regulation of community banks — institutions with less than $10 billion in assets. This step calls for repeal of provisions of Dodd-Frank that apply to smaller banks but are not linked to solvency concerns. The plan also proposes simplifying capital requirements and other provisions that apply to these banks..The most controversial element of the Minneapolis Plan is its straight-forward requirement that banks with more than $250 billion in assets build their common stock equity to 23.5 percent of risk-weighted assets, nearly twice current levels, over five years. The covered banks would include the Twin Cities' two banking giants, Wells Fargo and Minneapolis-based U.S. Bancorp. Once these banks reach the 23.5 percent level, the Treasury secretary would certify that they are no longer systemically important. Any bank not certified would see its capital requirements rise 5 percent a year until reaching 38 percent of risk-weighted assets. That would almost certainly lead such a bank to break up..Another provocative linchpin of the plan: A tax of up to 2.2 percent on debt in the shadow banking sector — mutual funds, hedge funds and other non-bank financial entities with more than $50 billion in assets. This tax would be designed to prevent shadow banks from gaining an advantage over other lenders required to hold higher levels of capital..Trade associations react.Leaders at the Minnesota Bankers Association and the Independent Community Bankers of Minnesota welcomed the Minneapolis Fed's proposal to scale back regulation of community banks. They also cited the need for regulatory changes not mentioned in the plan..Joe Witt, president and CEO of the MBA, has not tracked the Minneapolis Plan closely, he said. Instead, he continues to advocate for the Tailor Act, which has been incorporated into the Financial Choice Act championed by U.S. Rep. Jeb Hensarling (R.-Texas), who heads the House Financial Services Committee. The Financial Choice Act has emerged as the lead vehicle for dismantling or reforming the Dodd-Frank Act. "From a cost-benefit standpoint, some regulations add tons of costs to the system while adding very little safety and soundness or consumer protection benefit," Witt said. "Some correction is definitely needed, or the rapid consolidation of community banks will continue.".Jim Amundson, president and CEO at the ICBM, generally supports the Minneapolis Fed's call for much higher capital requirements at the largest banks. He described Hensarling's plan as a starting point for efforts to fix Dodd-Frank. Amundson listed as priorities: reforming the oversight and funding of the Consumer Financial Protection Bureau, and making it easier for community banks to originate mortgages. .Media reaction to the Minneapolis Plan was swift, extensive and wide-ranging:.American Banker: Stressed that the plan could significantly lower economic growth, but acknowledged Kashkari's view that it would offset that disadvantage many times over if it prevented just one financial crisis…skeptical that a soon-to-be Republican-controlled Washington, oriented toward growth, would embrace the plan..The Economist: Called the plan "eye-watering…radical stuff… outlandish" because it calls for such high capital standards. The magazine noted that the plan "mimics the direction — if not the extent" of Hensarling's Financial Choice Act, which allows banks to opt out of Dodd-Frank's complex rules if they agree to higher capital requirements..Wall Street Journal: An editorial described the plan as a refreshing addition to the debate about how to avoid a need to bail out failing banks in the event of another financial crisis..Financial Times: Its analysis noted instant opposition to the plan from lobbyists for large banks, but said it "deserves a proper hearing." Said the Minneapolis Fed proposed extreme measures "because other post-crisis tools are not really cutting it.".New York Times DealBook: Speculated that a few weeks before the election, the plan likely would have been seen as "a provocative but ultimately fruitless idea." But now it is being tossed into "a political abyss of post-election Washington, where even the most hard-wired lobbyists admit they have little idea what policies President-elect Donald J. Trump will ultimately adopt.".Minneapolis Star Tribune columnist Lee Schafer: Concluded that the plan "may have just reset the terms of the debate" over too big to fail banks. That's because the Minneapolis Fed's researchers found that post-crisis reforms now on the books haven't reduced the 100-year odds of bailouts in a new crisis all that much — to only 67 percent from 84 percent before 2008-09 debacle. The Minneapolis Fed claims its plan, fully implemented, would slash the odds of bailouts to just 9 percent..Nathan Stovall, S&P Global Intelligence: Noted that the Minneapolis Plan is much tougher on big banks than an existing Federal Reserve plan that allows them to supplant common stock with debt to meet higher capital standards in the event of a crisis. The Minneapolis Plan requires the capital to consist entirely of common stock. Said the plan is unlikely to be adopted, given how it would smack large banks' already-reduced returns, but that it should keep regulatory pressure on the nation's largest banks..Wall Street celebrates.Investors also weighed in. They quickly became giddy over their vision of a bonfire that could torch much financial regulation as part of a lighter-touch regulatory climate. The stocks of JP Morgan Chase, Bank of America, Citigroup and other banks went on a tear immediately after the election..Trump's campaign frequently pilloried Hillary Clinton for her ties to large banks and Wall Street. He positioned himself as an anti-Wall Street populist. Yet his early appointments and post-election comments signal an embrace of Wall Street and less regulation. Steve Mnuchin spent 17 years at Goldman Sachs. Paul Atkins, who is advising Trump on financial regulation, is an outspoken critic of the Dodd-Frank Act. Another advisor: Jamie Dimon, the powerful CEO at JP Morgan Chase..But insiders don't expect changes to unfold quickly. Mark Olson, the former Minnesota banker who served as a Federal Reserve Board governor from 2001 to 2006, now heads a Washington financial services advisory firm. Olson told the American Banker that changes in regulation will develop slowly. It will take months for the new administration to get appointees and resources in place. Also, it's unclear how much of a priority Trump will put on financial regulation, given his stress on other concerns during the campaign — Supreme Court nominations, immigration, trade and so on..David Skeel, a University of Pennsylvania law professor, was a panelist at one of the Minneapolis Fed symposiums. He has followed the implementation of Dodd-Frank closely since he wrote a book in 2011 on the unintended consequences of the law. Skeel predicts piecemeal changes in Dodd-Frank, rather than outright repeal. "Repealing most or all of the Dodd-Frank Act would be a massive undertaking and it's unlikely to happen," he said. The Trump administration probably would want to retain parts of the law, and any attempt to dramatically change it likely would face a filibuster by Senate Democrats..Skeel would save the derivatives and clearing house reforms in Dodd-Frank, which he believes have significantly improved regulation of derivatives. He would keep the Consumer Financial Protection Bureau, though he believes giving it more accountability "wouldn't be a bad thing." Skeel would also retain the provisions for resolving large banks' troubles. He supports raising the threshold for designating bank holding companies as more heavily regulated, systematically important financial institutions to up to $250 billion in assets from $50 billion now. He would repeal the Volcker Rule, which restricts banks from making certain speculative investment..Finally, there is this about Kashkari from Mike Stevens, senior executive vice president for the Conference of State Bank Supervisors. He spoke in the Twin Cities shortly after the Minneapolis Plan came out. "He's throwing bombs, bold ideas, out there," Stevens said, and that is the kind of independent policy thinking the Federal Reserve banks were set up to do. "Whether you appreciate what he is doing or question his motives, what he is setting himself up for or running for, doesn't really matter." Adopting such high capital standards may be a bridge too far, Stevens suggested, but even an outlandish idea that will never happen can trigger a conversation that needs to happen.