We are now two years into the “reform” of Dodd-Frank, and although there has been unanimity on a number of issues, certain changes have drawn dissent. The pruning of certain aspects of the original regulations has been a goal of Federal Reserve Vice Chair Randal Quarles, who has been supported by the other Federal Reserve governors, except for Governor Lael Brainard on six matters. Similarly, for changes on which the Federal Deposit Insurance Corporation (FDIC) board has also issued its approval, support has been unanimous other than for Director Martin Gruenberg on five matters. This article analyzes these competing schools of thought.
Governor Brainard has dissented from six Federal Reserve actions since April 2018. The first was the Federal Reserve’s proposal to further tailor the enhanced supplementary leverage ratio (E-SLR) that applies to U.S. global systemically important banks (G-SIBs), followed by dissents to the October 2018 “tailoring proposal” for U.S. banks, the March 2019 revisions to CCAR’s “qualitative objection,” the March 2019 decision to leave the Countercylical Capital Buffer (CCB) at 0 percent, the April 2019 foreign bank “tailoring proposal,” and the April 2019 proposal relaxing resolution planning requirements.
As for Director Gruenberg, as of August 31, 2019, he had dissented from all four of the six proposals above that came before the FDIC (E-SLR, the “tailoring proposals,” and the resolution planning proposal). In addition, he dissented from the revision to the regulations implementing the Volcker Rule.
From these divisions, certain principles may be derived. Despite the dissents, there does seem to be agreement that most Dodd-Frank reforms that relate to G-SIBs are appropriate. No member of the Federal Reserve or FDIC has sought a material reduction in the capitalization of the nation’s largest, most complex banks. The changes to the E-SLR may appear to be an exception, but here the debate is best seen as whether the E-SLR should be a backstop to the risk-based capital rules, or whether it should continue to be—as it was for half of the U.S. G-SIBs at the holding company level and all of their lead bank subsidiaries—the binding constraint. This debate has always followed use of the leverage ratio and is not new. It turns on two positions: (1) if the leverage ratio is the binding constraint, whether that encourages more risk-taking, versus (2) whether risk-based capital ratios are truly trustworthy. According to staff data, the recalibration of the E-SLR will not materially reduce capital at G-SIB holding companies, but it will result in a $121 billion reduction in capital at their lead bank subsidiaries. As of June 30, 2019, however, those lead banks’ traditional leverage ratios were anywhere from 132 to 840 basis points above well-capitalized.
A second exception could be Governor Brainard’s dissent on setting the CCB at zero; however, it is possible here that the Federal Reserve’s position will change. Vice Chair Quarles has recently spoken positively of the CCB; therefore, it may return at a percentage higher than 0 percent when or after the Federal Reserve finalizes its stress capital buffer regulations. Setting the CCB at a higher percentage should mean more G-SIB capital.
Third, the revisions to the Volcker regulations benefit G-SIBs, but Director Gruenberg’s dissent leaves out the principal weakness of the original version, which is its refusal to define in any meaningful way the very activity that the Volcker Rule proscribes: trading undertaken with short-term intent. The dissent also ignores that a substantial amount of trading activity beyond the Market Risk Capital Rule prong is caught by the new regulation’s nonstatutory “dealer” prong, which was not revised. To run with former Federal Reserve Chairman Volcker’s analogy to obscenity, the essence of the new Volcker regulations is that they have freed only certain National Geographics from being required to be wrapped in a regulatory brown paper bag.
Where the debate between the Quarles and Brainard-Gruenberg positions seems to focus is on the rules for institutions above $100 billion in assets and below the range of the G-SIBs. It is there that Governor Brainard has been vocal, criticizing the reduction in the liquidity coverage ratio (LCR) and AOCI capital requirement opt-out for banks with between $250 billion and $700 billion in assets, as well as the elimination of the LCR for banks with assets between $100 billion and $250 billion. In two, public dissenting statements, she referred to the effects of the Washington Mutual failure ($300 billion) and two distress acquisitions of banks in the $100 to $250 billion range during the 2008 financial crisis as among the reasons for her “no” vote. She further contended that the 2008 financial crisis reduced the number of banks that could acquire such large competitors and thus raised the specter of a future depletion of the Deposit Insurance Fund. On this point, Director Gruenberg has also agreed. In addition, by voting against the revisions to the Volcker Rule, Director Gruenberg opposed the tailored regulatory relief the new regulation provides to banks without significant trading assets and liabilities—non-G-SIBs to be sure.
The response to these concerns from Vice Chair Quarles is that the recalibration is modest and must be judged with respect to the totality of existing regulation. For example, with respect to the domestic tailoring proposal, Vice Chair Quarles stated:
But liquidity risk still exists for firms [between $100 billion and $250 billion] and, accordingly, liquidity requirements would not disappear altogether. The firms’ internal liquidity stress testing, risk management, and reporting requirements would continue . . . .For capital, these firms would move to a two-year cycle for supervisory stress testing . . . .
The total amount of capital maintained by large bank holding companies that are subject to stress testing requirements is currently about $1.3 trillion. The cumulative effect of the proposed changes we are considering today would result in a decrease of $8 billion of required capital, or a change of 0.6 percent.
On the liquidity side, the same set of firms maintains approximately $3.1 trillion of high quality liquid assets. The cumulative effect of the proposed changes, would be a reduction of between 2 to 2.5 percent of high quality liquid assets, depending on where the final rule lands in the proposed 70-85% range.
Similarly, on the elimination of the qualitative objection to stress testing, he commented:
[E]xamination work would continue on a year-round basis, taking into account the firm’s management of other financial risks, and culminating in a rating of the firm's capital position and planning. Firms with deficient practices would receive supervisory findings through the examination process, and would be at risk of a ratings downgrade or enforcement action . . . .
Focusing on banks in the $100 billion to $700 billion range, it seems that the debate, therefore, is over the right amount of regulatory “deterrence” to prevent another Washington Mutual or similar failure. This, of course, is a matter of judgment, and an answer to this debate will come only in a situation of material distress. It is nonetheless interesting to note that Vice Chair Quarles’ claimed effects of the U.S. domestic tailoring proposal on reductions in capital and liquidity are not material in either case.
Also relevant to the debate is the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCPA), which passed Congress with bipartisan support. The Quarles versus Brainard/Gruenberg debate extends to whether the tailoring proposals are appropriately consistent with the statute. By retaining the original Dodd-Frank concept of tailoring, but raising the threshold of mandatory enhanced prudential standards to $250 billion and discretionary standards to $100 billion, Congress intended that G-SIBs be treated differently from large- and medium-sized regional banks in some ways.
Dodd-Frank 2.0 is still not finally implemented, and the debate outlined in this article will undoubtedly continue. In addition, the 2020 election is underway, and bank regulation has not died as a significant issue. In particular, how the Quarles versus Brainard/Gruenberg debate is seen in light of the bipartisan statutory changes to Dodd-Frank made by EGRRCPA will be critical in the event there is a new president but no congressional appetite to strengthen bank regulation statutorily. If the current recalibration is viewed as a reasonable approach to implementing EGRRCPA, increasing requirements post-2020 will have a higher burden of justification.
 The Federal Reserve Board has not, at this writing, considered the new Volcker regulations.
 Martin J. Gruenberg, An Essential Post-Crisis Reform Should Not Be Weakened: The Enhanced Supplementary Leverage Capital Ratio, Remarks to the Peterson Institute for International Economics (Sept. 6, 2018).
 Based on call report information on the FDIC’s website.
 Vice Chair for Supervision Randal K. Quarles, Refining the Stress Capital Buffer, Speech at Program on International Financial Systems Conference, Frankfurt, Germany (Sept. 5, 2019).
 “You know it when you see it.” See Paul Volcker tells Senate: risky banking activity is like pornography, The Guardian, Feb 2, 2010.
 Statement on Proposals to Modify Enhanced Prudential Standards for Large Banking Organizations by Governor Lael Brainard (Oct. 31, 2018).
 See Statement by Director Martin J. Gruenberg, Meeting of the FDIC Board of Directors, Notice of Proposed Rulemaking on Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements (Nov. 20, 2018).
 See Vice Chairman for Supervision Randal K. Quarles, Statement on Proposals to Modify Enhanced Prudential Standards for Large Banking Organizations (Oct. 31, 2018) (emphasis added).
 Vice Chairman for Supervision Randal K. Quarles, A New Chapter in Stress Testing, Speech at the Brookings Institution (Nov. 9, 2018).