U.S. proposal would be negative for banks: Moody’s

The recently introduced bill aims to reduce regulatory and supervisory requirements on U.S. banks, including a repeal of the orderly liquidation authority (OLA) to resolve systemically important banks, eliminate the Volcker Rule and curb the power of the Consumer Financial Protection Bureau (CFPB).

Dismantling the OLA would increase the likelihood of a disorderly wind-down of a failed systemically important bank with greater losses to creditors while also increasing the risk of bank bailouts, Moody’s warns.

Scrapping the Volcker Rule and curbing the CFPB would increase risk taking by banks, and this added risk would only be partly offset by improved profitability prospects, the report states.

“Changes to the CFPB could … add risk by lifting the regulatory scrutiny that has caused banks to scale back or eliminate some riskier consumer lending products,” the Moody’s report says. “More generally, weakened supervision and oversight create the potential for increased asset risk in the banking system.

“From a credit risk standpoint, the resulting uptick in credit costs and tail risks from increased risk-taking would outweigh the potential boost to bank profitability from reduced compliance expenses and new revenue opportunities,” the report concludes.

In addition, the proposed bill would lead to less robust capital supervision and stress testing that would also be a negative for the sector, the Moody’s report says.

The measures introduced under the Dodd-Frank reforms “have been successful tools in reducing the risk of bank failures, not only improving capital and placing beneficial restrictions on shareholder distributions,” the report states, “but, more importantly, stimulating vast improvements in banks’ internal risk management and capital planning processes.”

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