Recent election years have been busy ones in the world of financial regulatory policy, and 2024 promises to be no different. This year could be even busier given the large backlog of proposed rules and the fallout from the regional banking crisis of spring 2023.
Regulators will also continue to adapt to evolving innovations in cryptocurrencies and tokenization, as well as the contours of private credit markets. Here are several key issues worth watching.
Impact of the election year
It is commonly accepted that every branch of government slows down its pace of work during a presidential election year. Recently, the opposite has been true for financial regulation. The 201 final rules adopted in 2020 by major federal financial regulators were the most of any post-Dodd-Frank year and far outpaced previous non-election years: 2017 (95), 2018 (106), and 2019 (144).
This year seems poised to continue that trend, given the significant backlog of new rulemaking by regulators, particularly the Securities and Exchange Commission. The looming of highly uncertain elections—and thus uncertain political appointments—will likely prompt financial regulators to complete the policy work they want to see as part of their legacy.
We will be monitoring progress in July on the Basel III end-of-phase bank capital proposals from the Federal Reserve, the FDIC, and the Comptroller of the Currency, which would revise the capital regulatory framework for banks with more than $100 billion in assets. Comments The results are expected to be released on January 16, and the Fed is expected to finalize the rules this year.
We are also closely monitoring developments in the structure of the equity market and climate-related reporting requirements.
Challenges to Authority
Financial services regulators have embarked on an ambitious policy-making agenda in recent years. The industry has filed Numerous lawsuits have been filed against regulators, arguing that the reforms lacked proper cost-benefit analyses and exceeded legal authority, and that regulators gamed the rule-making process.
Many of these cases will be heard in 2024 and could reshape the regulatory process, either by placing greater emphasis on statutory standards and cost-benefit analysis – thereby limiting the risk of litigation over future reforms – or by leaving a confusing landscape. Notably, five cases that could have significant ramifications for financial regulators will be heard or decided by the Supreme Court in 2024.
Supervision of agency heads
Regardless of how the lawsuits are resolved, the Capitol will likely continue to scrutinize agency leaders. While it is common for the non-presidential party to challenge the actions of presidentially appointed regulators, oversight in 2024 could be bipartisan in some cases, such as workplace conduct at the Federal Deposit Insurance Corporation.
We expect pressure on Capitol Hill to intensify as we approach the election year and could potentially lead to policy or personnel changes.
Bank mergers
Bank funding conditions, the interest rate environment and the imposition of stricter regulations are also encouraging mergers between banks of all sizes, including regional banks.
Some argue that consolidating regional banks into national franchises is necessary to ensure competition with the world’s largest banks and, therefore, a healthy U.S. banking sector.
At the same time, banking regulators and the Justice Department are reviewing the criteria used to greenlight bank mergers. How regulators apply those criteria is a major issue.
Bank financing
The way banks finance themselves has changed over time. The Federal Reserve’s dramatic interest rate hikes and focus on uninsured deposits during the bank failures of spring 2023 are likely to change that again.
The SEC has begun the process of requiring the clearing of Treasury repos, a key funding mechanism, and the Federal Reserve’s emergency funding to banks through the Bank Term Funding Program expires in 2024 unless further action is taken.
Role of non-banking institutions
Since reforms adopted after the 2008 global financial crisis, the nonbank sector has tended to step in when tighter regulations or other factors force banks to scale back their activities. This trend has accelerated in recent years, with nonbank private credit providers playing an increasingly important role in commercial lending markets.
The coming year could test the resilience of this sector and, at the same time, banks and private credit funds will likely continue to develop mutually beneficial relationships as regulators play catch-up and try to learn more about this market.
Artificial intelligence
This could be the year when AI enters regulatory and statutory texts. leaders Many key regulatory agencies have already laid the groundwork for such action through public discourse on various potential implications of AI. The Financial Stability Oversight Committee focused heavily on AI in its recent 2023 report. annual report.
We will look at which aspects of AI the regulatory community prioritizes and how it balances the ever-present issue of promoting technological innovation and protecting against often unforeseen effects.
Crypto and Blockchain
Many thought crypto was a bubble that burst with the failure of FTX in November 2022. Many in the regulatory community were relieved, to be frank. But price of bitcoin pink around 160% by 2023, which reinvigorates crypto supporters.
The legislative and regulatory community will need to address these growing markets beyond the current enforcement-first mantra of agencies like the SEC. We will be watching as this unfolds and see whether the U.S. legal and regulatory system is helping or killing the U.S. digital asset industry.
In the blockchain space in general, there is increasing institutionalization, mainly in the area of tokenized payments and traditional assets such as stocks and bonds. We will see if this represents a permanent change in the technology and how it is used by incumbent and digitally native financial institutions.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author information
David L. Portilla is a partner in the Davis Polk financial institutions firm and advises U.S. and non-U.S. banking organizations on mergers and acquisitions regulatory, policy, enforcement and governance matters.
Gabe Rosenberg is a partner in the Davis Polk financial institutions firm, advising financial services, fintech and banking clients on SEC, CFTC, CFPB, Federal Reserve and OCC regulations.
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