Chairman French Hill and the Republican members of the House Committee on Financial Services have written to Federal Reserve Vice Chair for Supervision Michelle Bowman, to Comptroller Jonathan Gould at the Office of the Comptroller of the Currency (OCC) and to Acting Chairman Travis Hill at the Federal Deposit Insurance Corporation (FDIC), urging them to withdraw four supervisory guidance documents.

Those documents include leveraged lending guidance, model risk management guidance, third-party risk management guidance, and the OCC’s venture funding bulletin.

These committee members state in the latter that “rescission of these directives would align with the goals laid out in President Trump’s Executive Order 14219 by directing the repeal of unlawful regulations.”

They contend that these guidance documents “reflect poor policy by materially hindering US economic growth and our national security,” and they seek immediate recission of them.

Guidance details

Leveraged lending

The GOP committee members point to guidance in 2013 and related FAQs issued in 2014 that restricted the ability of banking organizations to originate, arrange, or hold leveraged loans, or loans to corporate borrowers with high leverage levels, usually for the purpose of financing a merger, acquisition, or expansion.

“These companies traditionally are particularly reliant on bank credit, as they do not have credit ratings or an established earnings history. However, once financed, they are a potent source of economic growth,” the letter notes.

The guidance should be voided, the lawmakers contend, because after a decade of analysis, “it has made bank credit more difficult to obtain and has been an ineffective means of managing the risks related to truly highly leveraged loans.”

Model risk management

In 2011, the OCC and the Fed jointly issued guidance on model risk management, and the FDIC adopted it in 2017.

“The guidance was originally focused on models that produce quantitative outputs key to a banking organization’s financial condition (e.g., underwriting, valuing exposures, and determining capital and reserve adequacy). However, since its issuance, agency examiners have required all models on a wide range of topics to be developed in accordance with government-mandated processes,” the letter writers point out.

And the agencies have even required “non-models” to adhere to the guidance, the letter authors contend.

“Banks with different risk portfolios should not be subjected to a one-size-fits-all approach. Furthermore, except for financial reporting and capital adequacy, the majority of models and non-models used by banks pose no material financial risk and should not be the concern of examiners,” the letter states.

Venture funding

The lawmakers also cite the bulletin from November 2023 issued by President Biden’s acting comptroller, Michael Hsu, which “discourage[ed] banks and certain other OCC-supervised institutions from making venture loans to companies in an early, expansion, or late stage of development.”

The bulletin question states that “venture loans originated with a non-pass risk rating are inconsistent with safe and sound lending standards,” which “effectively bar[s] a bank from making them regardless of the bank’s underwriting process or reserving policies.”

The writers state that this prohibition also contradicts the OCC’s definition of “non-pass loans,” or loans that “do not expose an institution to sufficient risk to warrant adverse classification.”

The lawmakers say that “while this was classified as a bulletin, it has been enforced by OCC examiners as a binding rule.” And the results of it becoming a mandate have diminished the availability of credit to small businesses and early-stage companies.

Third-party risk management

The committee members also refer to a June 2023 piece of interagency guidance on third-party risk management, which they contend has moved from being pure guidance to “a binding set of requirements, with significant compliance costs for banking organizations.”

They point to community banks’ concerns about the guidance, namely, that “it is not appropriately tailored, imposing the same complex documentation and oversight standards expected of the largest financial institutions”

They reference Federal Reserve Governor Michelle Bowman’s dissenting opinion at the time the guidance was issued when she said it does not provide “clear, usable, and more appropriately tailored expectations for small banks.”

“The guidance has also been criticized for creating a chilling effect on partnerships between banks and fintech firms, payments companies, and other third-party providers,” the letter states. This could cause banks to avoid some or all third-party relationships, which would limit access to financial products and services, they note, referencing statements made by former FDIC Chair Jelena McWilliams in 2023.

The committee members also say each of these guidance documents was not submitted to Congress and the General Accounting Office for review prior to taking effect, in contravention of the CRA.

Community banks, general regulatory easing

Last month, US Treasury Department Secretary Scott Bessent said in a speech that instead of fostering a regulatory regime that fosters the very institutions servicing  everyday lenders (which he calls “Main Street” versus “Wall Street”) “the post-crisis regulatory framework has instead become a threat to the community bank model.”

Bessent outlined what the banking agencies in the Trump administration have already done to ease the burden on these smaller lenders.

He mentioned how Comptroller Gould has “reduced assessments on smaller banks by 30 percent, reversed the plan to merge community bank supervision into large bank supervision, and replaced community banks’ formulaic examination schedules with a more risk-based approach.”

For her part, Federal Reserve Vice Chair Michelle Bowman in June advocated for creating a Community Bank Leverage Ratio that would reduce the current 9% minimum to 8% to make the framework more attractive and to provide more regulatory relief.

If the ratio were lowered, more community banks could adopt it, and eligible firms would have more balance sheet capacity for lending, she has stated.

And in a well-publicized move, the FDIC and OCC have proposed a rule that would codify the recently adopted prohibition on using reputation risk as a basis for an adverse supervisory action (or even criticism) against an institution.

In other words, the regulatory agencies could not require a bank to terminate business with someone “based on political, social, cultural, or religious views, protected speech, or lawful but “politically disfavored” activities perceived to pose a reputation risk.”

Finally, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) recently released FAQs to address some aspects of Bank Secrecy Act/Anti-Money Laundering obligations that banks and other covered firms face to eliminate any requirement that they document a decision not to file a suspicious activity report.  

Even if these guidance documents are indeed rescinded, it’s not a signal by banking authorities to businesses to relax core controls.

Risk assessments should continue to drive monitoring and due diligence processes over transactions, accounting, data security, people and the like. In other words, there could be a policy pivot toward making compliance program elements more streamlined, but there is no reason to believe there will be leniency when baseline risk controls are inferior or untested.