Expect Bank Deregulation to Take Place in Small Pieces of Legislation

As lawmakers begin to make moves on promised bank deregulation, Fitch Ratings is of the opinion that this will more likely take the form of many small bills targeting specific segments of the financial sector instead of an overarching piece of legislation.

“Broad and deep deregulation is generally viewed by Fitch as likely to have a negative impact from a bank credit risk perspective; however, the ultimate form of regulatory change and its application by individual banks will determine the ratings implication,” wrote Fitch analysts in a new report.

For instance, if the Volcker Rule is repealed, it’s still unlikely that banks will return to full-scale proprietary trading, yet it may lead to negative ratings implications that depend on banks’ response, Fitch analysts said. If the Orderly Liquidation Authority (OLA)—the Title II provision of the Dodd-Frank legislation that gives the Federal Deposit Insurance Corporation (FDIC) powers to carry out quick liquidations of large, complex financial companies—is taken away, it could open up the banking sector to “…significant systemic risk in the event of a crisis, though resolution planning could be a mitigating factor to large bank failures,” Fitch said.

Meanwhile, replacing the Consumer Financial Protection Bureau (CFPB) is not expected to directly affect most banks’ and nonfinancial institutions’ credit profiles, “…though they could reduce the regulatory burden and associated costs,” analysts said.

– Nicholas Stern, senior editor

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