A bill easing financial regulations for US small to mid-size banks is not likely to be a near-term ratings issue, but over time could have negative credit-profile implications for banks particularly as it relates to capitalization, liquidity, risk management and governance, Fitch Ratings says. Regulators have already signaled willingness to ease or modify regulations for less-complex banks; we view robust regulation as supportive of bank creditworthiness, therefore, broad-based legislative deregulation could be negative for ratings depending on how banks respond.

The Senate's bipartisan passage of a bill rolling back financial regulations, including easing capital requirements for smaller institutions and custody banks, potentially marks a key legislative step toward regulatory easing. The bill will now be sent to the House of Representatives where it is likely to face pressure for greater deregulation from the Republican majority. The extent of further deregulation that may be incorporated by the House remains unclear. The ability for the House to pass broad and deep deregulation may be mitigated by the need for bipartisan support as seen in the Senate.

The senate bill raises the systemically important financial institution threshold to $250 billion from $50 billion, reducing the number of banks subject to heightened regulatory oversight to 12 from 38, while still allowing regulators discretion to label banks with $100 billion-$250 billion in assets as systemically important. Banks above $250 billion in assets would not see much benefit from the bill passed by the Senate.

Trust and custody banks would marginally benefit from the potential carve out of central bank deposits to their supplementary leverage ratios, allowing for increased leverage. The Senate bill would also require US regulators to consider certain investment-grade municipal securities as high-quality liquid assets for liquidity coverage calculations.

Banks between $50 billion and $250 billion in assets may see some meaningful benefit, as mid-size lenders would see alleviated stress tests burdens and exemption from enhanced prudential standards. Banks with less than $10 billion in assets would be exempt from the Volcker rule restrictions on speculative trading, and banks originating less than 500 mortgages annually would be exempt from some of the record-keeping requirements of the Home Mortgage Disclosure Act. The Volcker rule exemption would not aid large banks, which must still demonstrate compliance with the rule.

Small and mid-tier banks may also see some relief in terms of high volatility commercial real estate (HVCRE) capital requirements. The Senate bill would change the capital treatment of HVCRE, which are currently subject to a 150% risk weight. Under the bill, the scope of loans considered HVCRE would be narrowed, allowing for a lower risk weight on some currently designated HVCRE exposures and potentially encouraging banks to increase their risk appetite for commercial real estate. Similar to the bill that passed the House last year (Financial CHOICE Act), the Senate bill would exempt small banks from complying with a host of capital rules, provided they meet or exceed a minimum leverage ratio.