Proposals to ease enhanced prudential standards and tailor capital and liquidity rules to large banks’ risk profiles were released for comment Wednesday by the Federal Reserve Board on a vote of 3-1, with Fed Gov. Lael Brainard voting against the action.
The proposals, out for public comment until Jan. 22, would carry out the requirements of the 2018 Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA, S. 2155) and ease other requirements that were put in place following the 2008 financial crisis.
The framework establishes four categories of standards for banking organizations with more than $100 billion in total consolidated assets.
(In the two-minute video, Federal Reserve Board Chairman Jerome Powell, and Vice Chairman for Supervision Randal Quarles, discuss their views of the proposal.)
Fed Chairman Jerome (“Jay”) Powell said the proposals continue to take an institution’s size into account, but they introduce additional risk factors. The most stringent requirements would apply to “firms that pose the greatest risks to the financial system and our economy.” Vice Chairman for Supervision Randal Quarles said banking organizations would see a reduction in regulatory complexity and easier compliance, “with no material decline in the strength of the U.S. banking system.”
Brainard, acknowledging the work that went into the proposed rules, and noting much consultation with her colleagues in hopes of seeing proposed revisions that address EGRRCPA, said she finds the proposals go too far. She noted particular concern regarding a proposed change that would modify requirements for institutions with $250 billion to $700 billion in assets.
“Unfortunately, the proposals under consideration go beyond the provisions of S. 2155 by relaxing regulatory requirements for domestic banking institutions that have assets in the $250 to $700 billion range and weaken the buffers that are core to the resilience of our system,” Brainard said. “This raises the risk that American taxpayers again will be on the hook.”
(In the 30-second video, Gov. Brainard summarizes why she cannot support the proposal.)
Fed Vice Chairman Richard Clarida, attending his first open board meeting, voted with Powell and Quarles in supporting the proposals.
The Fed proposals categorize banking firms based on several factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. Each factor reflects greater complexity and risk to a banking organization, resulting in greater risk to the financial system and broader economy.
Firms in the lowest risk category – generally most domestic firms with $100 billion to $250 billion in total consolidated assets – would no longer be subject to standardized liquidity requirements. They would remain subject to firm-developed liquidity stress tests and regulatory liquidity risk management standards. Additionally, these firms would no longer be required to conduct company-run stress tests, and their supervisory stress tests would be moved to a two-year cycle, rather than annual. These reduced requirements would reflect the lower risk profile of these firms.
Firms in the next lowest risk category – generally those with $250 billion or more in total consolidated assets, or material levels of the other risk factors, that are not global systemically important banking organizations (GSIBs) – would have their standardized liquidity requirements reduced to reflect their more stable funding profile but remain subject to a range of enhanced liquidity standards. In addition, the firms would be required to conduct company-run stress tests on a two-year cycle, rather than semi-annually. The firms would remain subject to annual supervisory stress tests.
Firms in the highest risk categories – including the global systemically important banking organizations (GSIBs) – would not see any changes to their capital or liquidity requirements.
The Fed proposals include an appendix illustrating the proposed categories for capital and liquidity rule changes, and covered institutions based on second-quarter 2018 data, as follows:
Category I – U.S. GSIBs. Includes JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, State Street.
Category II – $700 billion or more in total assets; or $75 billion or more in cross-jurisdictional activity. Includes Northern Trust.
Category III – $250 billion or more in total assets; or $75 billion or more in nonbank assets, weighted short-term wholesale funding, or off-balance sheet exposure. Includes U.S. Bancorp, PNC Financial, Capital One, Charles Schwab.
Category IV – Other firms with $100 billion to $250 billion in total assets. BB&T Corp., SunTrust Inc., American Express, Ally Financial, Citizens Financial, Fifth Third, KeyCorp, Regions Financial, M&T Bank, Huntington, Discover.
Other firms – $50 billion to $100 billion in total assets. Includes Synchrony, Financial Comerica Inc., E*TRADE Financial, Silicon Valley Bank, NY Community Bancorp.
Taken together, the Board estimates that the changes would result in a 0.6 percent (an estimated $8 billion) decrease in required capital and a reduction of 2.5 percent of liquid assets for all U.S. banking firms with assets of $100 billion or more.
The regulatory capital and liquidity aspects of the proposals were jointly developed with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). A separate tailoring proposal affecting foreign banks will be released in the future, the Fed said.
Proposed changes to applicability thresholds for regulatory capital and liquidity requirements – developed by the Fed Board, OCC, and FDIC