Regulators split on proposal to reduce thresholds for regulatory capital, liquidity

A proposal to reduce applicability thresholds for regulatory capital requirements and liquidity requirements for banks was issued for comment Tuesday by the Federal Deposit Insurance Corp. (FDIC) Board, but only after a split vote that included a “no” cast by the former chairman and outgoing member of the board.

Former Chairman (and current board member) Martin Gruenberg offered five points of concern with regard to the proposal, in explaining his vote against the proposal. He told the other board members that the proposal’s “risks are substantial, and in my view underappreciated.” (Gruenberg’s term on the board expires this month; he may continue to serve until a successor, nominated by President Donald Trump, is confirmed by the Senate.)

The proposal was issued for a comment period to end Jan. 22.

Gruenberg’s five points noted:

  • The liquidity coverage ratio is already tailored to the size, complexity, and risk profile of the covered firms; the current rule has yet to be tested through a full economic cycle.
  • The proposal “significantly underestimates” the liquidity risks posed by banking organizations with assets between $100 billion and $700 billion.
  • Risks posed by the failure of banking organizations with assets between $100 billion and $700 billion are substantial and, in his view, also underappreciated.
  • Provisions in the proposal for high quality liquid assets sufficient to provide a 30-day runway before failure for institutions with assets over $250 billion, and a 21-day runway for institutions with assets between $100 billion and $250 billion, “seem modest requirements given the risks associated with the failure of institutions of that size.”
  • Since the liquidity coverage ratio requirements took effect in January 2015, all covered firms have performed well. “As the FDIC has documented in its Quarterly Banking Profiles, all of the firms subject to the LCR and the modified LCR have experienced strong growth in net income and loan balances,” he said.

(In the 1-minute video, FDIC’s Martin Gruenberg outlines his objections, and his “no” vote, on a proposal to reduce capital and liquidity profiles for certain banks.)

The other three members of the board – Chairman Jelena McWilliams, Comptroller of the Currency Joseph Otting (participating by telephone) and Bureau of Consumer Financial Protection (BCFP, formerly known as the CFPB) Acting Director John (“Mick”) Mulvaney – voted in favor of the proposal.

McWilliams, in a statement she read at the board meeting, asserted that strengthening capital and liquidity requirements at systemically important banks was an essential response to the financial crisis. However, she said “it is essential that the agencies periodically evaluate regulations to make sure that these goals are achieved efficiently and effectively.”

She noted that the enactment this spring of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA, S. 2155) raised the asset threshold for the application of enhanced prudential standards to $250 billion. She added that the legislation gave the Federal Reserve Board the authority to apply enhanced standards to firms between with total consolidated assets between $100 billion and $250 billion under certain conditions.

“The proposal before us today would implement the Act by more finely tailoring the application of regulatory capital and liquidity requirements based on a banking organization’s size, risk profile and systemic footprint,” she said. “Our largest, most systemically important banks would continue to be subject to the most rigorous standards, and their smaller, less systemically important peers would be subject to standards tailored to their risk profile.”

McWilliams said that the proposal would continue to subject all institutions to robust capital requirements. She noted that banks with total consolidated assets above $100 billion would still be subject to the total risk-based capital ratio, the tier 1 risk-based capital ratio, the common equity tier 1 risk-based capital ratio, the tier 1 leverage ratio, and the capital conservation buffer, in addition to supervisory stress testing.

“Banks that qualify as Category III would also be subject to the countercyclical capital buffer and the supplementary leverage ratio, and the G-SIBs would additionally remain subject to the G-SIB surcharge, the enhanced supplementary leverage ratio, and the Total Loss Absorbing Capacity rule, among other heightened standards,” she said.

She also asserted:

  • The cumulative expected decrease in capital among banks with total consolidated assets above $100 billion is less than 1%;
  • The proposal recognizes that liquidity standards can be better tailored among institutions: banks that qualify as Category III institutions are not G-SIBs and generally present lower risk profiles than the largest, most complex banks (although those firms would still be subject to the full LCR if they overly rely on short-term wholesale funding, and would be subject to reduced LCR requirements regardless).
  • All firms subject to the rule would still be subject to – and would still need to hold sufficient highly liquid assets to satisfy – liquidity stress-testing and liquidity risk management requirements at the holding company level.

Statement by Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation, Notice of Proposed Rulemaking: Proposed changes to applicability thresholds for regulatory capital requirements and liquidity requirements

Statement by FDIC Board Member Martin J. Gruenberg, Meeting of the FDIC Board of Directors, Notice of Proposed Rulemaking on Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements