A proposed rule to implement a 2018 financial regulatory relief law requirement to tailor prudential standards for large banking firms according to risk is slated for publication Thursday in the Federal Register. Comments are due Jan. 22.
The proposed rule, issued Oct. 31 by the Federal Reserve Board on a vote of 3-1 (with Gov. Lael Brainard dissenting), would carry out the requirements of the 2018 Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA, S. 2155) and tailor other requirements that were put in place following the 2008 financial crisis.
Revising the Fed’s enhanced prudential standards rule, the proposal would apply to top-tier U.S. bank holding companies (BHCs) and certain savings and loan holding companies (SLHCs). It categorizes 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.
The proposal would modify the application of requirements relating to supervisory and company-run stress testing; liquidity risk management, stress testing, and buffer maintenance; risk committee and risk management; and single-counterparty credit limits.
Prudential standards would be applied to firms according to four risk categories, as follows:
Category I standards would apply to U.S. global systemically important banks (G-SIBs).
Category II standards would apply to firms with $700 billion or more in total consolidated assets or $75 billion or more in cross-jurisdictional activity, and that are not U.S. G-SIBs (that is, not subject to Category I standards).
Category III standards would apply to firms that are not subject to Category I or II standards and that have $250 billion or more in total consolidated assets or $75 billion or more in any of the following indicators: nonbank assets, weighted short-term wholesale funding, or off-balance-sheet exposures.
Category IV standards would apply to firms with at least $100 billion in total consolidated assets that do not meet any of the thresholds specified for Categories I through III.
To determine which firms are subject to the most stringent standards under Category I, the proposal would use the existing methodology under the Fed’s G-SIB surcharge rule. Applicability of the remaining sets of standards would depend on a firm’s level of specific risk-based indicators.
The Fed notes that this proposed rule, while revising only the enhanced prudential standards rule, also provides a framework to be used throughout the Fed Board’s prudential standards framework for large financial institutions. Concurrently with this proposal (which awaits publication in the Register), the Fed, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp. (FDIC) are separately proposing amendments to their capital and liquidity requirements – including the regulatory capital rule, liquidity coverage ratio (LCR) rule, and net stable funding ratio (NSFR) proposed rule – to introduce the same risk-based categories for tailoring standards. The Fed Board also plans to propose, at a later date, similar amendments to its capital plan rule.
Resolution planning requirements for firms with total consolidated assets in the range of $100 billion to $250 billion will be addressed in a future proposal, the Fed notes. “In connection with that process, the Board is working with the FDIC to amend their joint resolution plan rules to, among other things, adjust the scope and applicability of the resolution plan requirements for companies that remain subject to the resolution plan requirement.”