Final rules on prudential standards and resolution plan requirements for large domestic and foreign banking organizations were approved on a split vote by the Federal Reserve Board Thursday; a third rule on assessments was also approved unanimously.
The votes of 4-1 on both the prudential standards and resolution planning final rules saw only Gov. Lael Brainard, in both cases, vote against issuing the final rules. All four members (Chair Jerome H. Powell, Vice Chair Richard Clarida, Vice Chair for Supervision Randal Quarles and Board Member Michelle Bowman) voted in favor of each of the three rules. Brainard joined in the affirmative for a final rule on assessments.
The final rule on prudential standards (which was largely the same as that proposed last year) will apply to top-tier U.S. bank holding companies (BHCs) and certain savings and loan holding companies (SLHCs). The rule 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.
It modifies 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. The Fed has suggested that the rule also provides a framework to be used throughout the Fed Board’s prudential standards framework for large financial institutions.
In a release, the Fed said the rule tailors regulations for domestic and foreign banks to more closely match their risk profiles. The Fed said the rules reduce compliance requirements for firms with less risk while maintaining the most stringent requirements for the largest and most complex banks.
“The rules establish a framework that sorts banks with $100 billion or more in total assets into four different categories based on several factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure,” the Fed said. “Significant levels of these factors result in risk and complexity to a bank and can in turn bring risk to the financial system and broader economy.”
The Fed said that the rules are “generally similar” to the proposals released for comment last year. It notes, however, that the final rules simplify the proposals by applying liquidity standards to a foreign bank’s U.S. intermediate holding company (IHC) based on the risk profile of the IHC, rather than on the combined U.S. operations of the foreign bank. “Additionally, for larger firms, the final rules apply standardized liquidity requirements at the higher end of the range that was proposed for both domestic and foreign banks,” the Fed said.
In voting against issuing the final rule, Brainard said it went beyond that required under last year’s regulatory relief legislation (the Economic Growth, Regulatory Relief and Consumer Protection Act [EGGRCPA, S.2155]) in that it weakens the safeguards “of the core of the (financial system) before they have been tested through a full cycle at a time when large banks are profitable and credit is ample.”
She said the final rule would reduce the liquidity coverage ratio (LCR) and remove an important capital requirement. “At this point late in the cycle, we shouldn’t be giving a green light to large banks to reduce the buffers they’ve worked so hard to build post-crisis – especially since capital is already coming down as planned payouts exceed earnings at many of the largest banks.”