Tailoring of capital, liquidity rules for banks adopted on split vote

A final rule aimed at tailoring capital and liquidity for domestic and foreign banking organizations was adopted on a split vote Tuesday by the board of the federal insurer of bank deposits. It was one of two rules adopted by the board (both on split votes).

The Federal Deposit Insurance Corp. (FDIC) Board adopted the rule 3-1, with Board Member Martin Gruenberg voting no, that would tailor capital and liquidity regulations for size, complexity, and risk among large U.S. bank holding companies, U.S. intermediate holding companies of foreign banking organizations (U.S. IHCs), and certain depository institutions, the FDIC said in a release.

The final rule is being issued jointly with the other federal banking regulators, the Federal Reserve and the Office of the Comptroller of the Currency (OCC).

The rule establishes four risk-based categories for determining capital and liquidity requirements. Those are:

  • Category I: U.S. global systemically important banks (GSIBs) and their depository institution subsidiaries. The rule makes no changes to previous requirements; FDIC said these institutions remain subject to the most stringent standards.
  • Category II: U.S. banking organizations with $700 billion or more in total consolidated assets; or $75 billion or more in cross-jurisdictional activity; or those do not meet the criteria for category I.
  • Category III: U.S. banking organizations with $250 billion or more in total consolidated assets; or $75 billion or more in weighted short-term wholesale funding, nonbank assets, or off-balance sheet exposure; or those that do not meet the criteria for categories I or II.
  • Category IV: U.S. banking organizations with $100 billion or more in total consolidated assets; or those do not meet the criteria for categories I, II or III.

The FDIC said requirements for categories II-IV banking firms (that is, all other banking organizations with $100 billion or more in total consolidated assets) will be based on each firm’s size, complexity, and risk profile. The agency also said banking organizations are categorized based on five risk-based indicators: total assets, cross-jurisdictional activity, short-term wholesale funding, nonbank assets, and off-balance-sheet exposure.

The agency said capital requirements for firms in categories I and II remain unchanged and that these firms remain subject to the full 100% liquidity coverage ratio (LCR). Banks in category III that rely on large amounts of short-term wholesale funding would also remain subject to existing capital requirements.

The remaining category III banks would be subject to a reduced LCR, the FDIC said, but would be required to maintain strong reserves of liquid assets. The final rule sets this requirement at 85% of the full LCR, at the top of the proposed range of 70% to 85%, the agency said.

Category IV banks would no longer generally be subject to standardized liquidity standards under the final rule, FDIC said, but would continue to be subject to liquidity stress-testing and liquidity risk management requirements at the holding company level. The agency estimated that the aggregate liquidity impact is about a 2% reduction in minimum required liquidity for domestic and foreign banking organizations with more than $100 billion in assets.

The FDIC also asserted that the cumulative impact on capital for categories III and IV firms “is immaterial,” with an estimated total decrease of less than 1%. “However, the elimination of the advanced approaches framework for these firms will meaningfully reduce their compliance burden without sacrificing capital adequacy,” the agency said.

It added that “because of their smaller size and lower risk profiles, the liquidity requirements for Category III and IV banking organizations are tailored based on certain factors. For example, if Category III firms do not rely on short-term wholesale funding, they are subject to a reduced LCR requirement.”

FDIC Board Chairman Jelena McWilliams, in a statement, said the rule “represents meaningful and appropriate tailoring to capital and liquidity standards while ensuring that the largest, most systemically important banks remain subject to the most rigorous requirements.” She said the regulation strikes “an appropriate balance” that ensures the largest banks have sufficient liquid assets to withstand periods of stress while taking into account the potential broader market impacts.

Board Member Gruenberg, by contrast, said he saw no reason to “weaken” existing liquidity requirements “at this time” and explained that was behind his lone vote against the change.

“A consequence of the revised framework would be to reduce significantly the liquidity requirements for banking organizations with assets between $100 billion and $700 billion,” Gruenberg said. “This would unnecessarily weaken a central post-crisis prudential protection for the financial system and place the Deposit Insurance Fund at greater risk.”

Final Rule on Tailoring Capital and Liquidity Rule for Domestic and Foreign Banking Organizations

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