Regionals, Big Banks Raise Fears on Slew of Fed Rules

WASHINGTON — A collection of regional and large banks are pushing the Federal Reserve Board to make changes to a slew of proposed regulations governing stress tests, capital and liquidity requirements.

In 90 comment letters, bankers argued that the central bank's 173-page proposal implementing sections 165 and 166 of the Dodd-Frank Act went too far and needed to be significantly reworked before it is finalized.

"Some parts of the proposed rules … do more harm than good, potentially contributing to systemic risk rather than mitigating it and having an adverse impact on banking institutions' customers and the broader economy," wrote Timothy Sloan, senior executive vice president and chief finance officer for Wells Fargo & Co.

The proposal, which was released just a few days shy of Christmas Eve, will apply to all bank holding companies with more than $50 billion of assets as well as nonbank financial firms designated as systemically important by the Financial Stability Oversight Council.

But many bankers complained the proposed standards treated all institutions in that bucket similarly, instead of recognizing the difference between the largest institutions and smaller big-size ones.

Capital Requirements
Banks protested part of the plan which calls for a risk-based capital surcharge for systemically important firms.

Under an international agreement by the Basel Committee on Banking Supervision, the eight largest banks will face a surcharge of between 1% to 2.5%.

But the Fed has said that all banks with more than $50 billion of assets are expected to eventually face a "modest" surcharge.

Banks complained the proposal left key details of the surcharge unspecified, including exactly how much banks would be charged. Instead, the plan reiterated the same principles used by the Basel Committee, which cites factors including size, interconnectedness and potential systemic risk.

"The inability of a bank to estimate its surcharge with any accuracy frustrates management's ability to make fundamental business decisions on an informed basis and creates uncertainty regarding the amount of capital that must be held," The Clearing House, Financial Services Roundtable, Financial Services Forum, SIFMA and ABA wrote in a joint 161-page letter.

Industry representatives said that firms would be forced to hold higher amounts of capital in the form of an "uncertainty surcharge."

"Although this result may seem to some like an acceptable, or even desirable, regulatory outcome, capital is not free, and the incidence of the costs of holding more capital than is necessary or appropriate will not fall solely on the banks, but also on customers of the banks and the greater economy," according to the trade group's joint letter.

Separately, firms also made the case that Congress never intended for "more stringent" requirements to be in the form of a capital surcharge or even higher-capital ratios.

Other firms went further making the case that other tools by regulators were much more efficient than an additional capital cushion.

"We believe that robust recovery and resolution planning may ultimately better address supervisory concerns than a specific capital surcharge, particularly with respect to custody banks," Stefan Gavell, executive vice president and head of regulatory and industry affairs of State Street Corp. wrote.

But not everyone agreed that regulators should ditch plans to ask banks to carry more capital.

"Community banks do not want to see a repeat of the 2008 financial meltdown when our largest banks were bailed out at taxpayer's expense largely because they undercapitalized, overleveraged and engaging in risky activities that put our entire economic system at risk," Christopher Cole, senior vice president and senior regulatory counsel for the Independent Community Bankers of America wrote.

Liquidity
Banks offered a host of concerns with the Fed's proposed liquidity requirements, ranging from how often banks must perform a liquidity stress test to certain definitions, including "highly liquid assets."

Several banks said that regulators' plan to require liquidity stress testing on a monthly basis was "excessive." Rather, banks suggested that firms should be required to produce such tests only twice a year.

"Multi-scenario liquidity stress testing should be conducted semiannually and should be supplemented by monitoring the liquidity positions of the firm through management of established metrics, which should utilize consistently applied assumptions allowing for a prompt identification of negative trends," wrote Sloan of Wells Fargo .

Banks also argued that regulators should broaden the definition of "highly liquid assets" to include other items, such as borrowing capacity from the Federal Home Loan Banks.

"The requirement that the asset must have low credit and market risk inappropriately restricts the pool of assets that could be included in the liquidity buffer," wrote Sloan.

Under the Fed plan, banks must ensure their assets are diversified in meeting the liquidity requirement. Banks said that allowing more types of assets to count as "highly liquid" could help accomplish that goal.

Others raised the unlevel playing field among varying sized-institutions.

D. Scott Warman, executive vice president and treasurer for M&T Bank Corp. noted that the largest bank holding companies already meet Basel III's short-term liquidity buffer, while commercial banks still fall short.

The Fed, he stressed, should not take a one-size fits all approach and require all bank holding companies to meet the same criteria even if their riskiness differs.

"Requiring a community-based bank like M&T to follow the same regulatory criteria as a money center bank, a custody bank, or a broker/dealer seems to over-reach that which the Dodd-Frank Act intends to address," wrote Warman.

Stress Tests
Bankers heavily criticized the Fed's stress testing requirements, citing the central bank's lack of transparency in the models it uses to make assessments, the overlapping stress testing requirements from other federal banking agencies, a compressed schedule for conducting the testing, and the disclosure of results under certain scenarios.

Financial institutions have been persistent since the release of the latest stress results in March for the Fed to disclose the models it used to score each institution. Banks have been confused — and in some cases, angry — about the results because their internal models didn't match up with the central bank's calculations.

"The design of the Federal Reserve's models, techniques and underlying assumptions that are used as part of the capital plan approval process should be transparent and subject to consultation and input before adoption and implementation," Barry Zubrow, executive vice president of corporate and regulatory affairs for JPMorgan Chase & Co. wrote. "Understanding the Federal Reserve's models and assessment process would enable banks to more effectively plan their capital actions requests given that the Federal Reserve's capital plan rule dictates a binary outcome." Firms also cautioned against duplicative efforts by other banking regulators like the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. to stress test institutions. If not coordinated, multiple overlapping stress test requirements would be burdensome on the individual institution, they argued.

Additionally, firms asked for more time to prepare for yearly stress tests, requesting that regulators provide supervisory stress scenarios and model-related information by Oct. 15 each year. Under the current plan, banks would only have six weeks to complete robust testing, which also overlaps with normal year-end financial closing activities.

Banks also urged regulators to strike a balance in how much information they disclosed under the stress tests.

"We encourage the Federal Reserve Board to carefully consider the substance and timing of the associated disclosures, given market sensitivity to and potential misuse of this information," in an unsigned letter by Goldman Sachs.

Under the proposal, banks would be required to publish the results under all scenarios, a troublesome notion for firms, since it could help to provide long-range earnings guidance.

That concern was shared by even smaller-sized institutions.

"Cullen/Frost also believes the required disclosures, particularly the disclosure of baseline scenarios for a nine-quarter forward looking planning horizon are tantamount to forward-looking guidance," Phillip Green, group executive vice president and chief financial officer for $20.4 billion-asset Cullen/Frost Bankers Inc. "Cullen/Frost expects that analysts and investors will use the published information in formulating forecasts and expectations related to a company's results of operations."

Scott Parker, the chief financial officer of CIT Group, a bank holding company which provides commercial financing and other services, specifically called on the Fed to recognize and differentiate specialized assets, or risk inaccurate risk assessments.

"We believe that such a refinement would increase the accuracy of the risk assessment of these assets, and could be achieved without impairing the Board's desire for standardized tests," wrote Parker.