Fed finishes overhaul of post-crisis supervisory regime

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WASHINGTON — The Federal Reserve Board on Thursday was set to finalize a host of changes to its post-crisis prudential standards that hew closely to proposals the central bank issued last fall and April.

The final rules most directly affect midsize and regional banks — with some changes for the largest institutions — easing requirements dealing with liquidity, living will submissions and the frequency of supervisory stress testing.

The Fed, which worked in conjunction with the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency on a subsection of the rule, largely approved the rules as proposed. However, one key changes included walking back a proposal allowing banks to change aspects of their living wills automatically.

Federal Reserve Vice Chairman for Supervision Randal Quarles said the final product benefited from feedback from banks and other stakeholders.

“We were able to maintain our objective from the proposals: developing a regulatory framework that more closely ties regulatory requirements to underlying risks, in a way that does not compromise the strong resiliency gains we have made since the financial crisis,” Quarles said in a prepared statement.

The rules were initially proposed as part of the regulators' obligations under the 2018 regulatory relief bill sponsored by Senate Banking Committee Chairman Mike Crapo. The Fed's primary task was to reconsider prudential standards for banks between $100 billion and $250 billion of assets.

The Fed then developed a four-tier methodology for the application of prudential standards for all banks over $100 billion of assets, placing banks in different categories based on size and riskiness. A related proposal also placed foreign-owned banking organizations and intermediate holding companies into categories tailored to their profile.

The most rigorous standards will apply to so-called Category 1 banks, which are the eight U.S.-based Global Systemically Important Banks: JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, BNY Mellon, State Street, Morgan Stanley and Goldman Sachs.

Those banks received virtually no relief in the plan and will continue to be subject to annual stress testing, the full Liquidity Coverage Ratio and biannual resolution plan submissions.

The next tier, Category 2, would apply to banks with more than $700 billion of assets or more than $75 billion in cross-jurisdictional assets. They will face all of their existing prudential requirements except those exclusively reserved for the G-SIBs, such as the enhanced supplementary leverage ratio and a special G-SIB capital surcharge.

Category 2 banks also would only have to submit resolution plans every three years. They would alternate between submitting full resolution plans and narrower, targeted resolution plans. Category 2 currently includes only Northern Trust.

Unlike banks in Categories 1 and 2, banks that fall into Categories 3 and 4 will see substantial regulatory relief.

Category 3 banks are those with more than $250 billion of assets or more than $75 billion in cross-jurisdictional assets, weighted short-term wholesale funding, or off-balance-sheet exposure.

Those banks would only undergo company-run stress testing every other year, could opt out of reporting other accumulated comprehensive income, and would be subject to a reduced Liquidity Coverage Ratio.

Category 3 banks would also only have to submit resolution plans every three years, alternating between full and targeted plans. Capital One, Charles Schwab, PNC, and U.S. Bancorp are the U.S.-based banks that fall into category 3.

Category 4 banks — those with between $100 and $250 billion of assets — enjoy the greatest relief under the final rules. Those banks would undergo supervisory stress tests every other year, and would only have to undergo liquidity stress tests quarterly rather than monthly.

Category 4 firms would not be subject to the Liquidity Coverage Ratio if the institution holds less than $50 billion in weighted short term wholesale funding. If they exceed $50 billion, Category 4 banks would be subject to a 50% LCR, though no firms in Category 4 currently exceed that threshold.

Category 4 firms would also not be required to submit resolution plans to the Fed and FDIC. The list of Category 4 firms are: Ally Financial, American Express, BB&T Corp., Citizens Financial, Discover, Fifth Third, Huntington, KeyCorp, M&T Bank, Regions Financial, SunTrust Inc. and Synchrony Financial.

Under the proposed rules, if banks wanted to change some aspect of their plan submissions, those changes would go into effect unless there was an affirmative objection by both the Fed and FDIC within six months. The final rule, however, does not allow the largest banks to request changes, and for the others, changes will only be allowed if the Fed and FDIC approve them.

Meanwhile, Fed Chairman Jerome Powell said that making the regulatory framework substantially the same for foreign banks operating in the U.S. was both fair and appropriate.

“U.S. regulators have a longstanding policy of treating foreign banks the same as we treat domestic banks. That is the fair thing to do,” Powell said in a prepared statement. “It also helps U.S. banks, because banking is a global business, and a level playing field at home helps to level the playing field for U.S. banks when they compete abroad.”

Gov. Lael Brainard cast the lone vote opposing the final rules, reiterating concerns she raised when the Fed proposed them.

She said the changes exceed the reg relief provided in the Crapo bill, and will lower capital and liquidity when the existing rules pose little constraint on banks’ ability to lend.

“Today’s actions go beyond what is required by law and weaken the safeguards at the core of the system before they have been tested through a full cycle,” Brainard said. “At a time when the large banks are profitable and providing ample credit, I see little benefit to the banks or the system from the proposed reduction in core resilience that would justify the increased risk to financial stability in the future.”

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Regulatory relief Liquidity requirements Living wills Regulatory reform LCR Regional banks Randal Quarles Jerome Powell Federal Reserve