Senators’ warning to Fed: Relief for midsize banks better be real
WASHINGTON — The recent regulatory relief law narrowed the definition of megabanks in the Federal Reserve's toughest supervisory tier, but also included a safety valve: The Fed can still maintain some prudential standards for smaller banks.
But now, lawmakers who advocated for regional banks to escape the Fed's reach worry that safety valve could be used too often, leaving institutions that were supposed to be the big winners in reg relief still weighed down by the post-crisis regime.
A group of seven senators, led by Sen. David Perdue, R-Ga., is planning to send the central bank a letter Friday morning outlining their concerns. They will urge the Fed to stand by the law's intent of subjecting only banks with systemic importance to the most rigorous supervisory procedures developed after the crisis.
Among their concerns is that the central bank may still apply stress test requirements broadly for banks with assets of $100 billion to $250 billion. In general, they suggested that the Fed target standards only for certain institutions in that middle tier, rather than viewing that whole category with a single lens.
"The Fed has consistently made representations to both Congress and the public that it has and will use its powers to tailor regulations to the appropriate risk profile," according to a copy of the letter obtained by American Banker, which the lawmakers addressed to Fed Vice Chairman for Supervision Randal Quarles. "Therefore, we urge you to tailor regulations for these financial companies and where your data indicates that they do not pose systemic risks, we strongly urge you to reduce regulations so that all non-systemic firms are treated accordingly."
The reg relief law's key provision was raising the asset threshold for banks considered "systemically important financial institutions" — the most demanding regulatory class — from $50 billion to $250 billion. But it also gave the Fed discretion to preserve certain standards for banks between $100 billion and $250 billion.
For its part, the Fed has won praise from the industry for many of its recent moves and statements, including steps to ease certain post-crisis capital standards for the biggest banks. Officials such as Quarles have sounded supportive of tailoring regulatory policy to a firm's risk profile.
But the senators said recent comments by Quarles and Fed Chairman Jerome Powell about implementing the new law "have concerned us."
"We are confused by your intent to continue to broadly apply comprehensive capital analysis and review (CCAR) stress tests and other enhanced supervision regulations designed for systemically important financial institutions on non-systemic financial companies," they wrote. "Congress did not ask the Fed to create a third layer of treatment between financial institutions above and below $100 billion in total assets."
Also signing the letter were Sens. Thom Tillis, R-N.C., Mike Rounds, R-S.D., Jerry Moran, R-Kan., James Inhofe, R-Okla., James Lankford, R-Okla., and Bill Cassidy, R-La.
In comments emailed to American Banker by a spokesperson, Perdue said the intent of the new law was for the Fed to make determinations about whether specific banks between $100 billion and $250 billion should still be subject to tougher standards.
“We are raising our concerns that Fed could overcomplicate what should be a simple assessment process," he said. "We made sure the Fed has discretion to keep banks under enhanced supervision if they see a threat to the financial system but we intended for this discretion to be applied on a bank-by-bank basis.”
The bill was a bipartisan compromise between Senate Banking Committee Chairman Mike Crapo, R-Idaho, and moderate Democrats. But the letter from Perdue, who also sits on the Banking Committee, could be indicative that Republicans in Congress will continue to sound the alarm about the post-crisis regulatory regime.
In a July speech, Quarles said "both risk-based and leverage capital requirements should remain core components of regulation for large firms with more than $100 billion in total assets" and "stress testing should continue to play an important role in assessing potential losses that large firms would suffer under a severely adverse economic scenario."
But he also noted cases where the Fed could ease banks' load. He said less complex firms, even some above the higher $250 billion threshold, may get a break in how often they submit company-run stress tests. Banks in the middle tier could see reforms in liquidity requirements, and have their resolution planning requirements scaled back or removed entirely.
"Most firms with total assets between $100 billion and $250 billion do not pose a high degree of resolvability risk, especially if they are less complex and less interconnected," he said.
But Powell previously indicated his support as well for stress testing of banks between $100 billion and $250 billion in assets.
“We do believe that supervisory stress-testing is probably the most successful regulatory innovation of the post-crisis era,” Powell said at a March Senate Banking Committee hearing. “We're strong believers in this tool, including for institutions of $100 billion to $250 billion.”
During the hearing, which occurred before the reg relief legislation passed the chamber, Powell said the Fed would likely create a framework for those banks.
“We'll be looking at all the institutions that — that are in that area and all the risks that might arise at banks between $250 billion and $100 billion, and — and we'll create a framework for assessing where systemic risk might be, where there might be regional risks,” Powell said.
The senators' letter also suggested that, besides taking a more granular approach to banks with between $100 and $250 billion in assets, the Fed should also use discretion in the reg relief law to exempt certain regional banks with more than $250 billion in assets from stricter regulatory scrutiny.
They argued, for example, that the liquidity coverage ratio should not be applied to non-systemically important regional banks the same way it is applied to "global systemically important banks" — also known as G-SIBs.
Fed data "also shows that regional financial companies with more than $250 billion assets are not systemic as well,” the lawmakers wrote. “The law provided the Fed with the ability and responsibility to tailor the regulations applied to these companies.”
One of the more contentious arguments around crafting the reg relief law was how it should be applied to foreign banks with substantial U.S. operations.
The letter said the Fed already requires those banks to establish intermediate holding companies, and that those companies should receive comparable treatment to U.S. banks of similar sizes and risk profiles.
"Appropriate and risk-sensitive regulation and supervision of international banks’ U.S. operations, which represent 20% of total U.S. banking system assets, will enhance their ability to provide vital credit and financial services to their clients and support U.S. economic growth," they wrote.
Industry groups, such as the American Bankers Association, are lauding the lawmakers' effort to help ensure that the Fed implements the new law in a manner that applies reg relief broadly.
“ABA has been a longtime advocate for tailoring regulation to a bank’s business model and risk profile, as opposed to relying on arbitrary asset thresholds — a principle now enshrined in law,” said Wayne Abernathy, the ABA’s executive vice president for financial institutions policy and regulatory affairs. “We look forward to learning more about the Federal Reserve’s plans to clarify the rules in this important area, and trust that regulators will consider lawmakers’ concerns.”