Federal Reserve Proposes Lighter Regulations for Mid-sized Banks

Oct 31, 2018 | News

The Federal Reserve announced a pair of proposals today that would significantly lighten the regulations on banks with assets between $100 billion and $250 billion while maintaining strict standards for the largest and riskiest banks.

The proposals were unveiled moments before a Federal Reserve meeting on Wednesday morning. Overall, the two proposals would mean a “0.6 percent decrease in required capital and a reduction of 2.5 percent of liquid assets for all U.S. banking firms with assets of $100 billion or more.”

A Federal Reserve press release stated that the proposals would expand the measure of risk by including not only asset size but also cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure.

In announcing the proposals, Federal Reserve Chairman Jerome Powell said that banks with less risk should be subject to less requirements. “The proposals before us would prescribe materially less stringent requirements on firms with less risk, while maintaining the most stringent requirements for firms that pose the greatest risks to the financial system and our economy,” Powell said. “And the proposals seek to maintain a middle ground for those firms that are clearly in the middle.”

Randal Quarles, Vice Chairman for Supervision at the Federal Reserve, also spoke in favor of the proposals saying that “these proposals embody an important principle: the character of regulation should match the character of a firm.”

The proposals would create four categories of risk for each bank with more than $100 billion in assets.

  1. Banks with assets between $100 billion and $250 billion;
  2. Banks with assets more than $250 billion that are not considered global systemically important banks(GSIB);
  3. Banks with assets more than $700 billion or more than $75 billion in cross-jurisdictional activity that are not considered GSIB; and
  4. Banks that are considered GSIB.

Banks in the first category (i.e. BB&T Corporation, SunTrust Banks, Inc., American Express, etc.) would not have to abide by the liquidity coverage ratio – a rule requiring banks to hold a portion of assets that could be easily converted to cash. In addition, these banks would not have to run internal stress tests, but would have to undergo supervisory stress tests every two years.

Banks in the second tier (i.e. Capital One, Charles Schwab, etc.) would see a reduced liquidity coverage ratio, which would provide these financial institutions more flexibility in how they invest their assets. These banks would have to run internal stress tests every two years, while undergoing supervisory stress tests annually.

Banks in the third tier (i.e. Northern Trust) would not see much change in regulatory standards. The liquidity coverage ratio would be reduced by 15 to 30 percent, but it would still be subject to annual internal and supervisory stress tests.

For banks in the fourth tier (i.e. JPMorgan Chase, Bank of America, etc.), the riskiest financial institutions, would see no regulatory changes.

The proposals have not been met without criticism. Federal Governor Lael Brainard argued that the proposals are inconsistent with the provisions laid out in the “Economic Growth, Regulatory Relief, and Consumer Protection Act” (i.e. S.2155) that was passed earlier this year.

“Unfortunately, the proposals under consideration go beyond the provisions of S.2155 by relaxing regulatory requirements for domestic banking institutions that have assets in the $250 to $700 billion range and weaken the buffers that are core to the resilience of our system,” said Brainard. “This raises the risk that American taxpayers again will be on the hook” if there is another financial crisis.

There has been a loud and vocal debate in Congress surrounding financial deregulation. Republicans have argued for less stringent regulations for mid-size banks. This culminated in a fairly bipartisan bill passed earlier this year, which has led to these proposals by the Federal Reserve. Before becoming official regulations, they must still go through an open comment period which ends January 22, 2019.

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