The Federal Reserve has proposed a framework that ties the degree of regulatory scrutiny to amount of risk exposure of a bank. The proposal would reduce compliance rules for firms with less risk but would increase for firms with greater risk.
"The proposal 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," said Jerome. Powell, chairman of the Fed.
The framework establishes four categories of standards for large banking organizations--those with more than $100 billion in total consolidated assets. For instance, proposed categories could include Category I: Wells Fargo and Bank of America; Category II: Northern Trust; category III: Sun Trust and Fifth Third; Category IV: Silicon Valley and NY Community Bank. The Fed is accepting comments on the framework.
The changes would significantly reduce regulatory compliance requirements for firms in the lowest risk category, modestly reduce requirements for firms in the next lowest risk category, and keep, for the most part, existing requirements in place for the largest and most complex firms in the highest risk categories, according to the Fed.
"With these proposals, banking organizations will see reduced regulatory complexity and easier compliance with no material decline in the strength of the U.S. banking system," said Randal Quarles, vice chairman for supervision.
The factors that would determine the categories a bank is assigned to include: Asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets and off-balance sheet exposure. Each factor reflects greater complexity and risk to a banking organization, resulting in greater risk to the financial system and U.S. economy.
Firms in the lowest risk category-- most domestic firms with $100 billion to $250 billion in assets—wouldn’t be subject to standardized liquidity requirements. They would remain subject to liquidity stress tests and regulatory risk-management standards. Additionally, these firms would no longer be required to conduct company-run stress tests, and their supervisory stress tests would be moved to a two-year cycle, rather than annual. These reduced requirements would reflect the lower risk profile of these firms.
Firms in Category II--those with $250 billion or more in total consolidated assets, or material levels of other risk factors, but are not global systemically important banking organizations, would have their liquidity requirements reduced; but remain subject to a range of enhanced liquidity standards. In addition, the firms would be required to conduct company-run stress tests on a two-year cycle, rather than semi-annually. The firms would remain subject to annual supervisory stress tests.
Firms in the highest risk categories wouldn’t see any changes to their capital or liquidity requirements.
In sum, the Fed estimates that the changes would result in a 0.6 percent decrease in required capital and a reduction of 2.5 percent of liquid assets for U.S. banking firms with assets of $100 billion or more.
The regulatory capital and liquidity aspects of the proposals were jointly developed with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.
