The Federal Reserve this week proposed the idea of easing regulations on larger financial institutions and announced it is seeking public comment on the issue.
The Fed has proposed four new tiers of regulation for banks with more than $100 billion in assets to ease compliance requirements for banks with less risk. According to the Fed, banks would be sorted into categories based on several factors, including asset size, cross jurisdictional activity, short-term wholesale funding reliance, nonbank assets, and off-balance sheet exposure.
The Fed explained that each factor shows varying degrees of complexity and risk to a banking organization and can result in a greater risk to the financial system and broader economy.
"The proposals 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," Fed Chair Jerome Powell said in a statement.
Here are the Fed's proposed guidelines:
Firms in the lowest risk category–generally most domestic firms with $100 billion to $250 billion in total consolidated assets–would no longer be subject to standardized liquidity requirements. They would remain subject to firm-developed liquidity stress tests and regulatory liquidity 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 the next lowest risk category–generally those with $250 billion or more in total consolidated assets, or material levels of the other risk factors, that are not global systemically important banking organizations (GSIBs)–would have their standardized liquidity requirements reduced to reflect their more stable funding profile 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–including the GSIBs–would not see any changes to their capital or liquidity requirements.
Taken together, the Board 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 all U.S. banking firms with assets of $100 billion or more.
The Federal Reserve has opened a public comment period for the proposal and will be accepting comments through January 22, 2019.
According to an article from Reuters, the move is a way to ease the burden on large commercial lenders that aren’t tied into large, “volatile” Wall Street businesses.
From the article:
Under the Fed proposal, midsized lenders including U.S. Bancorp, Capital One Financial Corp, PNC Financial Corp and Charles Schwab Corp would face lower liquidity and compliance requirements, and smaller banks would get even easier treatment.
The proposal stems from a law Congress passed in May that ordered the Fed to reduce regulatory burdens on community and regional lenders.