Banking and Finance Law Daily Fed, banking agencies, finalize tailoring of prudential standards
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Friday, October 11, 2019

Fed, banking agencies, finalize tailoring of prudential standards

By Colleen M. Svelnis, J.D.

The Fed has tailored prudential regulatory standards by modifying the assessments imposed on large holding companies consistent with the Economic Growth, Regulatory Relief and Consumer Protection Act.

The Federal Reserve Board has issued a final rule that revises the framework for application of prudential standards to U.S. and foreign banking organizations and would apply enhanced standards to certain large savings and loan holding companies. A second final rule, issued jointly by the Fed, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation, modifies the application of the agencies’ capital and liquidity rules. The changes tailor regulatory capital, stress testing, and liquidity regulations, are aimed at easing the compliance requirements for firms with less risk and are consistent with amendments made under section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). In addition, the Fed issued a Notice of Proposed Rulemaking that would adjust the amount charged to certain assessed companies for supervision and regulation to align with the revised tailoring framework prudential standards to institutions based on their risk profiles.

Senator Mike Crapo (R-Idaho), Chairman of the Senate Banking Committee and sponsor of EGRRCPA, applauded the Fed’s actions as "striking a more appropriate balance between preserving safety and soundness and tailoring regulations in a way that reflects a bank’s risk profile." According to Crapo, one of the primary purposes of EGRRCPA "was to spur economic growth by right-sizing regulations for financial institutions, including community banks and credit unions, midsized banks, and regional banks so they can redirect important financial resources to individuals, households and businesses."

Fed final rule. The Fed’s final rule revises the thresholds for application of prudential standards to large banking organizations and tailors the stringency of these standards based on the risk profiles of these firms. According to the notice, the Fed received approximately 50 comments on the proposals from U.S. and foreign banking organizations, public entities, public interest groups, private individuals, and other interested parties. The final rule revises the minimum asset threshold for state member banks to conduct stress tests, revises the frequency by which state member banks would be required to conduct stress tests, and removes the adverse scenario from the list of required scenarios in the Fed’s stress test rules. The final rule also makes conforming changes to the Fed’s Policy Statement on the Scenario Design Framework for Stress Testing.

The rule establishes risk-based categories for determining prudential standards for large U.S. banking organizations and foreign banking organizations. For U.S. banking organizations with $100 billion or more in total consolidated assets and foreign banking organizations with $100 billion or more in combined U.S. assets, the final rule establishes four categories of prudential standards based on several factors including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure.

The most stringent set of standards (Category I) applies to U.S. global systemically important holding companies (U.S. GSIBs) based on the methodology in the Board’s GSIB surcharge rule. The second set of standards, Category II standards, apply to U.S. banking organizations and foreign banking organizations that have $700 billion or more in total assets, or $75 billion or more in cross-jurisdictional activity, and that do not meet the criteria for Category I. In addition to being subject to current enhanced risk-management requirements, banking organizations subject to Category II standards are subject to annual supervisory stress testing and annual company-run stress testing requirements. The third set of standards, Category III standards, apply to U.S. banking organizations and foreign banking organizations that have $250 billion or more in total assets, or $75 billion or more in weighted short-term wholesale funding, nonbank assets, or off-balance sheet exposure, and that do not meet the criteria for Category I or II.

In addition to being subject to current enhanced risk management requirements, a banking organization subject to Category III standards is subject to annual supervisory stress testing. Under Category III, a banking organization is required to publicly disclose company-run test results every other year, rather than on an annual basis. The fourth category, Category IV standards, apply to U.S. banking organizations and foreign banking organizations that have at least $100 billion in total assets and that do not meet the criteria for Category I, II, or III, as applicable. Category IV standards align with the scale and complexity of these banking organizations but are less stringent than Category I, II, or III standards, which reflects the lower risk profile of these banking organizations relative to other banking organizations with $100 billion or more in total assets. A banking organization subject to Category IV standards is subject to supervisory stress testing every other year and is not required to conduct and publicly report the results of a company-run stress test.

Joint rule. The Fed’s final rules simplify earlier proposals by applying liquidity standards to a foreign bank’s U.S. intermediate holding company (IHC) based on the risk profile of that IHC, rather than on the combined U.S. operations of the foreign bank. For larger firms, the final rules apply standardized liquidity requirements "at the higher end of the range" that was originally proposed for both domestic and foreign banks. Along with the Fed, the FDIC and OCC combined to develop the regulatory capital and liquidity aspects of the rules.

Proposed rule. The Fed requested comments on its proposal to amend the Fed's assessment rule, Regulation TT. The proposed amendments would raise the minimum threshold for being considered an assessed company from $50 billion to $100 billion in total consolidated assets for bank holding companies and savings and loan holding companies. The proposed rule also would adjust the amount charged to assessed companies with between $100 billion and $250 billion in total consolidated assets to reflect changes in supervisory and regulatory responsibilities resulting from EGRRCPA. The proposal would align the assessment framework with the Board’s application of prudential standards based on banking organizations’ risk profiles. Comments are requested by Dec. 9, 2019.

Banking associations respond. American Bankers Association President and CEO Rob Thomas issued a statement thanking the agencies for their work and stated that tailoring regulatory requirements "improves supervision by allowing regulators to better allocate resources and focus on risks." Thomas also stated that the changes made "builds on what regulators and banks have together learned from several years of evolving these programs through actual experience." The ABA statement also noted that "We recognize that this is an ongoing process, and encourage the Fed to continue its efforts to identify ways to make regulatory requirements more clear, efficient and consistent."

Consumer Bankers Association President and CEO Richard Hunt also released a statement that "Since the financial crisis, the nation’s largest banks have more than doubled their capital levels and all passed annual stress tests. Regulations should be tailored for the strength of our banking industry and adjust as necessary to balance oversight with ensuring banks can continue meeting consumer needs, fostering economic growth and ensuring financial stability."

Companies: American Bankers Association; Consumer Bankers Association

MainStory: TopStory BankHolding BankingFinance BankingOperations CapitalBaselAccords DoddFrankAct FederalReserveSystem FedTracker FinancialStability PrudentialRegulation

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