The Federal Reserve Board [1] is planning to match the regulations for large banking organizations with their risk profiles.
In an invitation for public comment on this framework on Wednesday, The Fed said that the changes would reduce compliance requirements for banks with less risk while maintaining more stringent requirements for financial institutions that had higher risks.
"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," said Jerome H. Powell Chairman of the Federal Reserve.
Building on the Fed's existing tailoring of its rules and consistent with the changes from the Economic Growth, Regulatory Reform, and Consumer Protection Act, large banks with total consolidated assets of more than $100 billion would fall under four categories [2] under these new guidelines.
The biggest banks in the U.S. such as JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, State Street, and Northern Trust would fall under the first two categories. Banks under this category, according to the Fed are high risk and would not see any changes in regulations related to their capital or liquidity requirements.
Under the third category, financial institutions such as U.S. Bancorp, PNC Financial, Capital One, and Charles Schwab would have their standardized liquidity requirements reduced to reflect their more stable funding profile but remain subject to a range of enhanced liquidity standards. They would also be required to conduct company-run stress tests on a two-year cycle rather than semi-annually. However, they would remain subject to the annual supervisory stress tests.
A majority of banks in the U.S. fall under the fourth category, the lowest-risk one and would no longer be subjected to standardized liquidity requirements. While they would remain subject to firm-developed liquidity stress tests and regulatory liquidity risk management standards, 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 an annual one.
"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 K. Quarles Vice Chairman for Supervision at the Federal Reserve.
Hailing this move as a positive one, Jeb Hensarling, House Financial Committee Chairman, said that the new framework provided clarity to banks on regulatory requirements. "I wish the proposal went further but it represents a much-needed tailored approach to regulatory supervision.
To view the details of the Prudential Standards for Large Bank Holding Companies and Savings and Loan Holding Companies framework by the Fed, click here [3].