WASHINGTON — The Federal Reserve Board's proposal Wednesday to revamp many aspects of its post-crisis regulatory framework was as much about what the central bank left out of the plan.
As expected, the biggest winners are regional banks with assets of $100 billion to $250 billion. The Fed sought to
Yet much of the post-crisis supervisory program was preserved. The framework for G-SIBs was virtually unchanged, while stress tests and other requirements are still a reality for all banks above $100 billion of assets.
Greg Baer, president and chief executive of the Bank Policy Institute, said the proposal does not go far enough, unnecessarily deferring larger conversations about the applicability of foreign banking organizations, stress testing and other matters for a later discussion.
“The proposal considers important factors beyond a bank’s asset size; however, it does not do enough to tailor regulations based on banks’ risk profiles,” Baer said. “It is disappointing that the proposal defers reforms for [Comprehensive Capital Analysis and Review] stress testing and delays any consideration of reform for foreign banking organizations. Moreover, it is worth noting that this proposal does not resolve significant problems with the underlying rules it seeks to tailor.”
Yet others said the Fed struck the right balance.
Karen Shaw Petrou, managing partner at Federal Financial Analytics, said the emphasis on reducing compliance burdens for regionals in the $100-$250 billion range was appropriate, particularly dropping superfluous requirements such as the "advanced approaches" modeling used to calibrate capital levels for smaller banks.
Petrou noted that the Fed's differentiating certain large banks from the largest systemically important institutions is an important distinction, giving the market a sign that a failure of a regional bank could be resolved by the Federal Deposit Insurance Corp. without much trouble.
The proposal was required as a result of the regulatory relief law enacted in May, which raised the initial $50 billion asset threshold for "systemically important financial institutions" in the 2010 Dodd-Frank Act to $250 billion. But the law also gave the Fed discretion to develop standards for banks above $100 billion of assets.
The Fed's plan, released in two parts Wednesday, would establish four separate buckets of rules for banks over $100 billion. Category IV banks would be those with assets of $100 billion to $250 billion; Category III banks are those with more than $250 billion of assets and that exceed certain risk thresholds; Category II firms are those with more than $700 billion of assets or more than $75 billion of cross-border assets; and Category I banks would be made up of U.S. G-SIBs.
Those categories bring with them differing enhanced prudential requirements, but the primary beneficiaries of the proposals are the category IV banks. Those institutions would only have to undergo biannual (rather than annual) public stress tests, and face less stringent liquidity requirements. The would also enjoy an exemption from the countercyclical capital buffer, and the ability to opt out of "accumulated other comprehensive income" reporting.
Category III banks also got significant relief, with the Fed adjusting the Advanced Approaches thresholds to exempt those institutions, and proposing to allow them to opt out of AOCI reporting. They would also have to maintain a lower Liquidity Coverage Ratio and Net Stable Funding Ratio, and only have to carry out biannual company-run stress tests.
Yet the only concession for Category I banks was that semiannual internal stress tests would be eliminated.
Initial reactions to the proposal were mixed. Several banking industry critics said the proposal went to far, a view shared by Fed Gov. Lael Brainard, who voted against the proposal during Wednesday’s open board meeting. In particular, Brainard said the rollback of the LCR, which she said imposed "relatively low" compliance burdens, for banks over $100 billion could put the financial system at greater risk.
“The crisis demonstrated clearly that robust liquidity buffers are critical to provide defenses against the distress and failure of large banking firms and to protect U.S. taxpayers,” Brainard said.
Marcus Stanley, policy director for Americans for Financial Reform,
“To me, any bank over $250 billion in size is a really big bank in our system that should be getting significant attention,” Stanley said. “Maybe not as much attention as the G-SIBs, but we’ve created a space where you can sort of be over $250 billion and you’re just going to have a ton of headroom.”
David Portilla, a partner at Debevoise & Plimpton and former Treasury official, said that the scrutiny of the Fed’s proposal is in part an outgrowth of the Dodd-Frank reform law itself. Whereas the original Dodd-Frank Act required the Fed to apply enhanced prudential standards to banks over $50 billion, the new law enacted this year grants the agency even more discretion, and with that discretion will inevitably come some backlash.
“In some sense, as the Fed exercised more discretion, they probably opened themselves to different viewpoints as to whether they’ve done that appropriately,” Portilla said. “Whenever an agency exercises discretion, there’s viewpoints on whether they’ve got it right or wrong, and I’m sure this will not be an exception to that rule.”
Some saw signs that the Fed may not be willing to go further to unwind its post-crisis regime.
Petrou said the omission of any mention of recalibrating the G-SIB surcharge, which some Republicans in Congress had urged the Fed to do, indicates what many have suspected for some time: the central bank has little appetite for regulatory rollbacks for the biggest banks.
“I think there may be very modest changes to the surcharge but I don’t expect structural changes to the U.S. rules for the G-SIBs or the U.S. operations of any foreign bank whose parent company is a G-SIB,” Petrou said. “They’re just united on that front.”
But Stanley said that the Fed has done other things in recent months that have benefited the G-SIBs, so it may be premature to say the agency won’t loosen their regulations eventually. The Fed’s proposal earlier this year to adjust the enhanced Supplementary Leverage Ratio, the effective dropping of a proposed rule on merchant banking and the deep freeze of a proposed rule on executive compensation have all benefited the largest banks, Stanley said.
“It’s not that the G-SIBs didn’t get anything,” Stanley said. “They just didn’t get anything today.”
