WASHINGTON — The Federal Reserve Board took more steps Monday to recalibrate its post-crisis supervisory program, proposing to adjust prudential standards for U.S. operations of large foreign banks and to relieve resolution planning requirements for both domestic and foreign banks.
The proposals to some extent parallel a Fed plan unveiled in October to tailor supervisory requirements for U.S. regional banks.
As with that earlier proposal for domestic-based institutions, the Fed proposed four new risk-based categories — with different degrees of corresponding requirements — for foreign banking giants' U.S. subsidiaries. A separate proposal issued jointly with the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. would alter U.S. capital and liquidity requirements for overseas banking companies.
Meanwhile, the resolution plan proposal, which the Fed wrote along with the FDIC, would likewise create risk-based categories for U.S. and foreign firms to determine corresponding requirements for submitting so-called living wills.
"The proposals seek to increase the efficiency of the firms without compromising the strong resiliency of the financial sector," Fed Vice Chair of Supervision Randal Quarles said at an open Fed board meeting. "These proposals are a good first step toward that goal, and I look forward to the input we will receive."
As a result of both the October proposal and the plan released Monday, the toughest regulatory category in the Fed's regime would remain the one reserved for the eight U.S.-based "global systemically important banks," or G-SIBs.
But just like central bank did for U.S. regional banks, the Fed has proposed new buckets for foreign banks' U.S. operations with smaller risk profiles. Firms with more than $700 billion of assets or more than $75 billion of cross-border assets would be in the second category; banks with more than $250 billion of U.S. assets or more than $75 billion in off-balance-sheet exposure would follow; the fourth category would consist of banks with assets of $100 billion to $250 billion.
Making up the last category, foreign banks with assets of $50 billion to $100 billion would also be subject to some liquidity requirements.
The October proposal for U.S. banks was largely mandated by the regulatory law enacted by Congress last spring. While lawmakers had not specifically required the central banks to alter foreign bank requirements, the plan released Monday was widely expected.
"Like the domestic tailoring proposal that the board and the other banking agencies considered several months ago, today’s proposals were formulated with a basic objective in mind: to match the character of regulation to the character of the firm," Quarles said.
But the Fed board did not act unanimously. Gov. Lael Brainard, who has emerged as a consistently dissenting voice on reg relief matters, opposed both the foreign bank supervision and resolution planning proposals. She said the Fed was going far beyond its congressional mandate.
“I see no change in the financial environment that would require us to weaken protections that are vital to a safe and sound financial system and ensure large banks — and not taxpayers — are on the hook,” she said.
The proposal leaves it somewhat uncertain in which risk-based category certain foreign firms would fall to determine their level of supervision. The Fed requested input from the public on whether financial institutions should be measured by U.S. assets or by cross-jurisdictional activity, which would determine if institutions like Barclays, Credit Suisse and Deutsche Bank are placed in the second or third category.
Banks in the third category — which would include HSBC, Royal Bank of Canada and UBS — would see reduced liquidity requirements under the "liquidity coverage ratio" and "net stable funding ratio."
But in some cases, the proposals would actually strengthen liquidity requirements for certain foreign firms. Currently, Credit Suisse and UBS are not subject to the LCR or NSFR, but under the Fed’s proposal all "intermediate holding companies" that house the U.S. operations of foreign firms would be subject to the requirements.
Fed staff estimated that total liquidity requirements for IHCs of foreign banking companies would rise between 0.5% and 4% in aggregate.
Yet the proposal steered clear of whether to add such liquidity requirements for U.S. "branches" of foreign banks; instead the Fed asked for public input on whether impose such requirements.
"Introducing this concept is novel in the realm of international regulation ... and I believe that we need robust public discourse — domestically and internationally — on its advantages and disadvantages," Quarles said.
But Brainard said the Fed should not delay subjecting those branches to the same requirements.
"While I am encouraged that [the proposal] would apply the LCR and net stable funding ratio requirements to the intermediate holding companies ... of foreign banks, today’s proposal does not address the important liquidity risks associated with the U.S. branch and agency networks of these firms," she said. "As we saw in the crisis, the U.S. branches of foreign banks can face important run risk during periods of stress."
The proposal drafted by both the Fed and FDIC to ease living will requirements would create similar risk-based categories to tailor resolution plan requirements for firms based mostly on size.
The first category would include all eight U.S. G-SIBs, which would be required to submit resolution plans every two years starting July 1, alternating between full and “targeted” plans.
A full living will would be the same comprehensive plans banks are used to filing today, while a targeted plan would only include the “core elements” of a full plan, such as capital and liquidity, as well as changes resulting from new regulatory policy or an information request by the agencies.
The second and third category of filers would be required to file living wills every three years, also alternating between full and targeted plans.
Other foreign banking organizations would be classified as “triennial reduced filers,” and would have to submit reduced-content plans every three years starting in 2022. Banks in a final category would no longer have any living will requirements.
“In the seven or so years of resolution plan submissions, we have seen substantial gains in both the resiliency and resolvability of large banking organizations and the broader financial system,” Quarles said.
However, Fed Gov. Lael Brainard said that while she supports some reduction in the frequency of filings, the proposal would go beyond the reg relief law "in ways that may weaken the resolution planning process for very large banking firms and leave the system less safe."
"Under the proposal, most domestic banking organizations in the range of $100 to $250 billion in assets are no longer required to file a resolution plan at all. For banks with $250 billion to $700 billion in assets, the proposal would require a full resolution plan only once every six years," she said. "Beyond that, the proposal would allow even the largest and most systemic firms to obtain a waiver for many elements of their resolution plan if only one agency fails to proactively disapprove the waiver request."
