Reg-lite for small banks, higher capital for big banks: Minn. Fed TBTF plan

WASHINGTON — The Federal Reserve Bank of Minneapolis on Wednesday called for substantially higher capital for the largest banks while small institutions face a simpler, easier regulatory compliance scheme under a final plan designed to keep banks from being "too big to fail."

The final proposal largely mirrors the proposed plan that was published in November 2016. Both plans call for a 23.5% risk-weighted capital requirement for banks with more than $250 billion in assets; a certification process for the largest banks to be declared either capable of failure or subject to even higher capital standards; a 23.5% capital requirement for shadow banks with more than $50 billion in assets; and far fewer regulations on community banks.

Minneapolis Fed President Neel Kashkari said now is the time to pursue the goal of strengthening the banking system and preventing a downturn from having the same devastating effect as the 2008 financial crisis.

“With today’s strong economy, now is the perfect time to act to strengthen our financial system,” Kashkari said. “We must not wait, and we must not go backwards. If we wait until the next crisis to implement these reforms, it will be too late.”

Andrew Harrer/Bloomberg

The Minneapolis Fed held three public symposiums in Minneapolis and Washington over the course of 2016 and a request for public comments on the proposal after it was published. The banking industry has been unsurprisingly skeptical of the process, with few large banks sending representatives.

The main differences between the final proposal and the initial draft are that the latest version has a more detailed explanation of the regulatory rollbacks it would implement for community banks.

The final plan suggests that banks with less than $10 billion be subject to a much less complicated risk-based capital regime, akin to what was required in Basel I. The proposal would also limit bank regulators’ examinations of community banks to presume compliance, except in the case of a violation with a specific laws or regulation or if the regulator has “empirical evidence supporting a correlation with materially weaker bank conditions.”

Kashkari garnered significant amount of attention for his plan when it was first announced, in part because he declared that the efforts that regulators have put forth up to that time have not solved the "too big to fail" problem. Kashkari further maintained that the only viable solution to "too big to fail" would be to either break up the biggest banks or turn them into highly capitalized utilities.

Since President Trump’s inauguration, however, those policies have not gained traction. Trump’s nominee to chair the Federal Reserve Board of Governors, Jerome Powell, said during his nomination hearing that he did not think that the U.S. still had banks that were "too big to fail," citing the progress made since the crisis in stress testing, resolution planning, capital and liquidity at the largest banks.