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Federal Reserve Board Open Meeting

Board of Governors of the Federal Reserve System

“Open Board Meeting”

Wednesday, October 31, 2018

Key Takeaways

  • Two proposals were approved for publication in the Federal Register, one for the proposed rule on Prudential Standards for Large Bank Holding Companies and Savings and Loan Holding Companies, and the other being the interagency proposal of changes to applicability thresholds for regulatory capital and liquidity requirements, both open for public comment until January 22, 2019.
  • The four categories for enhanced prudential standards for bank holding companies and depository savings and loan holding companies are:
    • Category I – applies to U.S. G-SIBs who have the greatest risk to financial stability;
    • Category II – applies to very large firms with significant international activity and have $700 billion or more in total consolidated assets or $75 billion or more in cross-jurisdictional activity;
    • Category III – applies to firms below Categories I and II and have $250 billion or more in total consolidated assets or $75 billion or more in nonbank assets, weighted short-term wholesale funding or off-balance sheet exposures; and
    • Category IV – applies to firms with at least $100 billion in total consolidated assets that do not meet the thresholds for Categories I-III.

Opening Statements

Chairman Jerome Powell

In his opening statement, Powell stated the proposals being considered would tailor prudential standards to match the overall risk profiles of regulated institutions, under authority granted by the adoption of S. 2155, which charged the Board with tailoring regulations for firms with less than $250 billion in assets. Powell noted that size is only one factor in evaluations of risk, adding that the proposals being considered would enhance the framework by introducing additional measures of risk. Powell said 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 the economy.

Vice Chairman for Supervision Randal Quarles

In his opening statement, Quarles stressed that the proposals “embody” the principle that “the character of regulation should match the character of a firm.” Quarles noted that thus far, the Board has accomplished this through “simple” sorting mechanisms of asset size and international exposure but has developed “more risk-sensitive proxies” that relate more directly to the interconnectedness and complexities of firms to determine how best to regulate them. Quarles discussed firms with total assets between $100-$250 billion, saying they “for the most part do not exhibit meaningful levels of complexity,” noting that under the proposals these firms would not be subject to the liquidity coverage ratio (LCR) and the proposed net stable funding ratio (NSFR), but would still be subject to internal liquidity stress testing, risk management, and reporting requirements. Quarles also noted these firms would no longer be subject to the statutory company-run stress testing requirements. For firms with more than $250 billion in assets that are not global systemically important banks (GSIBs), Quarles said the proposals “notably modify an important aspect of their standardized liquidity regulation,” modifying the LCR to calibrate at a level 70-85 percent of the full LCR.

Governor Lael Brainard

In her statement, Brainard said the proposals “go beyond the provisions of S. 2155 by relaxing regulatory requirements for domestic banking institutions that have assets in the $250 to $700 billion range and weaken the buffers that are core to the resilience of our system.” Brainard said the proposals offered “little benefit” to institutions or the overall financial system, adding that the compliance burden of the LCR is “relatively low.” She said “robust” liquidity buffers are essential to protect taxpayers, and the proposals would “reverse progress” made since the financial crisis.

Staff Presentation

Mike Gibson, Director, Program Direction, Division of Supervision and Regulation, introduced the proposals, saying the Federal Reserve’s proposals for enhanced prudential standards are based on risk profiles, consistent with S. 2155, which distinguish firms based on size and other factors. Gibson noted that different firms pose different risks, and stress on larger banks can do more harm than that on smaller banks, making a strong case for tailoring based on size. Gibson added that as the risk profiles of institutions change, so will their standards. Gibson said there are no changes to capital or liquidity requirements for U.S. global systemically important banks (GSIBs), which will remain subject to the strictest standards. The proposals include a reduction in requirements for institutions with $100-$250 billion in total assets, which Gibson called “substantial relief” and a meaningful reduction in compliance burdens.

Brian Chernoff, Senior Supervisory Financial Analyst, Capital and Regulatory Policy, Division of Supervision and Regulation, explained that there will be two separate Federal Register notices, one for the proposed rule on Prudential Standards for Large Bank Holding Companies and Savings and Loan Holding Companies, and the other the interagency proposal of changes to applicability thresholds for regulatory capital and liquidity requirements, both open for public comment until January 22, 2019. He explained that the proposals tailor capital, liquidity and other requirements based on a firm’s size, complexity and risk profile, consistent with S. 2155.

Chernoff then discussed the four categories for enhanced prudential standards for bank holding companies and depository savings and loan holding companies:

  • Category I – applies to U.S. G-SIBs who have the greatest risk to financial stability;
  • Category II – applies to very large firms with significant international activity and have $700 billion or more in total consolidated assets or $75 billion or more in cross-jurisdictional activity;
  • Category III – applies to firms below Categories I and II and have $250 billion or more in total consolidated assets or $75 billion or more in nonbank assets, weighted short-term wholesale funding or off-balance sheet exposures; and
  • Category IV – applies to firms with at least $100 billion in total consolidated assets that do not meet the thresholds for Categories I-III.

Asad Kudiya, Counsel, Banking Regulation & Policy Group, gave a deeper explanation of the different categories, focusing on Categories III and IV. Regarding Category III, he noted that the proposals modestly reduce the regulatory compliance for firms in the category while largely maintaining stress testing standards, and include generally applicable risk-based capital requirements, the U.S. leverage ratio, the supplementary leverage ratio (SLR), proposed net stable funding ratio (NSFR), and the countercyclical capital buffer. Regarding Category IV, Kudiya noted that firms would still have generally applicable risk-based capital requirements and the U.S. leverage ratio, but that the countercyclical capital buffer, SLR, LCR and NSFR will not be applied. He added that these firms will still have internal stress tests quarterly and continue to hold liquid assets in the amount equal to their needs under stress.

Vice Chair Clarida asked how the proposals fit into the Board’s previous work to tailor regulations. Kudiya explained the Board has a long-standing practice of ensuring regulations align with risk profiles, and the proposals build on work that has already been done. Kudiya noted the GSIBs are already subject to the strictest standards, and that would not change under the proposal.

The Board voted to approve notice of proposed rulemaking for public comment.

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