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Federal Reserve Open Meeting on Tailoring and Resolution Planning

Federal Reserve Board of Governors

Open Meeting

Thursday, October 10, 2019

 Key Topics & Takeaways

  • Tailoring Rules: In a 4-1 vote, the Federal Reserve finalized rules to tailor regulations and sort firms into four categories based on risk indicators including total asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, non-bank assets and off-balance sheet exposure
  • Resolution Plans: In a 4-1 vote, the Federal Reserve approved a final rule to revise resolution planning requirements, establishing a two-year filing cycle for US GSIBs and three-year cycles for other institutions with over $250 billion in assets.

Federal Reserve Board

Opening Statements

Jerome Powell, Chair

In his opening statement, Powell said the Federal Reserve (Fed) was considering proposals to tailor enhanced prudential standards to match the overall risk profiles of large foreign and domestic banks. He said the actions being considered in the meeting are being applied with the discretion granted to the Fed by S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, which charged the Board with tailoring its regulations for firms with less than $250 billion in assets based on factors related to the risks a firm poses.

Powell noted that the final framework would be generally the same for domestic and foreign banks, commenting that this is the “fair thing to do” and it also helps U.S. banks when they compete abroad. He continued that several measures would be used to evaluate risk at banks, including size, cross-border activity and resilience to runnable funding. Powell emphasized that all of the Fed’s rules focus the toughest requirements on the largest and most complex firms.

Randal Quarles, Vice Chair for Supervision

In his opening statement, Quarles said he was pleased that in developing the final rules, the Fed was able to maintain its objective of a framework that more closely ties regulatory requirements to underlying risks in a way that does not compromise the strong resiliency gains made since the financial crisis. He noted three main sources of feedback to the Fed’s proposals: collaboration with the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC); written public comments and meetings; and peer regulators and supervisors.

Lael Brainard, Governor

Brainard did not offer opening remarks during the meeting, but her statement was published on the Fed’s website.

 Tailoring Rules

Staff Presentation

Staff gave a presentation of the draft final rules being considered to tailor prudential standards for large banking organizations and to amend assessment fees to align with the framework. They noted the substantial increase in quantity and quality of capital and liquidity since the financial crisis, and said the rules being considered today are part of ongoing efforts to improve the efficiency of the regulatory framework.

They explained that the final rules sort firms into four categories based on risk indicators including total asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, non-bank assets and off-balance sheet exposure. The four categories included:

  • Category I: U.S. global systemically important bank holding companies (GSIBs), which would remain subject to the most stringent standards;
  • Category II: firms with $700 billion or more in assets or cross-jurisdictional activity of $75 billion or more;
  • Category III: firms with $250 billion or more in assets or $100-250 billion in assets that meet one or more risk-based thresholds; and
  • Category IV: firms with $100-250 billion in assets that do not meet a risk-based threshold.

A visual guide to the requirements for each category was provided.

Staff said the same framework would apply to both foreign and domestic banks, with some tailoring based on the risk profiles of foreign banks’ U.S. operations.

Question and Answer

Powell asked about the potential of “cliff effects” for firms in the upper or lower limits of a category. Staff explained that the tailoring framework is intended to align requirements with risk profiles in a transparent way, and to encourage firms to lower their reliance on riskier types of funding. They added that the categories firms fit into are based on four-quarter averages of their risk profiles.

Brainard asked how the Fed would work with firms as they approach a new threshold. Staff answered that the four-quarter averaging is intended to give firms predictability and affords them a chance to understand the requirements.

Resolution Plan Rules

Staff Presentation

Staff presented on the final resolution plan rule, explaining that U.S. GSIBs would be required to submit resolution plans every two years, while other institutions would fall into three additional categories, each with a three-year filing cycle. Staff noted that firms falling into categories I, II or III under the tailoring rules (see above) would alternate full plan and targeted plan submissions, while an additional 53 foreign banking organizations with more than $250 billion global consolidated assets would be required to file a reduced plan every three years that only includes changes to a firm’s plan since its previous filing.

A visual guide to the requirements for each category was provided.

Question and Answer

Powell asked what information is excluded from targeted plan submissions. Staff answered that the targeted plans exclude information that remains “pretty static” from the full plans.

Governor Richard Clarida asked how the proposal fits with previous work on resolution plans. Staff noted that it maintains current practice for the largest banks while tailoring requirements for others based on the risks they pose to the market.

Final Statements and Votes

Governors Powell, Clarida, Quarles and Michelle Bowman all expressed their support for the final rules. Quarles commented that the rules are “very careful” in how they tailor regulation to actual risk with minimal impact on capital and liquidity.

Brainard spoke in opposition to the rules, arguing that they go beyond what was required by Congress in S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, and remove important capital requirements and weaken the liquidity coverage ratio requirement for the largest banks.

Both sets of rules were approved in 4-1 votes, with only Brainard dissenting.

For more information on this meeting, please click here.