6th November 2018

Fed Board invites comment on framework to match regulations for large banks with their risk profiles

The Federal Reserve Board has invited public comment on a framework that would more closely match the regulations for large banking organisations with their risk profiles. The changes would reduce compliance requirements for firms with less risk while maintaining more stringent requirements for firms with more risk.

The framework establishes four categories of standards for large banking organisations – those with more than $100bn in total consolidated assets. The proposals build on the Board's existing tailoring of its rules and would be consistent with changes from the Economic Growth, Regulatory Reform, and Consumer Protection Act.

The changes would significantly reduce regulatory compliance requirements for firms in the lowest risk category, modestly reduce requirements for firms in the next lowest risk category, and largely keep existing requirements in place for the largest and most complex firms in the highest risk categories.

Firms would be sorted into categories based on several factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, non-bank assets, and off-balance sheet exposure. Each factor reflects greater complexity and risk to a banking organisation, resulting in greater risk to the financial system and broader economy.

Firms in the lowest risk category – generally most domestic firms with $100bn to $250bn in total consolidated assets – would no longer be subject to standardised liquidity requirements. They would remain subject to firm-developed liquidity stress tests and regulatory liquidity risk management standards. Additionally, these firms would no longer be required to conduct company-run stress tests, and their supervisory stress tests would be moved to a two-year cycle, rather than annual. These reduced requirements would reflect the lower risk profile of these firms.

Firms in the next lowest risk category - generally those with $250bn or more in total consolidated assets, or material levels of the other risk factors, that are not global systemically important banking organisations (GSIBs) - would have their standardised liquidity requirements reduced to reflect their more stable funding profile but remain subject to a range of enhanced liquidity standards.

In addition, the firms would be required to conduct company-run stress tests on a two-year cycle, rather than semi-annually. The firms would remain subject to annual supervisory stress tests. Firms in the highest risk categories – including the GSIBs – would not see any changes to their capital or liquidity requirements.

Taken together, the Board estimates that the changes would result in a 0.6 per cent decrease in required capital and a reduction of 2.5 per cent of liquid assets for all US banking firms with assets of $100bn or more. A separate tailoring proposal affecting foreign banks will be released in the future. The deadline for comments is 22nd January, 2019.