11/14/18 - Promontory Currents: US Agencies Propose Updated Regulation of Large Banks
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11/14/18 - Promontory Currents: US Agencies Propose Updated Regulation of Large Banks

By Arthur Angulo and Miles Ravitz

On Oct. 31, the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp. invited comment on a proposed framework that would more closely match the regulations for large banking organizations — those with greater than $100 billion in assets — with their risk profiles.1 The proposal is a continuation of efforts to tailor the requirements applicable to large institutions and aligns with the provisions of the Economic Growth, Regulatory Relief, and Consumer Protection Act.

The proposal establishes a framework consisting of the following four categories of standards for large banking organizations:

  • Category I consists of U.S. global systemically important banks.
  • Category II consists of banks with over $700 billion in total assets or greater than $75 billion in cross-jurisdictional activity.
  • Category III consists of banks with greater than $250 billion in total assets or greater than $75 billion in nonbank assets, weighted short-term wholesale funding, or off-balance-sheet exposure.
  • Category IV consists of all other banks with between $100 billion and $200 billion in total assets.

Certain regulatory requirements would be progressively less stringent as one moves from category I to category IV. The key points of variation across the four categories include requirements for stress testing, risk-based capital, leverage capital, and liquidity risk management.2

The agencies’ proposal provides important insight into regulatory priorities and foreshadows future developments:

  • Regulators continue to hold U.S. G-SIBs to very high standards, as the proposal offers little relief for such firms.
  • The tailored requirements for application of the net stable-funding ratio may clear a path for the issuance of a final NSFR rule in the near future (the agencies issued a proposed rule on June 1, 2016).3  
  • The four categories as proposed will limit the number of banking organizations subject to the “advanced approaches” in calculating regulatory capital to the nine firms in categories I and II.
  • While the proposal does not apply to foreign banking organizations, including to a U.S. intermediate holding company of a foreign bank, the Federal Reserve intends to present a proposal “in the near future” on the applicable prudential standards for foreign banking organizations.
  • The Federal Reserve and FDIC intend to present a proposal “in the near future” that further differentiates resolution-planning requirements for large firms; this is consistent with Federal Reserve Vice Chairman for Supervision Randal Quarles’s July 2018 speech in which he indicated that the Federal Reserve is amenable to reducing resolution-planning requirements for all but the largest, most complex, and most interconnected firms.4  

Authors

Arthur Angulo is a managing director in Promontory’s New York office, and Miles Ravitz is a principal in Promontory’s New York office.


FOOTNOTES

1. “Proposed changes to applicability thresholds for regulatory capital and liquidity requirements,” Office of the Comptroller of the Currency, Federal Reserve Board, and Federal Deposit Insurance Corp. (Oct. 31, 2018); and “Prudential Standards for Large Bank Holding Companies and Savings and Loan Holding Companies,” Federal Reserve (Oct. 31, 2018).

2. The agencies provided a table summarizing the proposed requirements by category and a list of banking organizations by projected category: “Appendix,” OCC, Federal Reserve, and FDIC.

3. “Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements,” OCC, Federal Reserve, and FDIC (June 2, 2016).

4. Randal K. Quarles, “Getting It Right: Factors for Tailoring Supervision and Regulation of Large Financial Institutions,” Federal Reserve (July 18, 2018).