Fed Proposes Eased Rules for All but Biggest Banks

Regulators have proposed a softer oversight regime that dials back rules for U.S. banks considered unlikely to pose a threat to the financial system — a step meant to limit the toughest demands only to the largest lenders.

Responding to legislation that called on federal agencies to ease compliance burdens for non-Wall Street banks, Federal Reserve governors voted Wednesday on a plan that would separate megabanks from smaller, regional lenders.

Under the proposals, banks such as U.S. Bancorp, Capital One Financial Corp. and PNC Financial Services Group Inc. would escape the most stringent capital rules reserved for systemically important institutions.

"The proposals before us 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 our economy," Fed Chairman Jerome Powell said in a statement.

The revamp from the Fed — portions of which will be issued jointly with the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. — would "significantly reduce regulatory compliance requirements" on mid-sized institutions. That will mean an estimated $8 billion less in overall capital for the industry, a liquidity demand lowered by several billion dollars and reduced compliance costs, according to a Fed memo.

In the new system of tiers, banks will be evaluated on not only total assets but also their dependence on riskier short-term funding, their scale of off-balance sheet exposures and how much business they do outside the U.S.

What's Included

For banks between $100 billion and $250 billion in assets, including SunTrust Banks Inc., KeyCorp and Fifth Third Bancorp, the regulators plan to significantly reduce demands for how much easy-to-sell assets they keep on hand for a funding emergency. They'd also be put on a two-year cycle for stress tests.

Banks above $250 billion or smaller firms with higher risk factors would have some tougher demands tailored to how complex they are. But those that aren't systemically important would have a much-reduced liquidity requirement — as little as 70 percent of the current level.

The threshold for "advanced approaches" banks — the global giants — would be raised significantly.

Current rules say the category includes lenders with at least $250 billion in assets or $10 billion in foreign exposure, but the proposal would instead raise those levels to $700 billion or $75 billion in international activity, and that threshold would also bring "other prudential standards appropriate to very large or internationally active banking organizations."

The same eight banks known as global systemically important financial institutions occupy the top of five new tiers, retaining the same compliance expectations, and Northern Trust Corp. would be the sole occupant of the second tier, which still includes stringent regulations.

Foreign banks aren't included in the proposals, though regulators said they intend to follow up "in the near future" with a new system for those firms.

The possibility of relaxing rules for non-U.S. lenders — including some of the largest banks in the world — is "quite concerning," said Marcus Stanley, policy director at Americans for Financial For Financial Reform in Washington.

Opposition

Fed Governor Lael Brainard, an appointee of former President Barack Obama who was at the agency when some post-crisis bank regulations were approved, opposed the proposals.

She said the overhaul goes far beyond what was called for in the recent law and would "weaken the buffers that are core to the resilience of our system." She argued that weakening rules to this degree "raises the risk that American taxpayers again will be on the hook" to bail out banks should there be another meltdown.

Randal Quarles, the Fed's vice chairman for supervision, defended the proposals, saying banks with less than $250 billion "for the most part do not exhibit meaningful levels of interconnectedness and complexity," so they don't pose significant risks to the system.

"The character of regulation should match the character of a firm," Quarles said.

Trump's Regulators

Financial regulators appointed by President Donald Trump are gaining momentum in addressing some of the long-standing complaints bankers have had with the government's response to the 2008 financial crisis.

On Tuesday, the agencies proposed new derivative standards that are meant to respond to industry concerns that banks have been forced to maintain excessive capital levels against such assets. That change could have a significant benefit for Wall Street firms.

The agencies have also been working on a plan to revise the Volcker Rule, which restricted banks from investing with their own money.

Other changes the Fed is pursing include overhauling its capital rules, leverage demands, stress-test expectations and requirements for so-called living wills — in which lenders must formulate plans for how they would go bankrupt without hurting the broader financial system.

The proposal released Wednesday to relax rules for mid-sized banks will be open for public comment.

The Fed also said it and the FDIC will soon propose a way to further tailor the submission of living wills.