November 2, 2018
While maintaining its level of cash requirements for the so-called “too big to fail” institutions, the Federal Reserve plans to ease them for the not-quite-as-big. The central bank is proposing to relax rules on capital buffers that were implemented under the Dodd-Frank law enacted in response to the financial crisis that pushed the economy into the Great Recession, while also easing the schedule of “stress tests” for banks.
The thinking, according to the Fed, is to create “a framework that would more closely match the regulations for large banking organizations with their risk profiles. The changes would reduce compliance requirements for firms with less risk while maintaining more stringent requirements” for firms with greater risk.
“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 our economy,” Chairman Jerome H. Powell said.
Under the framework put out for public comment, the Fed would etablish four categories of standards for large banking organizations, i.e. those with more than $100 billion in total consolidated assets. The changes would significantly reduce regulatory compliance requirements for firms in the lowest risk category, the Fed says, while “modestly” reducing requirements for firms in the next lowest risk category and largely keeping the existing requirements in place for the largest and most complex firms in the highest risk categories.
Banks falling under the latter heading include JPMorgan Chase, Goldman Sachs, Bank of America and Citigroup.
The Fed’s governors voted 3-1 to propose the new framework. The dissenting vote came from Gov. Lael Brainard, the only Fed board member not appointed by President Trump, who warned that the proposal would raise the risk of another taxpayer bailout of big banks like the one that occurred during the 2008 financial crisis that led to the more stringent capital requirements.
Some of those requirements were eased this past May, when Congress enacted legislation to increase the threshold—from $50 billion in assets to $250 billion—for a bank being considered so big that its failure would lead to financial havoc. The impetus behind the legislation to partly dismantle the Dodd-Frank regulatory regime was to help small and medium-sized lenders, including community banks and credit unions.
Brainard said the new Fed proposals reach beyond that law by easing requirements for banks with assets from $250 billion to $700 billion. The proposals “weaken the [capital] buffers that are core to the resilience of our system,” she said before the Fed vote. “This raises the risk that taxpayers again will be on the hook.”
But Fed vice chairman Randal Quarles, the chief architect of the new proposals, said they follow an important principle: that the level of regulation of a bank should match its characteristics. Generally, Quarles said, U.S. banks with assets from $100 billion to $250 billion don’t show “meaningful levels” of complexity and tight connection with the financial system.
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