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.
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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.
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.