Randal K. Quarles of FED on Tailoring Banking Regulations in US

Mr. Quarles stated that, in late May, the Congress enacted the EGRRCP Act, which directs FED to further tailor the supervision and regulation of large banks with more than USD 100 billion in assets. In this context, he first described the ways in which FED has already tailored regulations to the largest and most complex banks since the global financial crisis. However, he said, “…we still have more to do to streamline our framework in a manner that more directly addresses firm-specific risks.” In applying enhanced prudential standards for firms with total assets of more than USD 100 billion, the Congress requires FED to consider not only size but also capital structure, riskiness, complexity, financial activities, and any other factors FED deems relevant. While similar factors are being used to calibrate the largest firms' global systemically important bank (G-SIB) surcharges, they have not been used more holistically to tailor the overall supervision and regulation of large banks that do not qualify as G-SIBs. Additionally, consistent with the legislation's tailoring requirements, FED must proactively consider how firms with more than USD 250 billion in assets that do not qualify as G-SIBs may be more efficiently regulated by applying more tailored standards. In conjunction with changing the regulations, FED also needs to consider how such changes would be reflected in supervisory programs, guidance, and regulatory reporting.

Supervisors need to balance providing appropriate relief to firms with ensuring that firms are maintaining resources and risk-management practices so they can be resilient under a range of conditions. He believes that FED should make it a near-term priority to issue a proposed rule on tailoring of enhanced prudential standards for large banking firms. This proposal, subject to notice and comment, would address the statutory obligations under the recent legislation by proposing to tailor enhanced prudential standards in a manner that recognizes relative complexity and interconnectedness among large banks. “The statute sets an eighteen-month deadline for this regulatory process, but we can and will move much more rapidly than this,” said Mr. Quarles. Following are the key highlights of the changes under consideration by FED, according to Mr. Quarles: 

• In terms of capital requirements, both risk-based and leverage capital requirements should remain core components of regulation for large firms with more than USD 100 billion in total assets. The already proposed stress capital buffer, if finalized, would also be critical for large firms. However, FED could consider a number of changes for less complex and less interconnected firms related to their capital requirements. For example, such firms, even if above USD 250 billion in assets, could have less frequent company-run stress tests. Additionally, less complex and less interconnected firms could be exempted from requirements to calculate risk-weighted assets under the models-based advanced approaches to capital.

• He strongly believes that liquidity regulation should be a primary component of supervision and regulation of large banks. Minimum standardized liquidity measures and internal liquidity stress tests remain critical for firms with more than USD 100 billion in total assets. However, for less complex and less interconnected firms with assets greater than USD 100 billion, there may be opportunities to modify aspects of the standardized liquidity requirements as well as expectations around internal liquidity stress tests and liquidity risk management. Similarly, banks with more than USD 250 billion in assets that are not G-SIBs currently face largely the same liquidity regulation as G-SIBs. It would make sense to calibrate the liquidity requirements differently for these firms relative to their G-SIB counterparts.

• He also mentioned the possibility of scaling back or entirely removing the resolution planning requirements for most of the firms with total assets between USD 100 billion and USD 250 billion that do not pose a high degree of resolvability risk, especially if they are less complex and less interconnected. He suggested that FED should consider limiting the scope of application of resolution planning requirements to only the largest, most complex, and most interconnected banking firms because their failure poses the greatest spillover risks to the broader economy. For firms that would still be subject to resolution planning requirements, FED could reduce the frequency and burden of such requirements, perhaps by requiring more-targeted resolution plans.

Related Link: Speech

Keywords: Americas, US, Banking, EGRRCP Act, Proportionality, G-SIBs, FED