FED Consults on Tailoring Regulatory Rules Based on Bank Risk Profiles
FED published two proposals—one by FED and the other one jointly issued with OCC and FDIC—that would create four tiers or categories of banks based on their risk profiles. The changes would significantly reduce regulatory compliance requirements for firms in the lowest risk category, modestly reduce requirements for firms in the next lowest risk category, and largely keep existing requirements in place for the largest and most complex firms in the highest risk categories. Comments will be accepted through January 22, 2019.
Firms would be sorted into categories based on several factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. Each factor reflects greater complexity and risk to a banking organization, resulting in greater risk to the financial system and broader economy. The framework establishes categories of standards for large banking organizations—those with more than USD 100 billion in total consolidated assets:
- Firms in the lowest risk category—generally most domestic firms with USD 100 billion to USD 250 billion in total consolidated assets—would no longer be subject to standardized liquidity requirements. They would remain subject to firm-developed liquidity stress tests and regulatory liquidity risk management standards. Additionally, these firms would no longer be required to conduct company-run stress tests and their supervisory stress tests would be moved to a two-year cycle, rather than annual. These reduced requirements would reflect the lower risk profile of these firms.
- Firms in the next lowest risk category—generally those with USD 250 billion or more in total consolidated assets, or material levels of the other risk factors, that are not global systemically important banking organizations (G-SIBs)—would have their standardized liquidity requirements reduced to reflect their more stable funding profile but remain subject to a range of enhanced liquidity standards. In addition, the firms would be required to conduct company-run stress tests on a two-year cycle, rather than semi-annually. The firms would remain subject to annual supervisory stress tests.
- Firms in the highest risk categories—including the G-SIBs—would not see any changes to their capital or liquidity requirements.
The joint proposal would amend certain prudential standards, including standards relating to liquidity, risk management, stress testing, and single-counterparty credit limits, to reflect the risk profiles of banking organizations under each proposed category of standards and would apply prudential standards to certain large savings and loan holding companies using the same categories. The proposal would include changes to the reporting panels and requirements of the FR Y-14, FR Y-15, FR 2052a, FR Y-9C, and FR Y-9LP reporting forms. A separate tailoring proposal affecting foreign banks will be released in the future. The Appendix contains a chart showing the proposed requirements for each category, as well as a list of firms projected to be included in each category. FED estimates that the changes would result in a 0.6% decrease in required capital and a 2.5% reduction of liquid assets for all U.S. banking firms with assets of USD 100 billion or more. The proposals build on the FED's existing tailoring of its rules and would be consistent with changes from the Economic Growth, Regulatory Reform, and Consumer Protection (EGRRCP) Act.
Related Links
- Press Release
- Proposed Changes (PDF)
- Proposed Rule (PDF)
- Appendix: Chart on Proposed Requirements (PDF)
Comment Due Date: January 22, 2019
Keywords: Americas, US, Banking, EGRRCP Act, Basel III, Reporting, Proportionality, Prudential Standards, US Agencies, FED
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Scott Dietz
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
Previous Article
Sabine Lautenschläger of ECB Speaks on Issues to be Dealt by BCBSRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.