trending Market Intelligence /marketintelligence/en/news-insights/trending/e6rYsI6Nfh39cKtpWjJkOw2 content esgSubNav
In This List

Fed finalizes overhaul of rules for large banks

Podcast

Street Talk Episode 87

Blog

A New Dawn for European Bank M&A Top 5 Trends

Blog

Insight Weekly: US banks' loan growth; record share buybacks; utility M&A outlook

Blog

Banking Essentials Newsletter 2021: December Edition


Fed finalizes overhaul of rules for large banks

The Federal Reserve finalized its new regulatory framework for banks with at least $100 billion in assets, including an easing of liquidity requirements for regional banks and a reduction in the frequency with which some banks must submit "living wills."

The Fed's final rules, which largely mirror its earlier proposals, would keep regulations mostly unchanged for the biggest U.S. banks while loosening requirements for smaller domestic banks and providing a mixed bag of measures for large foreign banks operating in the U.S.

The new framework "more closely ties regulatory requirements to underlying risks in a way that does not compromise the strong resiliency gains we have made since the financial crisis," Fed Vice Chairman for Supervision Randal Quarles said in a statement.

But Fed Governor Lael Brainard, an Obama administration appointee and the lone dissenter on the Fed's final rules, said regulators "should not give the green light to large banking organizations to reduce the buffers they worked so hard to build post-crisis."

The Fed's new framework creates four categories of banks based upon their size and complexity.

The eight U.S.-based global systemically important banks, including JPMorgan Chase & Co. and Wells Fargo & Co., will face the toughest requirements and see few changes to the way they are regulated.

The second category of banks would also see few changes to their current rules; for domestic banks, that category currently only includes Northern Trust Corp., which had raised concerns about the Fed's plan.

The third category of banks, which includes U.S. Bancorp, PNC Financial Services Group Inc. and Capital One Financial Corp., would see reductions in their current liquidity standards. They would now need to meet 85% of their current liquidity coverage ratios. The Fed had earlier proposed setting the LCRs for firms in that category to a range of 70% to 85%.

Five foreign banks in that category, Deutsche Bank AG unit DB USA Corp., HSBC North America Holdings Inc., TD Group US Holdings LLC, UBS Americas Holding LLC and Credit Suisse Holdings (USA) Inc., would also be subject to the 85% LCR rule. Under the new framework, the latter two units would have to abide by U.S. LCR rules for the first time.

Firms in the fourth category would generally not be subject to LCR requirements but would still be subject to internal liquidity stress testing and other liquidity-related rules. They also would be switched to a two-year stress test cycle instead of an annual one, a change the Fed implemented on an interim basis in 2019.

Overall, the changes will result in roughly $53 billion of liquidity requirement reductions among domestic and foreign bank holding companies with more than $100 billion in assets. That amounts to a 2% decrease among banks of that size.

Capital requirements will drop by about $11.5 billion, or 0.6%, for domestic and foreign firms of that size.

Standardized liquidity requirements will apply to foreign banks' U.S. intermediate holding companies. In their proposal, Fed officials had requested comments from the public on whether it was appropriate to add standardized liquidity rules for foreign banks' U.S. branches and other subsidiaries.

The Fed declined to take a stance on that question on Oct. 10 and will instead consult with regulators in other countries on the issue. Quarles, who currently chairs the international Financial Stability Board, said it is critical that regulators build a consensus on setting "clear and consistent standards promulgated by all prudential regulators."

New timelines for living wills

The Fed also finalized a rule shifting how often banks have to file living wills — resolution plans that detail how firms would be resolved during hypothetical bankruptcies.

The central bank formally switched the eight U.S.-based G-SIBs to a two-year filing cycle instead of an annual cycle, which the Fed said reflects the regulator's practice of recent years. Every other cycle, the G-SIBs would submit "targeted" resolution plans with fewer details, though the submissions would include outlines of capital and liquidity levels and any recent material changes.

Foreign and domestic banks in the second and third categories would file resolution plans every three years, switching between full plans and targeted ones.

Domestic banks in the fourth category would no longer have to file resolution plans, while other foreign banks would file "reduced" resolution plans every three years. The reduced plan would outline any changes that had occurred since the company's last filing.

Some portions of the Fed's final rules will also require approval from the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. The FDIC board, which includes OCC head Joseph Otting, has scheduled an Oct. 15 meeting on the issue.