On October 31, 2018, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency (the “OCC”) and the Federal Deposit Insurance Corporation (the “FDIC”) issued a pair of proposals that would more closely match the regulations for large banking organizations, or banks with more than $100 billion in total consolidated assets, with their risk profiles.
The framework of the proposed rules would assign applicable banks to one of four (4) categories. Banks would be sorted into these categories based on several factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets and off-balance sheet exposure. Once assigned, banks with lower risk profiles would be offered a wide variety of relief from current liquidity risk management standards and stress testing requirements. According to the Federal Reserve Chairman Jerome Powell, “[t]he 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…” Below is a summary of the proposed categories:
- Lowest Category of Risk (Category IV). Banks in the lowest risk category would no longer be subject to standardized liquidity requirements. These banks would remain subject to internal liquidity stress tests and regulatory liquidity risk management standards. In addition, applicable banks 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 an annual cycle. The Federal Reserve notes that most domestic banks with $100 billion to $250 billion in total consolidated assets would be assigned to this category.
- Second Category of Low Risk (Category III). Banks in the next lowest risk category 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, applicable banks would be required to conduct company-run stress tests on a two-year cycle, rather than semi-annually. Banks would remain subject to annual supervisory stress tests. The Federal Reserve notes that this category of risk would generally apply to most banks with $250 billion or more in total consolidated assets that are not global systemically important banking organizations (“GSIBs”).
- Highest Risk Categories (Category II and I). Banks assigned a high risk category (i.e., Category I or II) would not generally see any changes to their capital or liquidity requirements. The Federal Reserve notes that GSIBs, banks with more than $700 billion in total consolidated assets or $75 billion in foreign assets, would generally be assigned to one of the top two risk categories.
For more information on the proposal, click here.