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The Federal Reserve proposed on Wednesday loosening rules for 16 financial institutions, an important move forward in the Trump administration’s effort to roll back bank regulation.
The Fed’s proposals would affect banks with $100 billion to $700 billion in assets, including U.S. Bancorp, Capital One and American Express. The changes would not apply to the nation’s eight largest banks, like Bank of America and Goldman Sachs, which have significantly more loans and securities on their balance sheets.
The Background
In May, Congress passed the Economic Growth, Regulatory Relief and Consumer Protection Act, which pares back some of the regulations introduced after the financial crisis of 2008. The aim was to reduce compliance costs for many banks. Supporters of the law also contended that the banks it covers would not pose a big risk to the wider economy if they were to fail.
The act required the Fed to examine banks with assets between $100 billion and $250 billion and draft specific rule changes that would lessen regulatory burdens. But the Fed’s latest proposals would also relax rules for some banks that have more than $250 billion in assets, which drew criticism from Lael Brainard, a Fed governor appointed by the Obama administration.
The Fed’s deregulation comes at a time when banks do not seem to be weighed down by regulation. Bank profits are surging, and they are making large payouts to shareholders in the form of dividends and stock buybacks.
Still, Randal K. Quarles, who President Trump appointed to the Fed to oversee bank supervision, said of the Fed’s proposals, “I am hopeful that firms will see reduced regulatory complexity and easier compliance with no decline in the resiliency of the U.S. banking system.”
What did the banks get from Fed?
Perhaps the most significant change concerned a rule aimed at making sure banks have enough cash in times of crisis. The rule, known as the liquidity coverage ratio, requires banks to stockpile so-called liquid assets (like Treasury securities) that can be sold quickly to raise cash during a crunch period. The Fed’s proposal would allow 11 banks, including large regional lenders like SunTrust and BB&T, to stop complying with the ratio altogether, and it relaxes the ratio for four other firms. The Fed would still require the banks that get to drop the ratio to comply with other liquid standards. But Ms. Brainard said in a statement that the expected reduction in liquid assets would make it more likely that the affected banks would come under greater stress during challenging financial conditions.
Another big change proposed Wednesday concerned the tests the Fed performs on banks once a year to assess whether they have the financial strength to make it through a financial and economic shock. Bank executives have long complained of the high cost of complying with the tests, but regulators have contended the tests help them and bank executives better understand the risks in their businesses. Under the proposals, 11 banks will be subject to tests once every two years.
What didn’t the banks get from the Fed?
No bank with over $100 billion in assets will escape the stress tests altogether, a signal of their importance to regulators. The Fed also did not relax rules regarding so-called living wills, the plans that banks must draw up to make it easier for regulators to wind down failing firms. But the Fed said proposed changes to the living wills would be coming soon.
Why do banks with more than $250 billion in assets stand to get relief?
The May legislation also contained language that gave the Fed leeway to adjust regulations for firms with $250 billion in assets. In reviewing regulation for these bigger banks, the Fed looked at the risks in the businesses of banks with up to $700 billion in assets. PNC Financial Services has $380 billion in assets, and though it is above $250 billion, it is in a category of banks that would, under the Fed’s proposals, enjoy the relaxed liquidity rules. Northern Trust, with a much lower $132 billion in assets, is in a category that does not get that break. The reason is that Northern Trust has significant business overseas. PNC is more of a traditional regional lender.
Still, in a statement on Wednesday, Ms. Brainard said the proposals softening the requirements for banks with between $250 billion and $700 billion went “beyond the provisions” of the legislation passed in May. The proposed changes “weaken the buffers that are core to the resilience of our system,” she added.
