The Federal Reserve Board on Thursday finalized rules that tailor its regulations for domestic and foreign banks to more closely match their risk profiles. The rules reduce compliance requirements for firms with less risk while maintaining the most stringent requirements for the largest and most complex banks.
The rules establish a framework that sorts banks with $100 billion or more in total assets into four different categories based on several factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. Significant levels of these factors result in risk and complexity to a bank and can in turn bring risk to the financial system and broader economy.
The rules build on the Board’s existing practice of tailoring its requirements and are consistent with changes made by the Economic Growth, Regulatory Relief, and Consumer Protection Act.
“Our rules keep the toughest requirements on the largest and most complex firms,” Chair Jerome H. Powell said. “In this way, the rules maintain the fundamental strength and resiliency that has been built into our financial system over the past decade.”
While generally similar to the proposals released for comment over the past year, the final rules simplify the proposals by applying liquidity standards to a foreign bank’s U.S. intermediate holding company (IHC) based on the risk profile of the IHC, rather than on the combined U.S. operations of the foreign bank. Additionally, for larger firms, the final rules apply standardized liquidity requirements at the higher end of the range that was proposed for both domestic and foreign banks.
“The final rules maintain our objective from the proposals: develop a regulatory framework that more closely ties regulatory requirements to underlying risk,” Vice Chair for Supervision Randal K. Quarles said.
As the attached chart indicates, firms in the lowest risk category will have reduced compliance requirements, owing to their smaller risk profile. As the risk of a firm increases and it moves into a new risk category, its requirements will increase.
The Board estimates that the changes in the aggregate will result in a 0.6 percent decrease in required capital and a reduction of 2 percent of required liquid assets for all banks with assets of $100 billion or more. The rules do not reduce capital or liquidity requirements for firms in the highest risk categories, including U.S. global systemically important banks.
The regulatory capital and liquidity aspects of the rules were jointly developed with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. The rules will be effective 60 days after publication in the Federal Register.
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