Wall Street Journal, October 2, 2018: Fed rethinks how to define a big bank
WASHINGTON—The Federal Reserve could broaden the number of banks receiving regulatory relief under an initiative that changes how it defines a big bank.
As part of a series of rule changes still under development, the Fed is preparing to revise asset-size and other thresholds in its capital and liquidity rules, according to people familiar with the matter.
The changes could lead to lower regulatory costs for some large U.S. banks, includingCapital One Financial Corp. , PNC Financial Services Group Inc. and U.S. Bancorp. It is less clear the changes will help gigantic firms the Fed considers “systemically important” to the global financial system, such as Citigroup Inc. and Goldman Sachs Group Inc.
Likely candidates for the rule changes include the liquidity coverage ratio, which requires banks to hold assets they can easily convert to cash in a pinch, and “advanced approaches” rules, one of several capital regulations that limit banks’ borrowing.
The potential changes were discussed at a recent meeting between top officials at the Fed and the two other primary U.S. bank regulators, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., one of the people familiar with the matter said—a sign the Fed is beginning to turn Mr. Quarles’s ideas into formal proposals.
The changes are part of the Trump administration’s broader push to revisit bank rules it believes are overreaching. Other parts of that effort include a proposed rewrite in May of the Volcker rule’s trading restrictions and an April proposal to alter a big bank capital rule known as the leverage ratio.
The new law separately allows the Fed to exempt banks with fewer than $250 billion in assets from some tough rules, including annual “stress tests”—a change from the previous level of $50 billion. It tells the Fed to take into account banks’ size as well as other “risk-related” factors.
Regional banks have argued the rule is unfair because it puts them in the same bucket as global banking behemoths. Capital One, PNC and U.S. Bancorp have more than $250 billion in assets but are less one-fifth the size ofJPMorgan Chase & Co., the largest U.S. bank by assets. American Express Co. is smaller, but has to follow the Fed’s toughest liquidity rule because of the foreign-exposure threshold.
A financial company following a looser liquidity rule could have more freedom to jettison Treasury bonds or other safe assets and expand riskier, more profitable activities such as loans. These rules predate the financial crisis, and involve calculating a bank’s capital position using complex and expensive mathematical models.
A Fed rule change could reduce the cost of running the models, although it may not lower the bank’s overall capital requirement as long as other capital rules remain in effect.
