Fed Proposes Tailored Living Wills, Foreign Bank Capital Framework

The Federal Reserve today proposed several changes to its resolution planning framework for large banking companies, as well as to the regulatory capital requirements for U.S. subsidiaries of foreign banking organizations. The changes, Fed Chairman Jerome Powell said, are designed to maintain banks’ resilience while tailoring requirements appropriately to the risks different institutions pose.

The proposals build on the Fed’s framework, proposed in October, for U.S. firms with more than $100 billion in assets, which would establish four categories of firms subject to different requirements. The categories are keyed to risk-based indicators, including asset size, cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets and off-balance sheet exposure.

“Today’s proposed rulemaking from the Federal Reserve incorporates the knowledge and experience regulators and banks have gained over the last seven years of living will submissions,” said American Bankers Association EVP Wayne Abernathy. “Given that progress, it makes sense for the Fed to now reassess the pace of living will submissions to ensure the resolution planning process remains as effective and relevant as possible. We look forward to working with regulators as this proposal moves forward.”

For banking companies subject to the Dodd-Frank Act’s resolution plan—or “living will”—requirements, the Fed proposed that: category one banks (the eight U.S. global systemically important banks) would file living wills every two years, alternating between full plans and a more stripped down “targeted plan”; category two and three banks (the largest U.S.-based regional and foreign banking firms) file full plans every three years, also alternating between full plans and targeted plans; and category four banks (53 other foreign banking organizations) file plans of reduced complexity on a three-year cycle.

Meanwhile, the Fed also proposed to extend the treatment put forth last fall for capital and liquidity to foreign banking organizations. The agency estimated that its framework would increase required liquid assets by 0.5-4% at these banks, depending on each institution’s profile, and reduce required capital by about 0.5% at foreign banks with over $100 billion in U.S. assets. The Fed also sought comment on applying new liquidity requirements to branches of foreign banks. Comments on all proposals are due by June 21. For more information, contact ABA’s Ananda Radhakrishnan.