Fed Finalizes Regulatory Tailoring Proposal for Large Firms

The Federal Reserve today approved its long-awaited framework for tailoring enhanced prudential standards for firms with $100 billion or more in assets—as required by the S. 2155 regulatory reform law—and how it will apply those standards to large U.S. and foreign banking organizations. The framework establishes four categories for firms based on certain risk indicators, including asset size, cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets and off-balance sheet exposure.

The most stringent prudential standards will continue to be applied to Category I institutions (the eight U.S. global systemically important banks). Category II standards will apply to U.S. banking organizations and foreign banking organizations that have $700 billion or more in total assets, or $75 billion or more in cross-jurisdictional activity that do not meet the Category I criteria. Category III standards will apply to domestic and foreign banking organizations with $250 billion or more in assets or $75 billion or more in weighted short-term wholesale funding, nonbank assets, or off balance sheet exposure. Category IV standards will apply to other firms with more than $100 billion in total assets that do not otherwise meet the Category I, II or III criteria.

The framework outlines tailored standards for capital stress testing, resolution planning, risk management, liquidity risk management, liquidity stress testing, liquidity buffer requirements and single-counterparty credit limits.

“Tailoring regulatory requirements to fit each bank’s business model improves supervision by allowing regulators to better allocate resources and focus on risks,” said ABA President and CEO Rob Nichols, who welcomed the Fed’s action. “An appropriately calibrated regulatory regime permits regulators to more effectively apply financial stability rules without undermining the strength of U.S. bank regulations.”

Separately, the Fed proposed changes to the assessments imposed on large bank holding companies and savings and loan holding companies for the estimated cost of their supervision and regulation. The board proposed a 10% reduction in the share of costs charged to holding companies subject to Category IV standards and other assessed companies not subject to prudential standards.