Regulatory Tailoring for Large U.S. Banking Organizations: Federal Bank Regulators Propose Significant Revisions to the Application of Enhanced Prudential Standards and Capital and Liquidity Requirements for Large U.S. Banking Organizations

Sullivan & Cromwell LLP - November 5, 2018

On October 31, the Federal Reserve Board adopted two proposed rules that would tailor how certain aspects of the post-crisis bank regulatory framework, including certain capital and liquidity requirements and other prudential standards, apply to large U.S. banking organizations. One of the rules is to be issued jointly by the FDIC, Federal Reserve and OCC. The other was issued solely by the Federal Reserve. 

The proposals would assign all U.S. bank holding companies and savings and loan holding companies not substantially engaged in commercial or insurance activities with $100 billion or more in total consolidated assets to one of four categories based on their size and other “risk-based indicators.” Those indicators are (1) cross-jurisdictional activity, (2) weighted short-term wholesale funding, (3) nonbank assets, (4) off-balance sheet exposure, and (5) status as a U.S. global systemically important bank holding company (“G-SIB”). The category to which an institution would be assigned would determine the capital and liquidity requirements to which it and its subsidiary depository institutions would be subject, as well as the enhanced prudential standards and capital planning requirements to which the holding company would be subject. 

The proposals distinguish between U.S. G-SIBs and other large banking organizations. For U.S. G-SIBs and their subsidiary depository institutions, the proposals would eliminate the requirement to conduct semi-annual company-run stress tests but would otherwise not alter the capital and liquidity requirements, enhanced prudential standards, and capital planning requirements that currently apply to them. In contrast, as described by Federal Reserve Vice Chairman for Supervision Quarles, the requirements and standards applicable to other large U.S. banking organizations would be tailored, based on size and the risk-based indicators, to reduce “regulatory complexity” and the “compliance burden.”