FED RETHINKS HOW TO DEFINE A BIG BANK / THE WALL STREET JOURNAL

Fed Rethinks How to Define a Big Bank

Central bank may change criteria it uses to apply some of its capital, liquidity rules for biggest U.S. lenders

By Ryan Tracy


Randal Quarles, vice chairman for supervision at the Fed, said in prepared remarks: ‘It is clear that there is more that can and should be done to align the nature of our regulations with the nature of the firms being regulated.’ Photo: Ron Sachs/Zuma Press


WASHINGTON—The Federal Reserve could broaden the number of banks receiving regulatory relief from Trump-appointed officials 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, including Capital 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.


Fed Vice Chairman for Supervision Randal Quarles, who is set to testify before the Senate Banking Committee on Tuesday, has previously said those rules are worth revisiting.

“It is clear that there is more that can and should be done to align the nature of our regulations with the nature of the firms being regulated,” Mr. Quarles said in testimony prepared for the hearing.

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 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. But it isn’t clear when the Fed will formally propose the changes. The regulator has a crowded agenda and some of the changes may also need the approval of other financial regulators.

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 trading restrictions and an April proposal to alter a big bank capital rule known as the leverage ratio.

Another motivator: This summer, Congress passed bipartisan legislation amending the 2010 Dodd-Frank financial regulatory law to say that the Fed “shall … differentiate among companies on an individual basis” when applying its most stringent bank rules, even if a bank is very large. Dodd-Frank had said “may” instead of “shall.” The change gives the Fed an impetus to grant banks regulatory relief.
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.


In several of its rules, the Fed defines a big bank as holding more than $250 billion in total assets or more than $10 billion in foreign exposures on its balance sheet. Mr. Quarles has pointed out these thresholds were developed more than 10 years ago.


One key regulation that relies on those thresholds is the liquidity coverage ratio, which was adopted after the 2008 crisis. It requires banks to hold enough cash or easy-to-sell assets to cover a month’s worth of liabilities. The idea is to prevent a repeat of 2008, when even strong banks faced collapse because they were too reliant on volatile, short-term funding.

The liquidity rule applies equally to all banks that trip either threshold of $250 billion in assets or $10 billion in foreign exposures.

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. Bank have more than $250 billion in assets but are less one-fifth the size of JPMorgan 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 firm following a looser liquidity rule could have more freedom to jettison Treasury bonds or other safe assets and boost riskier, more profitable activities such as loans. Such a change could also affect the pricing or availability of deposits, since the rules effectively tax deposits that regulators judge likely to leave the bank in a crisis.

The Fed also uses the $250 billion-asset and $10 billion foreign exposure thresholds in so-called advanced approaches capital rules. 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.