Fed proposes easing bank capital rules
THE UNITED States Federal Reserve is proposing to ease requirements for holding capital and cash for US banks that are big, but not as big as the Wall Street mega-banks.
The Fed’s proposal is the latest move by federal regulators to relax government oversight of financial firms in line with US President Donald Trump’s objectives.
The Fed governors, by a 3-1 vote, put out the proposals for public comment. They also are looking to ease the schedule for the agency’s ‘stress tests’ for banks, based on their size and risk.
Fed officials are aiming to relax rules implemented under the 2010 law enacted in response to the financial crisis that pushed the economy into the Great Recession.
Governor Lael Brainard, the only Fed board member not appointed by Trump, was the dissenting vote. She warned that the moves would raise the risk of another taxpayer bailout of big banks.
A new law enacted in May dismantled a chunk of the Dodd-Frank rules framework for banks installed to prevent a recurrence of the 2008 crisis. The Republican-led legislation was aimed at helping small and medium-sized banks, including community banks and credit unions. It multiplied by five – to US$250 billion – the level of assets at which banks are deemed so big that if one were to fail it would create major havoc. Those banks are subject to stricter capital and planning requirements.
The new law meant that regulations and oversight were eased on more than two dozen financial institutions with assets between US$100 billion and US$250 billion, including BB&T Corp, SunTrust Banks, Fifth Third Bancorp and American Express.
Brainard said the new Fed proposals reach beyond that law by easing requirements for banks with assets from US$250 billion to US$700 billion. The proposals “weaken the [capital] buffers that are core to the resilience of our system”, she said before the vote last Wednesday. “This raises the risk that taxpayers again will be on the hook.”
But Randal Quarles, the Fed’s vice-chairman for supervision and the chief architect of the proposals, said they follow an important principle: that the level of regulation of a bank should match its characteristics.
Generally, he said, US banks with assets between US$100 billion to US$250 billion don’t show “meaningful levels” of complexity and tight connection with the financial system.
A capital buffer is designed to cushion the shock to a bank of unexpected losses. Capital is long-term money that a bank can draw on to make loans; it comes mostly from the bank’s shareholders and profits it keeps.
The stress tests assess whether a bank has a big enough capital buffer to survive an economic shock and keep on lending.