On October 31, 2018, the Board of Governors of the Federal Reserve System (“Board”) released two draft notices of proposed rulemaking (“NPRs”) to tailor its enhanced prudential standards (“EPS”) in accordance with Section 401 of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”).

One NPR, issued by only the Board, would tailor the application of EPS relating to capital stress testing; risk management; liquidity risk management, liquidity stress testing, and liquidity buffer requirements; and single-counterparty credit limits to U.S. bank holding companies (“BHCs”) and apply EPS as tailored to covered savings and loan holding companies (“SLHCs”).  The other NPR, a joint proposal with the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”), would tailor requirements under the agencies’ regulatory capital rules, the liquidity coverage ratio (“LCR”) rules, and proposed net stable funding ratio (“NSFR”) rules.  At the Board’s open meeting, Governor Brainard voted against the NPRs, saying in her prepared remarks that the proposals go beyond the provisions of EGRRCPA.

The proposals would establish a revised framework for applying EPS to large U.S. banking organizations, with four categories that reflect the different risks of covered firms in each category:

  • Category IV Firms: $100-$250 billion in total assets and does not meet Category I, II or III standards.
  • Category III Firms: $250 billion-$700 billion in total assets or $100 billion-$250 billion in total assets with $75 billion or more of a risk-based indicator (weighted short-term wholesale funding, nonbank assets, or off-balance sheet exposure), and does not meet Category I or II standards.
  • Category II Firms: $700 billion or more in total assets or cross-jurisdictional activity of $75 billion or more, and does not meet Category I standard.
  • Category I Firms: U.S. global systemically important BHCs.

The NPRs would provide the most relief for Category IV firms.  They would no longer be subject to the LCR and proposed NSFR, nor would they be required to conduct and publicly disclose results of company-run capital stress tests.  Category III firms would generally no longer be subject to full LCR and proposed NSFR requirements, and would be exempt from internal models-based risk-based capital requirements (i.e., “advanced approaches” capital requirements).  The NPRs propose modest changes for Category II and Category I firms.  SLHCs that are not substantially engaged in insurance underwriting or commercial activities would now be subject to the full range of the Board’s EPS to the same extent as BHCs based on the four categories.

Comments on both NPRs are due by January 22, 2019.

The NPRs also stated that there will be three related rulemakings forthcoming:

  • A proposal to adjust EPS for foreign banking organizations (“FBOs”), including intermediate holding companies of FBOs.
  • A proposal to further align the Board’s capital planning rules with the four categories, including reconciling the Board’s April 2018 proposed stress buffer rule with biennial stress testing for Category IV firms.
  • A proposal, to be issued jointly with the FDIC, to address the applicability of resolution planning requirements to firms with $100-$250 billion in total assets.