10 October 2019

Financial Times: Fed finalises rules easing regulations for banks

The US Federal Reserve has finalised a new set of rules that will allow many banks to reduce their capital and liquid assets, prompting a dissent from one governor who warned that the changes “increased risk to financial stability”.

Jay Powell, Fed chair, announced the regulator had completed its proposals on so-called bank “tailoring”, which will see different banks required to comply with different rules based on their size and complexity.

Mr Powell said in a statement: “The rules maintain the fundamental strength and resiliency that has been built into our financial system over the past decade.

“Congress and the American people rightly expect us to achieve an effective and efficient regulatory regime that keeps our financial system strong and protects our economy, while imposing no more burden than is necessary.”

Mr Powell was opposed by Lael Brainard, who was appointed to the Fed’s board by former president Barack Obama. Ms Brainard said in a statement: “Today’s actions go beyond what is required by law and weaken the safeguards at the core of the system before they have been tested through a full cycle.

“At a time when the large banks are profitable and providing ample credit, I see little benefit to the banks or the system from the proposed reduction in core resilience that would justify the increased risk to financial stability in the future.”

The changes mean that all but the largest and most complex banks will be subject to lower liquidity and capital requirements. Smaller and less complex banks will collectively have to hold a total of 0.6 per cent less in capital and 2 per cent less in liquid assets than before.

The rules will also allow some large regional US banks to avoid having to undergo annual stress tests. And when a bank does complete a stress test it will no longer have to model what would happen to its assets under an “adverse” scenario — though they will still have to model the worst-case “very adverse” scenario.

The rules mean that no foreign bank will have to comply with the most stringent liquidity requirements, following heavy lobbying from the banks in question. Instead they will only have to hold enough liquid reserves to cover a maximum of 25.5 days of operations, rather than the 30 that has been imposed on some domestic firms.

Full article on Financial Times (subscription required)

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