The Federal Reserve is now planning to further relax regulations for big banks with more than $250 billion in assets. This was stated by the Fed's vice-chair of supervision, Randal Quarles, while testifying before the U.S. Senate Banking Committee to evaluate how the central bank is implementing the Economic Growth, Regulatory Relief and Consumer Protection Act (better known as Crapo Act).
In his prepared remarks, Quarles noted, "Asset size should be only one among several relevant factors in a tailoring approach. We continue to evaluate additional criteria allowing for greater regulatory and supervisory differentiation across banks of varying sizes, and the Act reflects similar goals."
Definition of Big Bank to Change
Banks with assets worth more than $250 billion, but not posing systematic risk to the overall global financial system, are expected to get relief in form of lesser regulatory burden. Thus, the Fed's definition of big banks is likely to change.
At present, the Fed defines a big bank as an organization that holds total assets of more than $250 billion or foreign exposures of more than $10 billion on its balance sheet. On the basis of this, several regulations have been defined, including capital and liquidity ratios.
On this, Quarles said, "Some aspects of our regulatory regime - liquidity regulation, for example - treat banks with more than $250bn in assets with the same stringency as G-SIBS [global systemically important banks]. I see reason to apply a clear differentiation."
The Global Systemically Important Banks (G-SIBS) needs to fulfill the stringent levels of capital and liquidity rules owing to their crucial role in the global financial system. Some of the U.S. banks, like PNC Financial PNC , Capital One COF and U.S. Bancorp USB , have more than $250 billion in assets, but are not part of the G-SIBS. However, these banks face similar regulations which need to be fulfilled by the G-SIBS, including JPMorgan JPM , Citigroup C , Bank of America BAC and Wells Fargo WFC , among others.
Therefore, liquidity-coverage ratio (requires banks to hold assets that can be easily converted in cash at the time of financial crisis) and the so-called 'advanced approaches' capital rules are anticipated to change.
How Will the Banks Benefit?
As the Fed makes changes to the stringent regulatory requirements, banks will be able to record lower regulatory compliance costs. Further, these banks will be able to utilize freed-up capital to generate more revenues by boosting lending activities.
On the whole, this will be a positive development, for the banking industry, after the passage of the Crapo Act in May that provided relief to small and mid-size banks. In addition, this may even lead to a wave of M&As. At present, consolidation in the industry is few and far between, as banks try to put off crossing the threshold levels that trigger tougher rules.
Notably, the Fed intends to issue a proposed rule on the matter by the end of this year. So, till that time its wait and watch for these not-so-big-banks.
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