The final rule revises the criteria for determining the applicability of regulatory capital and liquidity requirements for large U.S. banks and U.S. IHC’s (Intermediate Holding Companies) of certain foreign banking organizations. The rule establishes four categories of banking organizations with at least $100 billion or more in total assets which are built on risk-based indicators such as size, cross-jurisdictional activity, reliance on short term wholesale funding, nonbank assets, and off-balance sheet exposure.
The four categories are defined as follows:
Category I – U.S. GSIBs (Globally Systemically Important Banks) and their depositary institution subsidiaries.
Category II – U.S. banking organizations and U.S. IHC with total consolidated assets of $700 billion or more or cross jurisdictional activity of $75 billion or more.
Category III – U.S. banking organizations and U.S. IHC that do not meet criteria for categories I or II and have total consolidated assets of $250 billion or more or $100 billion or more in total assets and $75 billion or more in weighted short-term wholesale funding, nonbank assets, or off-balance sheet exposure.
Category IV – U.S. banking organizations and U.S. IHC with total consolidated assets of $100 billion or more that don’t meet thresholds for the other three categories.
The Rules:
Category I
- Capital – S. GSIBs and their depository institution subsidiaries must calculate risk-based capital ratios using both the advanced approaches and the standardized approach and are subject to the U.S. leverage ratio. These banking organizations are also subject to the requirement to recognize elements of AOCI (Accumulated Other Comprehensive Income) in regulatory capital; the requirement to expand the capital conservation buffer by the amount of the countercyclical capital buffer, if applicable; and enhanced supplementary leverage ratio standards. U.S. GSIBs are also subject to the GSIB surcharge.
- Liquidity – Under the final rule, a banking organization subject to Category I standards will continue to be required to hold an amount of HQLA (High Quality Liquid Assets) equal to at least 100 percent of its total net cash outflows as calculated under the LCR (Liquidity Coverage Ratio) rule each business day.
Category II
- Capital – Category II banking organizations are required to comply with the advanced approaches capital requirements, generally applicable risk-based capital requirements, and the supplementary leverage ratio. They would not have been required to calculate risk-based capital requirements using the advanced approaches.
- Liquidity – Banking organizations subject to Category II standards as well as to their depository institution subsidiaries with total consolidated assets of $10 billion or more are subject to the full LCR requirement. These banking organizations are also included in the scope of application of the full requirement of the proposed NSFR rule.
Category III
- Capital – Category III capital requirements include the generally applicable risk-based capital requirements, supplementary leverage ratio, and the countercyclical capital buffer. These banking organizations are not subject to the advanced approaches risk-based capital requirements and would be able to make an election to opt out of the requirement to recognize elements of AOCI in regulatory capital.
- Liquidity – A banking organization subject to Category III with weighted short-term wholesale funding of $75 billion or more is subject to the full set of LCR and proposed NSFR requirements. However, a banking organization subject to Category III with less than $75 billion or more is subject to a reduced LCR requirement calibrated at 85% of the full LCR requirement. Banking organizations under Category III are required to maintain a minimum supplementary leverage ratio of 3%.
Category IV
- Capital – Banking organizations under Category IV include the generally applicable risk-based capital requirements and the U.S. leverage ratio.
- Liquidity – The minimum reduced LCR for banking organizations subject to Category IV is set to 70% of the full LCR. Banking organizations subject to Category IV that have weighted short-term wholesale funding of less than $50 billion are not subject to an LCR requirement.
Impact Analysis
The agencies conducted an impact analysis of the new rules. The biggest effect will be less stringent capital and liquidity requirements to banking organizations with $250 billion or more but less than $700 billion in total consolidated assets, such as U.S. Bancorp, PNC Financial, and Capital One, among others. U.S. GSIBs such as JPMorgan Chase & Co, Bank of America Corp, Citigroup, Goldman Sachs, and Morgan Stanley would not be affected.
The board estimates that the effect for all banks with assets of $100 billion or more will have a .6% reduction in required capital, and a 2% reduction of required liquid assets. The board expects the final rule to lower capital requirements by about $8 billion for domestic and foreign banking organizations subject to Category III and Category IV standards. This is equivalent to about 60 basis points of total risk-weighted assets for these banking organizations.
The board also expects the final rule to reduce compliance costs because certain banking organizations are no longer subject to the advanced approaches capital requirements as well as LCR and certain capital requirements no longer apply to banking organizations with total consolidated assets between $50 and $100 billion. Regarding liquidity standards, the board estimated that total HQLA requirements would decrease by about $48 billion and $5 billon for domestic and foreign banking organizations, respectively. This represents about a 2% decrease in liquidity requirements for both domestic and foreign banking organizations with more than $100 billion in assets. Total HQLA holdings are expected to decrease by about $56 billion and $6 billion at domestic and foreign banking organizations, respectively. This also represents about a 2% reduction in HQLA holdings for both domestic and foreign banking organizations with more than $100 billion in assets. In addition, the board estimated that the final rule would lead to a modest increase in the net interest margin and have a negligible impact on the loan growth of affected domestic banking organizations.
It is also important to note that the new rules had one lone dissenter from the Fed, Lael Brainard, a board governor who is opposed to the changes because they could weaken the financial system. Ms. Brainard believes the changes go beyond what is necessary and may leave the system less safe. “It is premature to reduce core capital and liquidity requirements for large banking institutions, since they have not yet been tested through a full cycle,” she said. “At this point late in the cycle, we should not give the green light to large banking organizations to reduce the buffers they worked so hard to build post-crisis.” While Ms. Brainard may be erring on the side of caution, the other board members agree that the changes maintain critical safeguards while making the regulation more efficient. The resiliency built up from the financial crisis is not undermined with the new set of rules.
