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Federal Reserve Board finalizes tailoring Prudential Standards

Applies to large banking institutions

On October 10th, 2019, the Federal Reserve Board (FRB) finalized the tailoring of the post-crisis regulatory framework for large, domestic banking institutions known as Enhanced Prudential Standards (EPS). The key purpose of tailoring is to match the “character of regulation to the character of the firm.

October 21, 2019 | Federal Reserve Board finalizes tailoring prudential standards for large banking institutions

On October 10th, 2019, the Federal Reserve Board (FRB) finalized the tailoring of the post-crisis regulatory framework for large, domestic banking institutions known as Enhanced Prudential Standards (EPS). According to Chairman Jay Powell, this approach reflects the spirit of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA)1 by prescribing “materially less stringent requirements on firms with less risk, while maintaining the most stringent requirements for firms that pose the greatest risks to the financial system and our economy.”2 In the Final Rules opening statement, Chairman Jay Powell solidified that the final rules “tailor our enhanced prudential standards to match the overall risk profiles of large domestic and foreign banks.”3 During board discussions, it was stressed that although a regulatory burden may have been lifted for smaller and less complex firms, this is not a relief for foundational capital, liquidity, and risk management expectations, or from ongoing supervision from the regulators.

The final rule marks a significant new stage in the evolution of tailoring by bank regulators that have intensified since its early start decades ago. As designed, the EPS tailoring rule fine-tunes requirements for capital, stress testing, liquidity, large exposures and reporting based on financial metrics that serve as a proxy for a firm’s size, complexity, interconnectedness, and systemic importance.

While the Fed used its discretion in establishing the tailoring metrics, the rule is largely consistent with the asset-size thresholds laid out in in the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) and in some cases provides tailoring relief beyond that in the legislation; that legislation gave the Fed greater discretion to tailor or eliminate EPS requirements. In a complementary rulemaking, the Federal Reserve and FDIC also tailored requirements related to resolution plans or "living wills" in a similar manner.4 Moreover, the banking agencies are working to finalize their related EPS and other rules at the insured depository level.

Efforts to tailor the post-crisis reform standards reflect concern that the initial efforts had gone too far and did not adequately balance the tradeoff between safety and soundness and burden, especially for smaller less complex firms. Much of the tailoring reflects the experience of the industry and regulators in implementing and enforcing the latest rules and guidance. To date, only very modest relief has been granted to the largest systemic firms, while smaller firms have received modest to substantial relief.

The final rule will be effective 60 days from being published in the Federal Register.

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November 16, 2018 | Federal Reserve Board proposes tailoring prudential standards for large banking institutions

On October 31, 2018, the Federal Reserve Board (FRB) proposed tailoring the post-crisis regulatory framework for large, domestic banking institutions known as Enhanced Prudential Standards (EPS). According to chairman Jay Powell, this approach reflects the spirit of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA)5 by prescribing "materially less stringent requirements on firms with less risk, while maintaining the most stringent requirements for firms that pose the greatest risks to the financial system and our economy."6

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Endnotes

1 The EGRRCPA was signed into law on May 24. It increased the asset threshold for a banking organization to be designated as a systemically important financial institution (“SIFI”) from $50 billion to $100 immediately after enactment with a further increase 18 months after enactment.

2 Chairman Jerome Powell, Opening Statement on Proposals to Modify Enhanced Prudential Standards for Large Banking Organizations (Oct. 31, 2018), available at https://www.federalreserve.gov/newsevents/pressreleases/powell-opening-statement20181031.htm.

3 Chairman Jerome Powell, Opening Statement on Final Rules to Tailor Enhanced Prudential Standards and Resolution Plan Requirements for Large Domestic and Foreign Banks (Oct. 10, 2019) available at https://www.federalreserve.gov/newsevents/pressreleases/powell-opening-statement-20191010.htm

4 Resolution Planning: https://www.federalreserve.gov/aboutthefed/boardmeetings/files/resolution-plan-rule-fr-notice-20191010.pdf

5 Ibid.

6 Ibid.

 

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