By Ryan Tracy
WASHINGTON -- The Federal Reserve is set to move Wednesday on one of the most significant roll backs of bank rules since President Trump took office with a proposal for looser capital and liquidity requirements for large U.S. lenders.
The changes would affect large U.S. lenders including U.S. Bancorp., Capital One Financial Corp., and more than a dozen others. The largest U.S. banks, including JPMorgan Chase & Co., wouldn't see any rule changes.
The draft proposal, which was likely to be approved at a Wednesday meeting of the Fed's governing board, would divide big banks into four categories based on their size and other risk factors. Regional lenders would be either entirely released from certain capital and liquidity requirements, or see those requirements reduced. They could also, in some cases, be subject to less frequent stress tests.
"These proposals embody an important principle: the character of regulation should match the character of a firm," Fed Vice Chairman for Supervision Randal Quarles said in a statement. Fed Chairman Jerome Powell also said he would support the proposal.
Fed governor Lael Brainard issued a statement opposing the proposal, saying the policy changes "weaken the buffers that are core to the resilience of our system" and raise "the risk that American taxpayers again will be on the hook."
The most significant changes in the Fed's proposal would affect banks with assets between $100 billion and $250 billion, a group that includes BB&T Corp., SunTrust, Inc. and others. Those firms would no longer have to follow the so-called liquidity coverage ratio, which requires firms to hold assets they can sell for cash in a pinch.
The proposal also would give those banks more flexibility in how gains and losses in securities portfolios affect their capital levels, which could reduce the amount of capital they must maintain.
Those banks may also be released from the public version of the Fed's annual stress tests next year. Wednesday's proposal didn't directly address that question, but Mr. Quarles said he expects the Fed to move from annual public exams on those banks to a two-year cycle, with 2019 as an "off-cycle" year.
Banks with between $250 billion and $700 billion in assets -- or other firms that trip certain risk thresholds such as $75 billion in nonbank assets or cross-border exposure -- also would receive flexibility around how their capital requirement reflects unrealized gains and losses. Under the plan, they would receive a long-sought goal: A relaxed liquidity coverage ratio requirement, about 70% to 85% of the one they currently face.
This group includes U.S. Bancorp., PNC Financial Services Group Inc., and Capital One Financial., which have been arguing for years that the Fed's liquidity rules treated them too harshly.
The Fed said the liquidity rule changes could reduce the amount of liquid assets big banks must hold by about $43 billion, or about 2.5% of the amount held by banks with more than $100 billion in assets. The impact will vary for individual firms, however. Fed officials said they will continue to "stress test" big banks' liquidity, and in some cases stress testing requirements can be stricter than the rules the Fed is proposing to relax.
Fed officials say they didn't see conclusive evidence around how the liquidity rule changes could affect lending. In general, a financial company following a looser liquidity rule could have more freedom to jettison Treasury bonds or other safe assets and expand riskier, more profitable activities such as loans. The firm might also be able to change pricing on deposits, because the rule effectively taxes deposits that regulators judge are likely to leave the bank in a crisis.
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