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4 questions ahead of Fed proposal to overhaul regional bank rules

WASHINGTON — For regional banks with more than $100 billion of assets, all eyes will be on the Federal Reserve Wednesday as the U.S. central bank proposes changes to its prudential supervision program for large banks.

The proposal will be a key indicator of how the Fed will implement the regulatory relief bill signed in May by President Trump. The law was hailed for limiting the Fed’s toughest regime to the biggest banks, but the agency retained discretion to maintain certain standards for regional banks, leaving them somewhat in limbo.

Specifically, the Fed will unveil details on how it may supervise banks with between $100 billion and $250 billion of assets.

The new law raised the asset cutoff for determining which banks are “systemically important financial institutions” — and subject to heightened post-crisis standards — to $250 billion, from $50 billion. But banks in the middle range could still face SIFI-like supervision in certain areas.

In July, Fed Vice Chairman for Supervision Randal Quarles suggested that banks falling within the midsize range could see less frequent stress tests and a break from filing resolution plans.

Meanwhile, even larger banks are hoping the Fed delivers relief for them too. Many expect the central bank to consider tailoring requirements for certain banks above $250 billion. Those institutions are still considered SIFIs, but the Fed has been urged to differentiate banks above the cutoff that are not among the eight U.S.-based “globally systemically important banks” — a special designation limited to the most complex institutions.

On top of this all, Republicans lawmakers are also urging the Fed to reduce the G-SIB surcharge, an additional capital charge for the largest banks based on their reliance on wholesale funding.

Here are four key questions ahead of the Fed’s board meeting:

Will regional banks be satisfied with Fed’s proposed changes?

Behind the scenes, regional banks have been pushing the Fed to ease supervision in accordance with the new law. Trade groups and some lawmakers have advocated on the banks’ behalf more publicly.

The public agenda for the Fed’s meeting was vague. The notice merely said board members would “discuss proposed rules that would modify the enhanced prudential standard framework for large banking organizations.”

But observers have speculated that a moderation of stress test requirements for regional banks will be among the areas of focus.

Jaret Seiberg, an analyst at Cowen Washington Research Group, predicts the Fed’s proposal will drop regional banks from the Comprehensive Capital Analysis and Review stress test as well as a short-term liquidity measure known as the Liquidity Coverage Ratio. But he noted that those banks will not be released from the Fed’s regime entirely.

“While we expect CCAR and LCR to be gone, they will be replaced with new stress testing and new liquidity requirements,” he said in a research note. “Those new standards should be materially less onerous, but it won’t be the same as not having any requirements.”

Others said the Fed’s proposal could provide more detail on how certain provisions of the new reg relief law — which was authored by Senate Banking Committee Chairman Mike Crapo — will be applied banks with between $100 billion and $250 billion of assets.

“The Crapo bill … requires that this group of banks undergo ‘periodic stress tests,’ but the law does not explicitly say what constitutes ‘periodic’ or how the stress test should be conducted,” said Brian Gardner, the managing director of Washington research at Keefe, Bruyette & Woods, in a note. “We think this week’s proposal could clarify the new stress test rules.”

Up until now, the Fed has sent mixed signals on its intent to regulate banks between $100 billion to $250 billion.

Quarles said during a speech in July that those banks could enjoy relief from resolution planning in addition to stress test frequency. “We should consider limiting the scope of application of resolution planning requirements to only the largest, most complex, and most interconnected banking firms because their failure poses the greatest spillover risks to the broader economy,” he said.

However, Fed Chair Jerome Powell told the Senate Banking Committee in March that the board believes “supervisory stress-testing is probably the most successful regulatory innovation of the post crisis era,” including utilizing the tool for midsize banks.

How will Congress react?

Members of Congress are also expected to watch the Fed’s proposal closely.

Republican lawmakers have largely pushed the Fed to relieve all banks under the $250 billion asset threshold from the enhanced prudential standards. But the progressive wing of the Democratic Party, which voted against S 2155, will likely view any significant relief as a giveaway to Wall Street. More moderate Democrats who supported the legislation may also weigh in on whether the Fed struck the right balance.

In September, nearly 30 House Republicans urged the Federal Reserve Board to use its new authority to relieve all banks with less than $250 billion of assets from the enhanced supervision that was established after the crisis.

“Due to the fact that there have been no past or present findings of systemic risk, we strongly believe that the Fed should take quick action to completely remove these firms, both domestic and international, from all SIFI-associated regulations,” they wrote.

A month earlier, Senate Republicans sent a similar letter to the Fed, led by Sen. David Perdue, R-Ga., expressing concern in particular that the midsize bans would still be subject to stress tests. The letter also argued that the LCR should not be applied to non-systemically important regional banks the same way it is applied to G-SIBs.

But if the Fed’s relief for all banks under $250 billion is sweeping, the proposal could get some blowback from Democrats who supported S 2155, in part because it authorized the central bank to maintain monitoring of regional banks. They have urged the Fed not to be hesitant about exerting its regulatory muscle.

At a Senate Banking Committee hearing earlier this month, Sen. Jon Tester, D-Mont., who was a key sponsor of S 2155, indicated that the Fed shouldn’t shy away from re-designating banks under $250 billion in assets if appropriate.

“Let’s say you find a bank … and you’ve changed the standards on them because you find that their portfolio is pretty reasonable and lacks risk, and they change it, do you have the ability to bring them in regardless of the size?” Tester said.

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