WASHINGTON—The Federal Reserve is set to propose a new way of deciding which large banks get hit with its toughest regulations, according to people familiar with the matter.
The expected plan may lower regulatory costs for regional U.S. lenders under the $700 billion asset line, from Discover Financial Services Inc. at around $100 billion in assets toU.S. Bancorp with its roughly $460 billion. The changes under consideration appear to be less beneficial to the very largest U.S. banks considered “systemically important” to the global financial system, such as Bank of America Corp. or Citigroup Inc.
The proposal, which hasn’t been made public and is scheduled for a vote by the Fed’s governing board on Wednesday, would create new regulatory categories of banks based on size as well as other risk factors, such as international activity, off-balance-sheet exposures, and reliance on volatile forms of short-term funding, the people said.
The proposal would also revise how the Fed defines a large, internationally active bank for purposes of its “advanced approaches capital rules,” these people said. That threshold would be set at $700 billion in total assets and $75 billion in cross-border activity, as opposed to the current levels of $250 billion in assets and $10 billion in foreign exposure, these people said.
A Fed spokesman declined to comment.
The 2010 Dodd-Frank financial-regulatory law drew a line at $50 billion in total assets. Any bank above that size faced mandatory “enhanced” scrutiny through annual stress tests and other rules. During the Trump administration, both Congress and regulators have been considering ways to redefine what a big bank is.
In May, Congress gave banks with $50 billion to $100 billion in assets a reprieve from mandatory Dodd-Frank rules and told the Fed to decide which banks above the $100 billion line would get relief. Wednesday’s proposal responds to that direction.
Additional details of the proposal, such as how the changes will affect the Fed’s annual stress tests, couldn’t be determined. As is always the case with bank regulation, the fine print of the Fed’s rules will matter in assessing their impact. Banks will be reading closely Wednesday to see precisely how the Fed is proposing to tweak capital and liquidity regulations.
One key question is how the Fed will change the “liquidity coverage ratio,” which requires banks to maintain adequate funding to meet their liabilities for 30 days. That rule is one of many that incorporates the “advanced approaches” threshold, which people familiar with the matter say the Fed is considering raising to $700 billion in assets and $75 billion in cross-border activity.
Fed Vice Chairman for Supervision Randal Quarles has mentioned the broad use of the advanced-approaches threshold as part of his arguments that the Fed needs to better tailor its regulations to different banks.
Mr. Quarles has also suggested the Fed should consider short-term funding, international activity, trading and other activities when it assesses banks’ risks.
“To date, our tailoring of regulations has been based largely—but not exclusively—on asset size, which reflects an unduly one-dimensional approach,” Mr. Quarles said in a July speech. “We have been evaluating additional criteria that may provide for greater regulatory differentiation across large banks.”