The Biden Administration's Fact Sheet on the Regulation of Large Regional Banks
On Thursday the White House released a fact sheet titled “President Biden Urges Regulators to Reverse Trump Administration Weakening of Common-Sense Safeguards and Supervision for Large Regional Banks.”
This post looks at what the Biden Administration is calling on regulators to do, how the recommendations compare to current rules and whether all this could be accomplished under existing law.1
Quantitative Liquidity Requirements, Internal Liquidity Stress Testing and Liquidity Buffer
Background
The post-2008 financial crisis regulatory liquidity regime in the United States includes (1) requirements to remain in compliance with, and disclose, certain standardized quantitative liquidity metrics; (2) requirements to conduct internal stress tests, without requiring public disclosure of the results and (3) requirements to comply with various qualitative liquidity risk management practices.
The relevant standardized quantitative liquidity requirements are the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The idea of the LCR is that banking organizations should be required to hold high quality liquid assets equal to or greater than projected net cash outflows during a 30-day stress period. The NSFR is meant to complement the LCR by requiring banking organizations to maintain a minimum level of stable funding over a one-year period, with the level of stable funding that is required determined based on liquidity characteristics of the firm’s assets.
As for internal liquidity stress tests, banking organizations must assess the potential impact of liquidity stress scenarios on their “cash flows, liquidity position, profitability, and solvency.” Firms must test themselves against various scenarios (at a minimum: market stress, idiosyncratic stress, combined market and idiosyncratic stress), and must do so across various planning horizons (at a minimum: overnight, 30-days, 90-days, one year). Results of the 30-day time horizon component of the internal liquidity stress test are used to calculate a required liquidity buffer, which the firm must maintain in the form of unencumbered highly liquid assets that are subject to certain operational requirements.
Finally, there are a number of more qualitative requirements. For example, a firm must have a contingency funding plan, must establish liquidity risk limits, must have various procedures for monitoring liquidity risk, and so on.
Rules Pre-2019 Tailoring
As originally adopted, the LCR applied in full to BHCs that had either (a) $250 billion or more in total assets or (b) $10 billion or more in on-balance sheet foreign exposure. Other BHCs with $50 billion or more in total assets were subject to a “modified” LCR that was effectively 70% of the full LCR.2 In addition, the modified LCR required only monthly calculations, rather than daily calculations as under the full LCR.
The NSFR rule was never finalized prior to the enactment of the EGRRCPA, but as proposed in 2016 the applicability rules were generally the same as for the LCR.
Under Regulation YY as originally adopted, the monthly internal liquidity risk stress testing and liquidity risk management requirements described above applied to all BHCs with $50 billion or more in total assets.
2019 Tailoring Changes
By law, BHCs in the below $100 billion asset category were no longer subjected to enhanced prudential standards. As for firms above that threshold:
The LCR and NSFR continue to apply in full to U.S. GSIBs (Category I firms) and firms with $700 billion in total assets or $75 billion in cross-jurisdictional activity (Category II firms).
Firms not in the above categories with $250 billion of total assets or more than $75 billion in nonbank assets, weighted short-term wholesale funding (wSTWF) or off-balance sheet exposure (Category III firms) are subject to the full LCR/NSFR if they have $75 billion or more in wSTWF. If not, such firms are instead subject to a “reduced” LCR/NSFR effectively equal to 85% of the full LCR/NSFR, calculated daily like the full requirement.3
Other firms with $100 billion or more in total assets not in the above categories (Category IV firms) are generally not subject to any LCR or NSFR requirement, unless their wSTWF is equal to $50 billion or more. If so, the firm is subject to an LCR/NSFR requirement effectively equal to 70% of the full LCR/NSFR. These ratios must be calculated monthly, rather than daily as is the case for firms in other categories.
Currently, to my knowledge, no firms in either Category III or Category IV trip the relevant wSTWF thresholds.
As for internal liquidity stress testing requirements, those generally continue to apply unchanged to all firms with $100 billion or more in total assets, except that Category IV firms are allowed to conduct such stress tests only quarterly, while Category I, II and III firms must continue to do so monthly.
Category IV firms also benefit from somewhat less intense liquidity risk management requirements - for example, the liquidity risk limits that they must adopt do not necessarily need to include certain of the risk limits that Category I, II or III firms are required to adopt, and expectations with respect to intraday liquidity risk monitoring are less stringent.
Biden Administration Position
In the fact sheet, the White House states that the Dodd-Frank Act “required banks with between $100 and $250 billion in assets to hold sufficient high-quality liquid assets to cover expected net outflows during a stress period” but that the Trump Administration “eliminated these rules for banks below $250 billion in assets.”
The fact sheet says regulators are “encouraged to consider” bringing back these requirements and, more generally, to use “rigorous liquidity stress tests that factor in the risks of faster withdrawals in an always-on online environment.”
Observations
The White House statement seems to describe only the LCR, but I assume the same arguments apply as to which firms should be subject to the NSFR.
It is not technically true that the LCR was eliminated for BHCs with below $250 billion in assets, but given the wSTWF thresholds that must be met in order for the LCR to apply to Category IV firms this has been the practical effect.
It is understandable given that the impetus for the fact sheet is the failure of two banks with below $250 billion in total assets, but the focus in the fact sheet on firms of this size may give the wrong impression in terms of foreshadowing the extent of potential changes. The big thing many were really upset about in the 2019 tailoring was the outcome for the superregional Category III banks, most of whom went from full LCR requirements to reduced LCR requirements. Given then-Governor Brainard’s prior statements taking issue with the tailoring approach to firms in the $250 billion to $700 billion range, it seems likely that, in addition to anything that is done about Category IV firms, any redo of the 2019 tailoring will also seek to bring Category III firms back under the scope of the full LCR.
Other than generically calling for stress tests to be “rigorous,” the statement does not offer any recommendations related to internal liquidity stress testing or liquidity risk management requirements. I assume the applicability and frequency of these requirements, too, will be targeted by the regulators for a rethink. Fair enough, but given that this was a requirement to which SVB Financial was subject (and based on publicly available reports, did poorly at), I would hope that any changes here are informed by what went right or wrong when applying this to Category IV firms like SVB. If the assumptions or processes underlying a firm’s internal liquidity stress tests are lousy, who cares how frequently they are being conducted?
Firms in Category I and Category II, although already subject to the full LCR/NSFR, also may not escape unscathed from all this. The fact sheet and other statements from regulators over the past month indicate that a broader reconsideration of outflow rates, which funding sources truly are stable, and other aspects of liquidity regulation all may be on the agenda. For instance, even if the requirement to maintain at least a 100% LCR does not change, changes to assumptions about how flighty certain types of deposits are could result in increases to the amount of HQLA that a firm needs to hold to achieve that ratio.
There are various reservations of authority in the regulations which, in theory, could permit the Board to, without engaging in new rulemaking, order firms to conduct internal liquidity stress tests more frequently, or to make other liquidity-related changes. I think those are unlikely to be used here, however, and I would expect the agencies to seek to implement most changes here through notice and comment rulemaking.
One possible exception, though, may be internal liquidity stress tests, for which the regulations already give the Board the authority to “require the [BHC] to vary the underlying assumptions and stress scenarios.” This could conceivably be done in the form of supervisory feedback, without necessitating any change to regulations.
Annual Supervisory Stress Tests
Rules Pre-2019 Tailoring
There were various changes to the rules over the years, but in general the Federal Reserve Board’s supervisory stress test and comprehensive capital analysis and review (CCAR) applied to firms with $50 billion or more in total assets. At the same time, even before S. 2155, there was some degree of tailoring. For example, in early 2017 the Board under Chair Yellen and de-facto Vice Chair for Supervision Tarullo unanimously voted to remove the CCAR qualitative objection for firms under $250 billion in total assets, provided they had less than $75 billion in nonbank assets.
2019 Tailoring and Other Changes
The enactment of S.2155 resulted in further tailoring. Firms under $100 billion were, by statute, excluded from annual supervisory stress testing requirements. In addition, firms in Category IV are now subject to annual supervisory stress tests only on a two-year cycle.
Separate from the S. 2155 rulemakings, the Board also in early 2020 adopted a stress capital buffer framework under which results of the supervisory stress tests are used to calculate (one component of) a firm’s yearly capital requirements. Specifically, a firm’s SCB is calculated by adding together (1) the difference between starting and minimum projected CET 1 capital ratios under the supervisory stress test and (2) four quarters of planned common stock dividends as a percent of RWAs.
All firms above $100 billion must submit a capital plan to Board each year, but in years where a Category IV firm is not required to participate in the supervisory stress test and does not opt-in to participating the SCB for the Category IV firm is revised only based on the firm’s updated planned common stock dividends.
Biden Administration Position
The fact sheet criticizes the decision made to “reduce[] the obligation for banks like Silicon Valley Bank to undergo these stress tests from once a year to once every two years.”
Observations
Unlike many of the recommendations in the fact sheet, this may be a place where the regulators are at least somewhat constrained by the statute. The EGRRCPA provides that firms with between $100 billion and $250 billion should be subject to supervisory stress tests on a “periodic” basis, as compared to the “annual” supervisory stress test to which the statute dictates that firms above $250 billion be subject.
12 calendar months is indeed a “period,” so maybe subjecting Category IV firms to annual requirements is consistent with the letter of the statute. It seems tough to reconcile with the spirit, however.
If a two-year cycle is really unacceptable to the Board, it could conceivably go with an 18-month cycle for Category IV firms or something like that, but I think the Board likes having every in-scope firm undergo the supervisory stress test (and have an SCB assigned) at the same time, so this option may be less likely.
What the White House seems particularly concerned about is the transition period before becoming a Category IV firm combined with the every-other-year nature of the supervisory stress testing requirements, which in the case of SVB Financial resulted in a very long wait before SVB would have been required to participate in the supervisory stress test. Maybe the easier way to solve this, then, is to say that Category IV firms must participate in the supervisory stress test in the first year after they become Category IV firms, even if other Category IV firms are not participating in the stress test that year. This would be a little messy in that some Category IV firms would wind up on even-year cycles while others would be on odd-year cycles, but I think everyone could manage.
As with the fact sheet’s approach to the discussion of liquidity requirements, I wonder if in some sense this skips over key points of contention. Sure, requirements for Category IV firms are interesting and seem likely to be reconsidered by regulators, but this was not necessarily the primary focus of progressive concerns about Trump-era stress testing changes. There is a ton of stuff on the Board’s plate, so maybe this is lower down the priority list, but I wonder if as part of any stress testing changes there will be a push to re-litigate things like static balance sheet assumptions, how many quarters of dividends need to be pre-funded or the merits of a stress leverage buffer requirement.
Living Wills
Background
Section 165(d) of the Dodd-Frank Act requires BHCs to prepare and submit resolution plans, commonly called living wills, to the Federal Reserve Board and the FDIC. These plans are required to address how the whole company could be rapidly and orderly resolved in the event of material financial distress.
In addition, the FDIC has established its own standalone resolution planning requirements for insured depository institutions.
Rules Pre-2019 Tailoring
Prior to the enactment of the EGRRCPA, 165(d) living will requirements applied to all BHCs with $50 billion or more in total assets. Submissions were, in theory, required annually, but the Board and FDIC eventually came to the conclusion that such a cadence made it difficult to review plans, provide feedback and then have that feedback incorporated into the banking organization’s next resolution plan. As a result, the agencies frequently extended the submission deadlines.
The FDIC’s IDI plan rule as adopted in 2012 applied to IDIs with $50 billion or more in total assets. As with the 165(d) rule, the default cycle was annual, but the FDIC frequently extended submission deadlines.
2019 Tailoring and Other Changes
The EGRRCPA eliminated 165(d) resolution plan requirements for BHCs with less than $100 billion in total assets. As for the remaining firms:
The U.S. G-SIBs are now required to file 165(d) resolution plans every two years. Submissions alternate between “full” plans that include the comprehensive information required by the rule and “targeted plans” that include information on core areas like capital and liquidity in addition to information responsive to other topics that the agencies direct firms to address. For example, the 2021 targeted plans required firms to explain whether the coronavirus events had led to any lessons learned about resolution-related capabilities.
U.S. BHCs in Category II or Category III are now required to file 165(d) resolution plans every three years, alternating between full plans and targeted plans.
Category IV firms are not required to file 165(d) resolution plans.
As for IDI plans, in November 2018 FDIC Chairman McWilliams announced that the FDIC intended to take another look at the IDI plan rule as a general matter and that, until this review was completed, no IDI plan submissions would be required. The FDIC issued an ANPR on IDI plan changes in 2019, but given the events of 2020 the FDIC never progressed to a rule proposal.
With no final rule anywhere on the horizon, in January 2021 the FDIC announced that in light of “the passage of time from the last submissions pursuant to the IDI Rule and the uncertain economic outlook,” IDI plan submission requirements would be reinstated for banks with $100 billion or more in total assets. Under the FDIC’s statement of policy, submissions are now required on a three-year cycle.
Biden Administration Position
The fact sheet states that “Trump Administration regulators removed the [living will] requirement for bank holding companies in the $100 to $250 billion size range.” The Biden Administration believes this was the wrong approach and that “banks and bank holding companies of this size” should have to submit such plans.
Observations
As with the fact sheet’s claim about the LCR, it is not technically true that 165(d) resolution planning requirements were categorically eliminated for BHCs with total assets between $100 billion and $250 billion. But while the fact sheet falls short of being technically correct (the best kind of correct), the fact sheet is right as to the practical outcome because no BHCs in the $100-$250 billion asset size category currently trip the other factors that would result in such a firm being placed in Category II or Category III.
Subjecting Category IV firms to resolution plans would on its own be a significant change compared to the post-EGRRCPA status quo, but here again I wonder if this will really be the only area targeted for change. For example, in a statement in 2019, then-Governor Brainard characterized the new rules for Category II and Category III firms as requiring a full resolution plan “only once every six years.” This suggests that, in addition to whatever is done for Category IV firms, there may be a push to again change required frequency of plan submissions or even to do away with the “targeted” plan concept entirely.4
Those sorts of changes would likely require notice and comment rulemaking, but even without changes to frequency or required content of resolution plans the regulators have broad discretion as to how they evaluate resolution plans. This means that, even if the regulations themselves remain untouched, for firms currently subject to resolution planning requirements the agencies could make it tougher to get a passing grade. This has already been foreshadowed to some degree by the late 2022 statement from the agencies as to their “expectation that the next plan review will include expanded testing of the firm's resolution capabilities.” There is also resolution planning guidance for large regionals expected to be released this year (subject to notice and comment) that could, without changing any regulations, effectively impose new requirements.
The White House fact sheet does not mention IDI plans, but unlike with 165(d) plans there is no statutory constraint prohibiting the FDIC from applying IDI plan requirements to banks with $50 billion or more in total assets. It is not clear to me whether this is something the FDIC would be interested in doing. In public statements, Chair Gruenberg has certainly indicated that he believes banks of this size may pose risk, but on the other hand, in 2021 when the FDIC re-applied IDI plan requirements, but only to banks above $100 billion and only on a three-year frequency, then-board member Gruenberg did not voice any public dissent.
It also bears reiterating that SVB was subject to IDI resolution planning requirements, so to the extent the FDIC does contemplate any changes to the IDI plan rule, I would hope to see a discussion of how SVB’s IDI plan was or was not helpful to the resolution of SVB. Similarly, it would be helpful for the agencies to explain what they believe a 165(d) plan would offer for firms in the $100 billion to $250 billion range that an IDI plan does not.5
Capital Rules
Background
Except for community banks that have elected to comply with a higher community bank leverage ratio in exchange for not being subject to risk-based capital requirements, nearly all BHCs in the United States are subject to risk-based and leverage capital requirements. Most BHCs calculate their risk-based capital ratios under what is called the standardized approach, which assigns risk-weightings for credit risk based on a standardized set of risk-weights set out in the capital rules.
A few very large BHCs are also required to calculate their capital ratios under what are called the advanced approaches, which as compared to the standardized approach feature (1) internal ratings-based and other methodologies for calculating capital requirements for credit risk and (2) requirements to calculate capital requirements for operational risk. By virtue of the Collins Amendment, a BHC that is subject to both the standardized approach and advanced approaches is bound by whichever approach produces the lower (i.e., less favorable) capital ratio.
There are also additional capital requirements that apply to certain BHCs. For example, among other things:
Firms with significant trading activities are subject to a requirement to calculate risk-weighted assets for market risk.
Certain firms are subject to a supplementary leverage ratio (SLR) requirement which, as compared to the ordinary leverage ratio requirement generally applicable to all U.S. banking organizations, includes in the denominator certain off-balance sheet exposures.
U.S. GSIBs are subject to heightened requirements, including an enhanced version of the SLR and a G-SIB surcharge calculated based on two methodologies (one of which is more punitive than the Basel G-SIB surcharge methodology).
Rules Pre-2019 Tailoring
Under the capital rules as originally adopted, advanced approaches banking organizations were BHCs with either (a) $250 billion or more in total assets or (b) $10 billion or more in on-balance sheet foreign exposure. Firms in this group were not permitted to opt-out of recognizing the impact of AOCI in regulatory capital, were subject to the SLR, and would have been subject to the countercyclical capital buffer (CCyB), if ever raised above zero.
Firms that were not advanced approaches organizations were permitted to opt-out of recognizing the impact of AOCI in regulatory capital and were not subject to the SLR or CCyB.
2019 Tailoring Changes
Under the 2019 tailoring rules, the definition of advanced approaches firm was revised to mean Category I or Category II BHCs. This meant that, as compared to the pre-2019 framework, firms with $250 billion or more in total assets that are in Category III benefitted by no longer being required to calculate risk-based capital under both the advanced approaches and the standardized approaches. These firms also were able to opt out of recognizing the impact of AOCI in regulatory capital.
Category III firms, even though no longer advanced approaches firms, do, however, remain subject to the SLR and to the CCyB (if activated).
Category IV firms are not subject to the SLR or the CCyB.
Biden Administration Position
Here the fact sheet is alternatively pretty specific and then rather vague. First, it says that “Signature Bank and Silicon Valley Bank had large unrealized losses on securities exceeding the capital available to absorb these losses.”
The statement then goes on to say that the Trump Administration “changed the rules to weaken a variety of capital requirements for some regional banks.” The Biden Administration calls for “some of the requirements that already apply to the largest banks” to apply to firms the size of SVB as well.
There is also a general reference to completing the Basel III endgame.
Observations
The reference to unrealized losses implies that the Biden Administration does not believe that regional banks with more than $100 billion in total assets should be able to exercise an AOCI opt out. This may be a fine idea, but in some sense this reference to unrealized losses is a red herring, as most of SVB’s unrealized losses were in its HTM portfolio, which would not have flowed through to AOCI even if no AOCI opt-out had been in effect. It is possible the Biden Administration is calling for a change in the treatment of securities held in the HTM portfolio as well, but that would be a pretty significant change to float in such an oblique way.
The statement is also little confusing because, in general (although maybe not for SVB Financial6), even before the 2019 tailoring many large regional banks were not subject to the SLR and were able to exercise an AOCI opt-out. So here the Biden team's focus appears not necessarily to be on Category IV firms, but rather on the small group of Category III firms that, absent the 2019 changes, would have been advanced approaches firms.
It is also unclear what the White House has in mind when it says that “some” of the requirements that apply to the largest banks should also apply to large regional banks. Maybe this is just about the SLR and CCyB, but again that is a little weird because even under the old rules most of the large regionals that are the focus of the fact sheet would not have been subject to these requirements. That does not necessarily mean these changes are not a good idea, but it does mean this would not, as the statement implies, merely be a reversion to the original Dodd-Frank rules.
Whichever new capital requirements are applied, the White House calls for them to only kick in “at an appropriate time” and only “after a considerable transition period.” This is consistent with what Vice Chair for Supervision Barr has been saying about a holistic capital review that, subject to a transition period, will be designed to apply appropriate capital requirements through the cycle. The point is that capital requirements should be calibrated not only with the conditions of 2023 in mind but with an eye to a range of conditions a banking organization could face.
That is fair enough, but even so, it is sort of funny to read this in juxtaposition to the complaints elsewhere in the statement about the “lengthy transition periods” currently granted to Category IV firms by the tailoring rules.7 Best of luck to the staff at the regulatory agencies tasked with figuring out how to make a transition period "considerable" without making it "lengthy."
Strengthen Various Supervisory Tools
Biden Administration Position
In addition to the regulatory changes discussed above and below, the Biden Administration calls for regulators to “strengthen supervisory tools,” including but not limited to stress tests, to ensure that banks with $100 billion or more are positioned to withstand rising interest rates. Regulators also should “use their tools to assess liquidity for accelerated outflows of concentrated depositors and related liquidity shocks.”
Observations
Unlike other recommendations in the fact sheet, I think this for the most part describes things the regulators were already doing, or at the least, had the power to do.
The facts that have come out to this point about SVB suggest that the issue might not necessarily be the supervisory tools themselves, but rather what is to be done when those supervisory tools reveal weaknesses within a banking organization. The current approach of MRAs and MRIAs, then maybe 4(m) agreement or informal enforcement action, then maybe public enforcement action, cannot necessarily force management to make changes they do not want to make.
Also, to the dismay of both bank advocates and their critics, firms are generally forced or, from a regulatory hawk’s perspective, allowed, to linger in the regulatory “penalty box” for some time. Firms are then either, from a dove’s perspective, not given a sufficiently clear path out of the box or, from a hawk’s perspective, not appropriately made to face more severe consequences for failing to remediate outstanding issues. Clearer rules both for getting out of the penalty box and what should happen if a firm fails to promptly do so could be helpful.
Elsewhere, the White House throws in a sentence saying that “regulators should consider other measures to address risks associated with banks’ rapid growth.” Nothing more is said about this in the fact sheet, but back in January Acting Comptroller Hsu did say that the OCC was “considering steps to provide greater transparency and predictability” with respect to an escalation framework for dealing with too big to manage banks. Even a few months later I am still not sure how seriously to take this, but given that at least part of the story with SVB seems to be about its rapid growth, this could be an initiative that gets renewed attention.
The fact sheet also says that “supervisors should consider making sure rapidly growing banks prepare for [enhanced prudential standards] even as they approach the asset threshold.” There are lots of ways the regulators could go with this, but one possibility is that requiring quarterly implementation plans as a BHC approaches a new threshold will become the norm. The Board has already imposed this as a condition in certain merger approval orders.8
Long Term Debt Requirement
Rules Pre-2019 Tailoring
Under rules adopted in 2016, BHCs that are U.S. G-SIBs are required to maintain minimum levels of total loss-absorbing capacity (TLAC), at least some of which must be in the form of long-term debt (LTD). These requirements apply both as risk-based requirements (that is, TLAC and LTD measured as a percentage of risk-weighted assets) and leverage-based requirements (that is, TLAC and LTD measured as a percentage of total on-balance sheet assets and certain off-balance sheet exposures).
2019 Tailoring Changes
The 2019 tailoring process did not make any changes to these requirements.
Biden Administration Position
In 2022, the Federal Reserve Board and FDIC released an ANPR seeking comment on whether large regional banks should be subject to additional resolution-resource requirements including, but possibly not limited to, an LTD requirement.
This week’s fact sheet calls for the regulators to “move forward expeditiously” with the process started by the ANPR by issuing a proposed rule that would expand LTD requirements to “a broader range of banks.”
Observations
The White House endorses an LTD requirement for regional banks, but punts on the key question of which regional banks. The agencies in the ANPR had implied, without outright committing to anything, that LTD requirements would be applied to firms with $250 billion or more of total assets, but would not be applied to Category IV firms.9
Even before release of the White House fact sheet, Vice Chair for Supervision Barr had said in his Congressional testimony this week that the agencies “plan to propose a long-term debt requirement for large banks that are not GSIBs.” VCS Barr, like the White House, did not indicate whether he means only firms with $250 billion or more in total assets or, in light of the SVB situation, also Category IV firms.
Also punted on, for understandable reasons, in both the White House fact sheet and the VCS Barr testimony is any commentary on the technical details of an LTD requirement. For instance, which entity within the banking organization’s structure should be required (or permitted) to issue qualifying LTD? How should requirements be calibrated?
Similarly, it is not clear what, if anything, the agencies have planned for some of other ideas floated in the ANPR. For example, are clean holding company and additional separability requirements still on the table?
Section 956 Incentive Compensation Rules
The fact sheet closes by saying that the recommendations therein “build upon regulatory reforms already on this Administration’s agenda,” including completion of incentive compensation rules for bank executives under Section 956 of the Dodd-Frank Act.
Here the White House is adopting a pretty generous definition of “on the agenda,” given that the most recent regulatory agendas of the federal banking regulators list a Section 956 rulemaking as a “long-term action” - i.e., an action not on their immediate list of priorities. As of this January it had even slipped off the very active near-term agenda of SEC Chair Gensler. (Under the law, the rules are supposed to be issued jointly by the Board, OCC, FDIC, NCUA, SEC and FHFA.)
Assuming the agencies are able to coordinate on a path forward, I am not sure what the next steps will be. The saga of this rule already includes a 2011 proposal and then a 2016 re-proposal, and it is not clear to me that all the agencies would necessarily be comfortable just adopting a final rule now. They may feel the need, instead, to issue another re-proposal or to at least re-open the comment period on the 2016 proposal.
Stepping back, there is also the question, of course, as to whether the Section 956 rules would have actually made a difference for SVB, Signature or other banks that have found themselves in a bad place as a result of their business models or their inability to manage interest rate risk.
Even if the answer is no, that does not necessarily make the Section 956 rules a bad idea, but looking back at what the 2016 rules would have required, I am skeptical that the rules would have materially affected management’s decision making in this case.10
Thanks for reading! Thoughts, challenges, criticisms are always welcome at bankregblog@gmail.com
A few miscellaneous housekeeping items:
Topics are generally presented in the order they were listed in the fact sheet.
Because they were the focus of President Biden’s fact sheet, the discussion in this post focuses on the Federal Reserve Board’s regulations for large U.S. bank holding companies (BHCs).
These requirements also apply, or will apply, to the few savings and loan holding companies that are above the $100 billion total assets threshold. But in some cases changes made by the Board to its regulations post-2018 actually resulted in heightened requirements for certain SLHCs compared to the status quo ante, so for simplicity I will gloss over that here and address only what changed for BHCs.
The rules for foreign banks doing business in the U.S. through U.S. operations of a similar size to U.S.-native banks are often but not always similar to those that apply to U.S. regional banks, but the differences are such that to avoid confusing things I will leave a discussion of the foreign bank rules to a different post.
In most but not all cases, the post-2019 rules for holding companies are the same as for their subsidiary depository institutions. For example, if a holding company is subject to the LCR, the IDI subsidiary of that holding company is now (most of the time) subject to the LCR as well.
But there are a few instances — for example, in the case of the capital plan rule and the stress capital buffer — where a given requirement applies only (if at all) at the holding company level. This nuance, which I generally gloss over here, is particularly relevant when considering the regulations that apply to banks such as Signature Bank or First Republic Bank that have chosen to operate without a holding company.
The U.S. LCR rule, in contrast to the Basel standard, also includes a “maturity mismatch add-on.” Firms subject to the pre-EGRRCPA modified LCR were not subject to this requirement.
Unlike the pre-EGRRCPA modified LCR mentioned above in note 2, the post-2019 reduced LCR does include a maturity mismatch add on. “The agencies acknowledge that contractual maturity mismatch is not a quantitative component of the Basel III LCR standard, but believe that is an important component of addressing the liquidity risks of banking organizations subject to the LCR rule.”
I am mildly skeptical that the “targeted” plan concept is as much of a giveaway to the banks as some to seem think it is. Even in targeted plan filings, there is still plenty of information (sometimes of questionable use) given to the agencies and - based on last year’s results at least - it is not like the agencies feel constrained in their ability to label resolution plans as deficient or as having shortcomings.
For firms like SVB Financial the justification for wanting both a 165(d) plan and an IDI plan may be pretty reasonable, but some of the non-SVB BHCs in Category IV are basically just big regional IDIs, sometimes with relatively small broker-dealer operations attached. For those firms, it is not clear to me how much would be gained by subjecting them to both IDI plan and 165(d) plan requirements.
Based on size alone SVB Financial would not have been an advanced approaches firm as it was under the $250 billion total assets threshold, but based on 2022 data SVB Financial likely would have been above the $10 billion on-balance sheet foreign exposure threshold. (Assuming of course that it would not have managed its exposures to avoid this outcome, had it been a possibility.)
The fact sheet says, “The Trump Administration not only extended stress-testing cycles but also allowed lengthy transition periods that delayed capital stress tests after banks first reached $100 billion in assets. . . . Regulators should, as appropriate, consider shortening the transition periods for common-sense safeguards like stress testing.”
For example, U.S. Bancorp must submit quarterly implementation plans ahead of its transition to Category II standards, and BMO’s U.S. IHC must submit quarterly implementation plans ahead of its transition to Category III standards.
See footnote 4 in the ANPR: “The total population of large banking organizations corresponds to Category II through IV firms under the Board's tiering framework for enhanced prudential standards. In this ANPR, the agencies are focused on domestic large banking organizations in Categories II and III, which generally exceed a threshold of $250 billion in total consolidated assets.”
I suppose a counterpoint is that, even if the rules did not affect decision making, they could have made it easier to, after the fact, either claw back or otherwise reduce compensation.