Randy Benjenk is quoted in Risk regarding the Federal Reserve’s new proposal to assess risk in a more targeted way, splitting banks into four categories.
US global systemically important banks (G-Sibs) land in the first category; banks
with more than $700 billion in assets, or more than $75 billion in cross-jurisdictional
activity, are in the second. Those with between $250 billion and $700 billion, or $75 billion in non-bank assets, weighted short-term wholesale funding or off-balance sheet exposure will make up Category III. Those in Category IV have $100 billion to $200 billion in assets.
Mr. Benjenk says, “Category III institutions are probably the winners of today’s proposal. These were the ones that didn’t get much direct relief in the Crapo bill.” He adds, “This proposal gives them a modified Liquidity Coverage Ratio (LCR), biennial company-run DFAST and relief from the advanced approaches. The Fed didn’t propose relief from the qualitative aspects of the Comprehensive Capital Analysis and Review for this group, which it could have done. But, otherwise, I think these institutions will get of the most relief under this proposal beyond what the statute required.”
The Fed’s proposal also would free Category III and IV banks from advanced approaches to recognizing capital. Mr. Benjenk says this is not only a major win for the four Category III institutions, but also a big step towards regulators figuring out the role of advanced approaches going forward.
Mr. Benjenk says, “Institutions put a lot of work into implementing the advanced approaches when they were first adopted domestically. They had to go out and get approval, they had to get their models tested, all under the theory that at some point they would be able to rely on internal models rather than standardized capital.” These changes would bring the US more in line with the Basel standard, he added. “Internationally, these are not applied except to the largest institutions, so the proposal is more consistent with Basel, which applies liquidity standards similar to the way the US regulators are proposing to do here.”
The proposal entirely eliminates liquidity requirements for Category IV banks, with
the Fed assuming they will match the HQLA levels of holding companies that are
currently not subject to the LCR rule. He says, “The Fed is saying banks will hold HQLA consistent with their business needs, rather than consistent with any regulation.”
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