Wall Street’s Smaller Rivals Freed From Harshest Fed Demands

(Bloomberg) -- The Federal Reserve relaxed burdens for all but the giant Wall Street lenders it oversees in the most sweeping revamp of U.S. banking rules undertaken by watchdogs appointed by President Donald Trump.

Driven by a law enacted last year, the Fed moved to “tailor” oversight to ease up on smaller banks that are considered less risky. The overhaul, approved in a 4-1 vote Thursday, goes even further than Congress required by dialing back constraints tied to capital, liquidity, stress testing and leverage for both domestic and foreign banks doing business in the U.S.

In one of the key changes, the rule lowers the amount of easy-to-sell assets that big regional banks such as U.S. Bancorp, Capital One Financial Corp. and PNC Financial Services Group Inc. have to stockpile to protect themselves should markets dry up in a crisis. Such lenders will be permitted to hold 15% fewer highly-liquid assets than Wall Street megabanks, and smaller firms such as KeyCorp, Fifth Third Bancorp and Ally Financial Inc. generally have an even lower expectation for stockpiling assets.

The overall changes -- opposed by Fed Governor Lael Brainard -- could free up tens of billions across the industry, according to agency estimates.

‘Less Risk’

“All of our rules keep the toughest requirements on the largest and most complex firms, because they pose the greatest risks to the financial system and our economy,” Fed Chairman Jerome Powell said in a statement. “Firms that take on less risk will see their regulatory burdens appropriately set to match that risk.“

While Wall Street was left out of Thursday’s rule cutting, giants such as JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc. have already scored some big wins in the de-regulatory climate that has swept through Washington during the Trump era.

A recent overhaul of the Volcker Rule will make it easier for banks to trade without running afoul of post-crisis restrictions on banks’ speculative investing. And in what could be Wall Street’s most lucrative victory, the Fed and other agencies have proposed reversing a rule that’s forced banks to set aside as much as $40 billion in margin for certain swaps trades.

The new tailoring effort places each bank in one of a range of categories. The largest, most complex institutions will be in the top bucket, while firms with less than $100 billion of assets will be assigned to a category that receives that lightest-touch oversight. Placement in each tier is based on assets, dependence on potentially volatile short-term funding, scale of off-balance-sheet exposures and their amount of foreign business.

Lower Capital

The Fed estimates the changes will lower capital demands for the industry by more than $11 billion and provide a $50 billion break in the amount of highly liquid assets that banks have to keep on hand to fund themselves.

Foreign banks will be treated the same as domestic banks, according to the Fed, though some regulations will aim at their U.S. holding companies while others target each firm’s combined U.S. operations. The agency’s final chart has the U.S. operations of Deutsche Bank AG, Barclays Plc, Mitsubishi UFJ Financial Group, Inc. and Credit Suisse Group AG in the second category, one slot below the globally significant U.S. banks. A third bucket includes HSBC Holdings Plc, UBS Group AG and others.

The Fed also moved Thursday toward recalibrating the assessments it charges banks for supervision and to formalize an easier schedule for banks to file their so-called living wills -- extensive plans for each firm to be safely resolved in a bankruptcy. For Wall Street banks, that means producing the document every two years, alternating between a full plan and a more targeted plan that only focuses on a few key areas.

Brainard, an appointee of former President Barack Obama who was at the agency when some post-crisis bank regulations were approved, has routinely opposed the central bank’s efforts to roll back industry constraints put in place after the 2008 financial meltdown. In voting against the tailoring changes, she said they “weaken core safeguards against the vulnerabilities that caused so much damage in the crisis.”

The Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. are also set to jointly issue some of the same tailoring changes. The FDIC board -- which includes the head of the OCC -- is scheduled to follow up next week on Oct. 15.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

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