On November 29, 2018, the Federal Reserve Board published for public comment a Notice of Proposed Rulemaking that would reorganize the current prudential standards regulatory framework for US banking organizations deemed to be of systemic risk into four separate categories to reflect their risk profiles.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), banking organizations with total consolidated assets of $50 billion or more were deemed by statute to be a risk to the financial stability of the US financial system and are subject to a series of regulatory requirements imposed by the Federal Reserve Board, including stress testing, liquidity risk management, capital buffers, risk committee and enhanced risk management and single counterparty credit limits.

On May 24, 2018, the President signed Public Law 115-174, the “Economic Growth, Regulatory Relief, and Consumer Protection Act” (“EGRRCPA”) which includes some revisions to Dodd-Frank, one of the most significant being a change in the statutory systemic risk threshold for bank holding companies from $50 billion of total consolidated assets to $250 billion of total consolidated assets. However, the Federal Reserve Board still retains the ability to impose any of those enhanced prudential standards on bank holding companies with more than $100 billion if it believes that it is necessary for U.S. financial stability or safety and soundness. Read our post on this new law.

The proposal would establish four risk-based categories of prudential standards:

Category I:     Bank holding companies that are defined as US global systemically important bank holding companies (“GSIB”), a designation that currently covers the largest and most internationally active US banking organizations that the Federal Reserve Board has said pose the greatest threat to the stability of the US financial system.

Category II:    Bank holding companies with $700 billion or more in total consolidated assets or $75 billion or more in cross-jurisdictional activity.

Category III:    Bank holding companies with $250 billion or more in total consolidated assets or $75 billion or more of nonbank assets, weighted short-term wholesale funding or off-balance sheet exposure.

Category IV:    Other bank holding companies with $100 billion to $250 billion in total consolidated assets.

GSIBs will continue to be subject to the most stringent prudential standards, with one exception applicable to all US bank holding companies. Dodd-Frank imposed a requirement that all bank holding companies with $50 billion or more must conduct semi-annual company-run stress tests. EGRRCPA lowered that requirement to “periodic” and the Federal Reserve Board is proposing to eliminate the midcycle test for all bank holding companies.

Bank holding companies in Category II generally will remain subject to their current requirements, aside from the elimination of the midcycle stress test. However, bank holding companies in Categories III and IV would see easing in some of their current requirements in such areas as stress testing and liquidity risk management.

Bank holding companies with total consolidated assets of $50 billion or more are not completely freed from prudential standards. They still will be subject to the risk committee and chief risk officer requirements.

These proposals would not apply to non-US banks with banking operations in the United States, including companies organized under US law that may hold US subsidiaries of non-US banks; a separate proposal will be issued regarding the US operations of non-US banks.

Comments must be received on or before January 22, 2019.