By Thomas G. Wolfe, J.D.
In response to the Federal Reserve Board’s request for comments on its proposal to modify the “Prudential Standards for Large Bank Holding Companies and Savings and Loan Holding Companies,” the Federal Reserve Bank of Minneapolis is opposing the Board’s plan to relax liquidity-related regulations for large banks. The Minneapolis Fed’s November 2018 comment letter asserts, “In short, the proposed rule-making would weaken the resiliency of large banks at a time when it should be strengthened.”
In October 2018, in keeping with the “Economic Growth, Regulatory Relief, and Consumer Protection Act,” the Federal Reserve Board generated two proposals to establish a revised framework for applying prudential standards to large U.S. banking organizations based on risk. Generally, the proposals seek to more closely align the regulatory requirements that apply to large banking organizations with their risk profiles. The proposed framework would not apply to the U.S. operations of foreign banking organizations.
While the first proposal seeks to tailor the application of prudential standards to U.S. bank holding companies and to apply enhanced standards to certain large savings and loan holding companies, the Board’s second proposal (posed jointly with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation) seeks to tailor the application of the agencies’ capital and liquidity rules.
Comment letter. In its Nov. 19, 2018, comment letter, the Minneapolis Fed maintains that the Federal Reserve Board is forgetting lessons learned from the financial crisis and the Great Recession. “In this specific case, we are concerned about the unnecessary relaxation of liquidity-related regulations for large banks,” the letter states. Moreover, the Minneapolis Fed agrees with Federal Reserve Board Governor Lael Brainard’s analysis of the Board’s proposal and agrees with Brainard that the Board’s “proposed changes should not move forward.”
Viewing the Board’s proposal as a potential threat to the financial stability of the U.S. financial system by “rolling back” existing regulations, the comment letter also indicates that the Minneapolis Fed is “deeply troubled by ongoing efforts of the Board of Governors to change rules in a way that reduces the equity funding of the largest banks.” Large banks “should have enough skin in the game, through equity funding, to ensure that their shareholders bear the risk of their investments, rather than taxpayers,” the Minneapolis Fed asserts.
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