Board Proposes Steps to Strengthen Regulation of Big Banks

Board Proposes Steps to Strengthen Regulation of Big Banks

Bank The Federal Reserve Board has proposed steps to strengthen regulation and supervision of large bank holding companies and systemically important nonbank financial firms. Mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the proposals address issues of capital, liquidity, credit exposure, stress testing, risk management, and early remediation requirements.

The Fed's proposal generally applies to U.S. bank holding companies with assets of $50 billion or more and nonbank firms deemed systemically important by the Financial Stability Oversight Council. This set of proposals does not apply to foreign banking companies or savings and loan holding companies. The Federal Reserve Board will issue separate proposals addressing those firms.

Public comments on the current proposal are requested by March 31, 2012. The Federal Reserve Board's proposed measures include:

  • Risk-based capital and leverage requirements that will be enacted in two phases. Phase one would institute the capital plan rule the Board issued in November. That rule requires firms to develop annual capital plans, conduct stress tests, and maintain adequate capital. In phase two, the Board would propose to create a risk-based capital surcharge based on the work of the Basel Committee on Banking Supervision.

  • Liquidity requirements. Among a series of phased-in measures, companies would be required to conduct internal liquidity stress tests and set limits to manage liquidity risk. 

  • Stress tests. The Board would conduct annual stress tests of the companies using three economic and financial market scenarios. A summary of the results, including company-specific information, would be made public.

  • Single-counterparty credit limits. These requirements would limit a firm's credit exposure to a single counterparty as a percentage of the firm's regulatory capital. Credit exposure between the largest financial companies would be subject to a tighter limit.

  • Early remediation requirements. These measures are designed to make sure financial weaknesses within a firm are addressed early. The Board is proposing various triggers for remediation, including capital levels, stress test results, and risk-management weaknesses. Some of the triggers would be forward looking.

December 27, 2011