Washington, D.C. — The Bank Policy Institute and the American Bankers Association today urged the Federal Reserve to modify the thresholds for the Fed’s current tailoring rule, which determines regulatory thresholds for banks of varying sizes, to account for economic growth and inflation in recent years. In a comment letter filed today, the associations noted that the tailoring framework was designed to align regulatory requirements with banks’ size, complexity and risk profile. Without periodic adjustments, thresholds become increasingly disconnected from those objectives as the economy grows.
“Indexing the regulatory thresholds established in the tailoring rule would reflect macroeconomic growth, right-size the regulatory environment and promote economic growth and financial stability,” the associations stated in the letter. “It would also be consistent with the Federal Reserve’s proposal to implement automatic indexing in the GSIB surcharge framework. Separately, we encourage the Federal Reserve to consider whether additional changes to the tailoring framework would improve its overall design and risk sensitivity.”
Key Context. Congress directed the Federal Reserve in 2018 to tailor enhanced prudential standards based on a firm’s size and risk profile, moving away from a one-size-fits-all approach. The current framework, implemented in 2019, places banking organizations into four categories that generally correspond to asset size.
When adopting the framework, the Federal Reserve indicated that thresholds should be reevaluated over time to reflect macroeconomic and industry growth. The thresholds have not been updated since 2019 despite seven years of economic growth and inflation. At the same time, several regulatory requirements and pending capital proposals rely on the existing category structure, making it important that thresholds remain appropriately calibrated.
How It Works. The current tailoring framework establishes four categories of banks: Category I, II, III and IV.
- Periodic Gut Check. In 2019, the Fed recognized that the thresholds in the framework would need to be re-evaluated over time “to ensure they appropriately reflect growth on a macroeconomic and industry-wide basis.” The Fed has not revisited these asset thresholds since their creation, during which time seven years of economic growth and inflation have occurred.
- What’s Happening Now. The Federal Reserve should fulfill its commitment to reevaluate the thresholds now. In addition to economic growth and inflation since 2019, the number and significance of recent proposals, including stress testing and capital proposals, that would apply to banks based on the current tailoring framework make immediate revisions to the current tailoring thresholds essential.
Recommendations: The associations urged the Federal Reserve to:
- Recalibrate the existing thresholds to reflect economic growth and inflation since 2019.
- Adopt automatic indexing to ensure thresholds remain aligned with economic conditions over time.
- Provide greater certainty for banks regarding the requirements that apply to them, particularly in light of pending capital proposals.
- Consider broader reforms and updates to improve the tailoring framework’s effectiveness, including regarding the number of categories and the thresholds that define them.
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About Bank Policy Institute
The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud and other information security issues.
About the American Bankers Association
The American Bankers Association is the voice of the nation’s $25.1 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $19.7 trillion in deposits and extend $13.2 trillion in loans.
Media Contact
Tara Payne
Bank Policy Institute
tara.payne@bpi.com
Josh Britton
American Bankers Association
jbritton@aba.com
