Factbox: Trump’s Fed eased banking rules. Now, what can Democrats take back?


WASHINGTON, Jan.5 (Reuters) – Under the leadership of Republicans appointed by former President Donald Trump, the US Federal Reserve has relaxed a series of banking rules and requirements introduced in the wake of the 2007-2009 financial crisis, arguing that they were too brutal and expensive.

With a new Democratic candidate set to take the post of vice president of oversight left vacant last month by Randal Quarles, who led the regulatory overhaul, the Fed should seriously consider reversing many of the changes over the years. last four years.

Here are some of the more controversial changes Democrats, advocacy groups and the Fed’s only Democratic governor, Lael Brainard, have criticized for weakening financial system guarantees.

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ADAPTATION OF CAPITAL AND LIQUIDITY

In 2018, Congress passed a law directing regulators to relax capital and liquidity requirements for all banks except the nation’s largest, with lawmakers saying post-crisis rules were too strict for them. small banks and hurt the economy.

The Fed has led the way by “adapting” the rules. While the law only ordered relief for lenders with up to $ 250 billion in assets, Quarles used the discretionary powers the law gave the Fed to extend relief to banks with up to $ 250 billion in assets. $ 700 billion in assets.

Quarles’ successor is likely to reconsider this discretionary relief which could be reversed without going through lawmakers, analysts have said.

BANK ‘WILL OF LIFE’

The 2018 law also ordered the Fed to reduce the frequency with which large banks must file “living wills” detailing how they could be safely liquidated in the event of a crisis.

Once again, Quarles went further than prescribed by Congress, allowing banks with up to $ 700 billion in assets to submit a full plan once every six years rather than once a year as previously required. .

REWRITING THE VOLCKER RULE

The implementation of the “Volcker rule”, which prevents banks from engaging in speculative investments on their own account, was one of the most controversial regulatory projects to emerge from the financial crisis a decade ago.

Streamlining this extremely complex rule was a priority for Quarles when he joined the Fed, but it still took the Fed and four other regulators two and a half years to finish rewriting it.

Critics said the changes put the financial system at risk, but overhauling them would consume a lot of resources, analysts said.

STRESS TESTS

Quarles made a number of changes to big bank stress tests, the annual health checks that are often the biggest strain on lenders, determining their capital requirements.

He tried to make tests, which banks have long criticized as opaque and subjective, more predictable and transparent.

Most notably, he removed the Fed’s power to dismiss banks on “qualitative” rather than quantitative grounds.

Many analysts expect Quarles’ replacement to strengthen this cornerstone of Fed banking supervision, including ordering lenders to set aside enough cash to cover eight quarters of future dividend payments, up from four currently. .

INTER-AFFILIATE EXCHANGES

While many of Quarles’ changes targeted small and mid-sized banks, one was a direct victory for Wall Street lenders.

In 2020, the Fed and other regulators agreed to reduce the amount of collateral banking organizations must set aside to protect certain swap transactions between their subsidiaries, freeing up about $ 40 billion, according to industry estimates.

Critics have warned that the change could encourage banks to accumulate large risky swap positions and said the Fed should review it.

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Reporting by Pete Schroeder; edited by Michelle Price and Pravin Char

Our standards: Thomson Reuters Trust Principles.

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