Joint Trades Letter to the Board on the Regulatory Tailoring Thresholds and Framework

Ladies and Gentlemen:

The Bank Policy Institute and the American Bankers Association submit this letter to provide recommendations to the Board of Governors of the Federal Reserve System regarding the indexing of the thresholds in the tailoring rule applicable across the prudential framework, as well as the overall structure of the tailoring framework. We urge the Federal Reserve to recalibrate the tailoring thresholds for economic growth and inflation since 2019 (when the tailoring rule was adopted) and provide for automatic periodic indexing of the thresholds going forward. This action is urgently necessary, especially in light of the agencies' pending proposals to significantly revise the capital framework. 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. 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.

In the Economic Growth, Regulatory Relief, and Consumer Protection Act, Congress modified Section 165 of the Dodd-Frank Act to require the Federal Reserve to tailor enhanced prudential standards. The modifications mandate that the Federal Reserve establish enhanced prudential standards for bank holding companies ("BHCs") with total consolidated assets equal to or greater than $250 billion. The Federal Reserve is statutorily authorized (but not required) to apply enhanced prudential standards to BHCs with $100 billion or more, but less than $250 billion, in total consolidated assets, provided that the Federal Reserve (i) determines that application of the prudential standard is appropriate (A) to prevent or mitigate risks to the financial stability of the United States, or (B) to promote safety and soundness; and (ii) takes into consideration the BHC's or BHCs' capital structure, riskiness, complexity, financial activities (including financial activities of subsidiaries), size, and any other risk-related factors that the Federal Reserve deems appropriate.

In 2019, when the Federal Reserve established the current tailoring framework, it noted that the thresholds in the framework would need to be reevaluated over time "to ensure they appropriately reflect growth on a macroeconomic and industry-wide basis." The current tailoring framework for the application of enhanced prudential and capital and liquidity standards establishes four categories of firms (Categories I, II, III, and IV).

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