The Federal Reserve has decided to relax some of the rules imposed on financial institutions (FIs) during the Obama administration, with a trio of changes.
The regulator not only voted against activating a key buffer that would protect banks against financial risks, but removed one part of its stress-testing regime that measured domestic banks’ ability to face financial crises. In addition, the Financial Stability Oversight Council (FSOC) wants to change the oversight of certain financial companies so they won't have to face extra supervision for being “too big to fail.”
However, while FIs might be rejoicing about the changes, progressive groups have criticized the Fed for weakening the post-crisis regulations implemented during the Obama administration. In fact, they warned that the changes could leave the country in danger of a future meltdown.
"This is consistent with the blind deregulatory zeal of the Trump administration, which is completely ignoring the lessons of the last crash,” said Dennis Kelleher, chief executive of Better Markets, which advocates stricter controls on FIs, according to Financial Times (FT).
Though the move was opposed by Fed Governor Lael Brainard, the Fed decided to not raise the counter-cyclical buffer, which aims to strengthen global banks’ stability during high financial risk. Instead, it chose to leave the buffer at zero.
Brainard was also against the proposal to end pass-fail judgments that measure banks’ ability to handle financial crises. As a result, the Fed will remove “qualitative” grades for domestic firms, while major foreign banks will continue to be subjected to the qualitative test.
The FSOC, led by Secretary of the Treasury Steven Mnuchin, revealed proposals to change the way it monitors non-bank financial companies, such as insurance firms, that have faced additional supervision if they were considered “too big to fail." Last October, the FSOC ended the supervision of Prudential, the final insurer on that list.
Furthermore, the FSOC's proposals would make it less likely for those companies to be placed back on the watchlist, and any move to do so would face a cost-benefit analysis.
“Today’s proposal would make significant improvements to how the council identifies, assesses and responds to potential risks to U.S. financial stability. ... These changes will help ensure that the council accomplishes its mission efficiently and effectively," said Mnuchin.