In response to the crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter, the Dodd-Frank Act; P.L. Among its stated purposes are "to promote the financial stability of the United States…, [and] to end 'too big to fail,' to protect the American taxpayer by ending bailouts." This report focuses on one pillar of that approach—the Federal Reserve's (Fed's) enhanced (heightened) prudential regulation for large banks and nonbank financial firms designated as systemically important by the Financial Stability Oversight Council (FSOC). For an overview of the TBTF issue and other policy approaches to mitigating it, see CRS Report R42150, Systemically Important or "Too Big to Fail" Financial Institutions , by Marc Labonte. The Dodd-Frank Act automatically subjected all bank holding companies and foreign banks with more than $50 billion in assets to enhanced prudential regulation (EPR). In addition, Basel III (a nonbinding international agreement that U.S. banking regulators implemented through rulemaking after the financial crisis) included several capital requirements that only apply to large banks. In 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (referred to herein as P.L. 115-174 ) eliminated most EPR requirements for banks with assets between $50 billion and $100 billion. Banks that have been designated as Global-Systemically Important Banks (G-SIBs) by the Financial Stability Board (an international, intergovernmental forum) or have more than $250 billion in assets automatically remain subject to all EPR requirements, as modified. 115-174 gives the Fed discretion to apply most individual EPR provisions to banks with between $100 billion and $250 billion in assets on a case-by-case basis only if it would promote financial stability or the institution's safety and soundness. It then discusses several rules proposed by the Fed that would reduce EPR requirements for some large banks; some in response to P.L. Who Is Subject to Enhanced Prudential Regulation? U.S. Banks

			Banks and Bank Holding Companies

By statute, enhanced regulation applies to large U.S. bank holding companies (BHCs). As a result, more foreign banks would become subject to some EPR requirements under the proposal. However, the FSOC may designate any nonbank financial firm as a systemically important financial institution (SIFI) if its failure or activities could pose a risk to financial stability. The novelty in the Dodd-Frank Act was to create a group of specific prudential requirements that apply only to large banks. Some EPR provisions are intended to reduce the likelihood that a bank will experience financial difficulties, while others are intended to help regulators cope with a failing bank. Stress Tests and Capital Planning

Stress tests and capital planning are two enhanced requirements that have been implemented together. 115-174 raised to more than $250 billion in assets (with Fed discretion to apply to financial firms with between $100 billion and $250 billion in assets), and Fed-run (or "supervisory") stress tests (called DFAST) for any BHC or nonbank SIFI with more than $50 billion in assets, which P.L. Capital requirements are intended to ensure that a bank has enough capital backing its assets to absorb any unexpected losses on those assets without failing. 115-174 raised to more than $250 billion in assets (with Fed discretion to apply to banks with between $100 billion and $250 billion in assets), to periodically submit resolution plans (popularly known as "living wills") to the Fed, FSOC, and FDIC that explain how they can safely enter bankruptcy in the event of their failures. Although all banks are regulated for liquidity adequacy, Title I requires more stringent liquidity requirements for banks with more than $50 billion in assets, which P.L. 115-174 raised to more than $250 billion in assets (with Fed discretion to apply to banks with between $100 billion and $250 billion in assets), to limit their exposure to unaffiliated counterparties on an individual counterparty basis and to periodically report on their credit exposures to counterparties. 115-174 raised to at least $50 billion in assets, to form risk committees on their boards of directors that include a risk management expert responsible for oversight of the bank's risk management. Provisions Triggered in Response to Financial Stability Concerns

Title I of the Dodd-Frank Act provides several powers for—depending on the provision—FSOC, the Fed, or the FDIC to use when the respective entity believes that a bank with more than $50 billion in assets or designated nonbank SIFI poses a threat to financial stability. The ratio is applied only if a bank receives written warning from FSOC that it poses a "grave threat to U.S. financial stability," and ceases to apply when the bank no longer poses a grave threat. Capital requirements are intended to ensure that a bank has enough capital backing its assets to absorb any unexpected losses on those assets without resulting in the bank's insolvency. Proposed Changes to Large Bank Regulation

As of the date of this report, the Fed and the other bank regulators have proposed several rules that would modify EPR
One set of rules, implementing Section 401 of P.L. Two other rules were proposed independently of any legislative action One would combine elements of stress tests requirements and Basel III to create a stress capital buffer requirement for large banks, effectively reducing capital requirements mainly for large banks that are not G-SIBs. 115-174 , the Fed's rules had also tailored some of the EPR requirements for banks with more than $50 billion in assets, so that more stringent regulatory or compliance requirements were applied to banks with more than $250 billion in assets or G-SIBs, depending on the requirement. 115-174 , EPR would become much more tiered and tailored by bank size. The Fed has proposed rules that would implement changes to bank asset thresholds and specific EPR requirements found in P.L. The Fed has provided three justifications for making these requirements less stringent than the current capital planning requirements. If they were less than 2.5%, then a bank is required to hold the same amount of capital under the proposal as currently under the capital conservation buffer. It found that the proposed rule would have reduced required capital for large banks that are not G-SIBs (because the stress test is currently the binding constraint) by between $10 billion and $45 billion and would have required G-SIBs to hold the same or more capital (because the G-SIB surcharge is being added to the stress capital buffer); overall, capital requirements for G-SIBs would have increased by between $10 billion and $50 billion. Treatment of Custody Banks Under the Supplementary Leverage Ratio

Custody banks provide a unique set of services not offered by many other banks, but are generally subject to the same regulatory requirements as other banks. As discussed in the " Basel III Capital Requirements " section above, under leverage ratios, including the SLR, the same amount of capital must be held against any asset, irrespective of risk to ensure that banks have a minimum amount of total capital. Evaluating Proposed Changes

Collectively, recent proposed changes would, to varying degrees, reduce capital and other advanced EPR requirements for banks with more than $50 billion in assets. In the view of the banking regulators and the supporters of P.L. 115-174 , these changes better tailor EPR to match the risks that large banks pose. Opponents are concerned that the additional systemic and prudential risks these changes pose outweigh the benefits to society of reduced regulatory burden, believing that the benefits will mainly accrue to the affected banks. According to Section 165 of the Dodd-Frank Act, the purpose of enhanced regulation is "to prevent or mitigate risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected financial institutions." Ultimately, the risk to financial stability posed by a large bank failing—and the efficacy of EPR in mitigating that risk—cannot be known for certain until a large bank fails, and no failure has occurred since the crisis. In general, enhanced prudential requirements impose costs on large banks.
The 2007-2009 financial crisis highlighted the problem of "too big to fail" financial institutions—the concept that the failure of large financial firms could trigger financial instability, which in several cases prompted extraordinary federal assistance to prevent their failure. One pillar of the 2010 Dodd-Frank Act's (P.L. 111-203) response to addressing financial stability and ending too big to fail is a new enhanced prudential regulatory (EPR) regime that applies to large banks and to nonbank financial institutions designated by the Financial Stability Oversight Council (FSOC) as systemically important financial institutions (SIFIs). Previously, FSOC had designated four nonbank SIFIs for enhanced prudential regulation, but all four have since been de-designated.
Under this regime, the Federal Reserve (Fed) is required to apply a number of safety and soundness requirements to large banks that are more stringent than those applied to smaller banks. These requirements are intended to mitigate systemic risk posed by large banks
Stress tests and capital planning ensure banks hold enough capital to survive a crisis. Living wills provide a plan to safely wind down a failing bank. Liquidity requirements ensure that banks are sufficiently liquid if they lose access to funding markets. Counterparty limits restrict the bank's exposure to counterparty default. Risk management requires publicly traded companies to have risk committees on their boards and banks to have chief risk officers. Financial stability requirements provide for regulatory interventions that can be taken only if a bank poses a threat to financial stability. Capital requirements under Basel III, an international agreement, require large banks hold more capital than other banks to potentially absorb unforeseen losses.
The Dodd-Frank Act automatically subjected all bank holding companies and foreign banks with more than $50 billion in assets to enhanced prudential regulation. In 2017, the Economic Growth, Regulatory Relief, and Consumer Protection Act (P.L. 115-174) created a more "tiered" and "tailored" EPR regime for banks. It automatically exempted domestic banks with assets between $50 billion and $100 billion (five at present) from enhanced regulation. The Fed has discretion to apply most individual enhanced prudential provisions to the 11 domestic banks with between $100 billion and $250 billion in assets on a case-by-case basis if it would promote financial stability or the institutions' safety and soundness, and has proposed exempting them from several EPR requirements. The eight domestic banks that have been designated as Global-Systemically Important Banks (G-SIBs) and the five banks with more than $250 billion in assets or $75 billion in cross-jurisdictional activity remain subject to all Dodd-Frank EPR requirements. In addition, the Fed has proposed applying some EPR requirements on a progressively tiered basis to the 23 foreign banks with over $50 billion in U.S. assets and $250 billion in global assets.
P.L. 115-174 also reduced the amount of capital that custody banks are required to hold against one of the EPR capital requirements, the supplementary leverage ratio (SLR). In addition, the Fed has issued a proposed rule that would reduce the amount of capital that G-SIBs are required to hold against the SLR. Finally, the Fed has proposed another rule that would combine capital planning under the stress tests with overall capital requirements for large banks.
Collectively, these proposed changes would reduce, to varying degrees, capital and other advanced EPR requirements for banks with more than $50 billion in assets. In the view of the banking regulators and the supporters of P.L. 115-174, these changes better tailor EPR to match the risks posed by large banks. Opponents are concerned that the additional systemic and prudential risks posed by these changes outweigh the benefits to society of reduced regulatory burden, believing that the benefits will mainly accrue to the affected banks.
The 2007-2009 financial crisis highlighted the problem of "too big to fail" financial institutions—the concept that the failure of large financial firms could trigger financial instability, which in several cases prompted extraordinary federal assistance to prevent their failure. One pillar of the 2010 Dodd-Frank Act's (P.L. 111-203) response to addressing financial stability and ending too big to fail is a new enhanced prudential regulatory (EPR) regime that applies to large banks and to nonbank financial institutions designated by the Financial Stability Oversight Council (FSOC) as systemically important financial institutions (SIFIs). Previously, FSOC had designated four nonbank SIFIs for enhanced prudential regulation, but all four have since been de-designated.
Under this regime, the Federal Reserve (Fed) is required to apply a number of safety and soundness requirements to large banks that are more stringent than those applied to smaller banks. These requirements are intended to mitigate systemic risk posed by large banks
Stress tests and capital planning ensure banks hold enough capital to survive a crisis. Living wills provide a plan to safely wind down a failing bank. Liquidity requirements ensure that banks are sufficiently liquid if they lose access to funding markets. Counterparty limits restrict the bank's exposure to counterparty default. Risk management requires publicly traded companies to have risk committees on their boards and banks to have chief risk officers. Financial stability requirements provide for regulatory interventions that can be taken only if a bank poses a threat to financial stability. Capital requirements under Basel III, an international agreement, require large banks hold more capital than other banks to potentially absorb unforeseen losses.
The Dodd-Frank Act automatically subjected all bank holding companies and foreign banks with more than $50 billion in assets to enhanced prudential regulation. In 2017, the Economic Growth, Regulatory Relief, and Consumer Protection Act (P.L. 115-174) created a more "tiered" and "tailored" EPR regime for banks. It automatically exempted domestic banks with assets between $50 billion and $100 billion (five at present) from enhanced regulation. The Fed has discretion to apply most individual enhanced prudential provisions to the 11 domestic banks with between $100 billion and $250 billion in assets on a case-by-case basis if it would promote financial stability or the institutions' safety and soundness, and has proposed exempting them from several EPR requirements. The eight domestic banks that have been designated as Global-Systemically Important Banks (G-SIBs) and the five banks with more than $250 billion in assets or $75 billion in cross-jurisdictional activity remain subject to all Dodd-Frank EPR requirements. In addition, the Fed has proposed applying some EPR requirements on a progressively tiered basis to the 23 foreign banks with over $50 billion in U.S. assets and $250 billion in global assets.
P.L. 115-174 also reduced the amount of capital that custody banks are required to hold against one of the EPR capital requirements, the supplementary leverage ratio (SLR). In addition, the Fed has issued a proposed rule that would reduce the amount of capital that G-SIBs are required to hold against the SLR. Finally, the Fed has proposed another rule that would combine capital planning under the stress tests with overall capital requirements for large banks.
Collectively, these proposed changes would reduce, to varying degrees, capital and other advanced EPR requirements for banks with more than $50 billion in assets. In the view of the banking regulators and the supporters of P.L. 115-174, these changes better tailor EPR to match the risks posed by large banks. Opponents are concerned that the additional systemic and prudential risks posed by these changes outweigh the benefits to society of reduced regulatory burden, believing that the benefits will mainly accrue to the affected banks.