US Fed plans to raise bank oversight thresholds, sources say

By Nupur Anand, Pete Schroeder and Saeed Azhar

NEW YORK/WASHINGTON, Sept 25 (Reuters) - The US Federal Reserve is working on a plan to raise the asset thresholds that trigger stricter oversight of big banks, four people with knowledge of the matter said, which would allow some lenders to avoid costly additional regulation and potentially spur consolidation.

The central bank ‌is expected to soon propose reindexing the thresholds where banks become subject to stress tests of their balance sheets, liquidity, capital and other more stringent rules, to account for inflation and ‌economic growth, the people said. Three of the people said they expect the Fed to propose the changes later this year.

Current rules impose stricter requirements when a bank reaches $100 billion in assets, stepping up at $250 billion and again at $700 billion. Lenders ​say those thresholds, set in 2019, haven't kept pace with the economy, subjecting banks to increasingly stringent oversight that exceeds the risks they pose.

Banks say crossing the $100 billion threshold typically requires major investment in compliance staff, risk management systems, stress-testing capabilities and regulatory reporting infrastructure that can run into tens of millions of dollars annually.

The Fed is considering reindexing the highest threshold closer to $1 trillion and some of the requirements triggered by the lower threshold closer to $150 billion, said the people, who declined to be named as they were discussing sensitive regulatory issues.

Banks that stand to benefit include U.S. Bancorp, Capital One, PNC Financial and Truist, which are closest ‌to the $700 billion threshold, giving them more room to grow without ⁠incurring some of the toughest Fed oversight, including aspects of new incoming capital rules and daily reporting requirements to supervisors.

Western Alliance, Zions and several others, meanwhile, could grow beyond $100 billion without incurring all the requirements currently imposed on lenders in that category. Pinnacle Financial Partners and one or two other lenders sitting between $100 billion ⁠and $150 billion could even shed some requirements.

A Fed spokesperson declined to comment. In January, Fed Vice Chair for Supervision Michelle Bowman said the central bank would consider reindexing the thresholds and suggested using nominal GDP, but the Fed has not commented since then.

"The US economy has grown significantly over the past seven years, and it makes sense to have rules for all banks that will help consumers and small businesses through increased bank lending capacity ​and ​more competition," a U.S. Bancorp spokesperson said.