By Patrick Rucker
WASHINGTON (Reuters) - The Federal Reserve will seek significantly more capital from the largest U.S. banks and give some relief to smaller lenders as it updates its annual stress test, Fed Governor Daniel Tarullo said on Monday.
The reforms will include a new capital buffer to better protect the financial system from a shock at the nation's largest lenders like JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC).
"In pulling this package of modifications together, we have consciously shaped them in accordance with the principle that financial regulation should be progressively more stringent for firms of greater importance," Tarullo said in a speech at Yale University in New Haven, Connecticut.
Under the plan, roughly 25 regional banks including Regions Bank and SunTrust Bank would face less scrutiny during the annual stress test.
Specifically, because of their size, those lenders would be spared a costly review of risk management, internal controls, and governance practices.
The largest eight or so U.S. banks would still face such scrutiny. Eventually, they would also be subject to the capital buffer rule.
The Fed, which regulates the banking and financial services sector, expects to outline the new capital plan next year. It will not impact the 2017 stress test, officials said.
REGULATORY ARCHITECT
Tarullo has been a key architect of banking rules conceived since the 2007-2009 financial crisis. He helped write the fine print of the 2010 Dodd-Frank Wall Street reform law.
The Fed's stress test considers how roughly 30 banks could weather a downturn lasting more than two years.
Large banks that pass the test may still have to boost capital reserves if they are deemed "systemically important" to global finance.
In July, banks that got a stress test review largely received a thumbs-up from the Fed.
The cutoff for the new capital rule is $250 billion in consolidated assets. Banks below that threshold would not have to satisfy the new standard.
Regional banks have argued for years that they do not deserve the same costly scrutiny faced by the largest Wall Street firms.
The Fed on Monday formally proposed the allowance for regional banks and asked for comment by Nov. 25.