On June 26, 2014, the Federal Reserve (Fed) published answers to a list of frequently asked questions (FAQs) from foreign banking organizations (FBOs) that face enhanced prudential standards — including formation of an intermediate holding company (IHC) for non-branch U.S. operations and submission of an Implementation Plan. Many of the questions were generated from a town hall meeting the Fed conducted in May 2014 to help selected FBOs understand the planning requirements and timing associated with the enhanced standards.
Large FBOs that are required to form IHCs should definitely take a close look at the FAQs. However, even the other FBOs not subject to the IHC requirement may still want to give the FAQs a read since they are likely to include valuable clues about the Fed’s position on other aspects of the enhanced prudential standards (e.g., risk management, liquidity, governance). The FAQs may also serve as a sign of regulators’ increased willingness to openly communicate and collaborate with businesses in order to improve compliance, particularly given the scale and complexity of the rules.
According to the Fed, these initial answers are part of an ongoing communication process that will include a dedicated mailbox for FBOs to submit new or follow-up questions to be addressed in subsequent FAQs. The information in the FAQs — and the creation of an ongoing process for clarifying the Fed’s evolving requirements — has important implications for affected organizations.
- Revising assumptions. FBOs will be able to confirm or need to adjust their planning assumptions and implementation strategies in response to new and emerging information from the Fed. The FAQs contain guidance on several major issues such as holding company structures and governance models to more nuanced details such as the style and length of the Implementation Plan, specifics on Comprehensive Capital Analysis and Review (CCAR) inputs as well as formats that are preferred for pro-forma financial requirements.
- Speeding up timelines. Until now, many FBOs have been designing their Implementation Plans for submission of January 1, 2015 and the overall effective date of July 1, 2016. However, the FAQs bring up a number of issues that will likely require FBOs to take action sooner than they expected. For example, the FAQs indicate that implementation plans for IHCs must include detailed descriptions of their Risk Committee structures, which means FBOs will need to design those structures before submitting their plans, instead of deferring critical design decisions until the implementation phase. In addition, the FAQs indicate that model approve for use of market risk models for capital purposes must occur prior to use in risk-weighted capital calculations.
- Designing for flexibility. Since the Fed’s requirements are likely to evolve as subsequent FAQs are released, FBOs should create implementation plans and capabilities that are flexible and scalable. Treating compliance as a one-time, check-the-box exercise may be a recipe for disaster.
For more information, you can read the FAQs on the Fed website. Or for a comprehensive analysis of the enhanced prudential standards, download Deloitte’s detailed report.
Posted by Irena Gecas-McCarthy, Principal, Deloitte & Touche LLP