FRB finalizes US risk committee, home country stress testing certifications for FBOs

More than two years after issuing its proposal, the Federal Reserve Board (FRB) finalized1 changes to the FR Y-7 (Annual Report of Foreign Banking Organizations) with respect to the US risk committee and home country stress testing certification requirements for foreign banking organizations (FBOs).

The changes are effective beginning with the reports submitted on or after March 1, 2018.

For more information on the reporting requirements, please click here.

US risk committee certification

Under Regulation YY (Enhanced Prudential Standards), the FRB requires FBOs with total assets between $10 billion and $50 billion, as well as FBOs with more than $50 billion in total assets but less than $50 billion in US assets, to file an annual certification that it maintains a committee of its global board that (1) oversees the risk management policies of the combined US operations and (2) includes at least one member with experience in identifying, assessing, and managing risk exposures of large, complex firms.

With respect to this requirement, the FRB clarified that the “FBO is not required to form a special US risk committee comprised of members of the FBO’s board of directors.”  Instead, it must ensure that the FBO’s board (or a committee of the board) has “primary responsibility for oversight of the risks of the combined US operations.”

In addition, with respect to how the requirement would apply to an FBO with a two-tier board structure, which the FRB acknowledged is a common feature of FBOs in Europe, the FRB clarified that a committee of either the supervisory board or the management/executive board (or a combination thereof) could be considered a committee of the FBO board for purposes of complying with the requirement.

Notably, Regulation YY does not require FBOs with more than $50 billion in total assets and more than $50 billion in US assets to file the certification because these FBOs are subject to more prescriptive risk committee requirements, and the FRB “expects to gain sufficient information through the supervisory process to evaluate whether the US risk committee meets the [applicable] requirements.”

Home country stress testing compliance certification

Regulation YY also requires all covered FBOs (i.e., those covered by the US risk committee certification requirement, as well as those with more than $50 billion in total assets and more than $50 billion in US assets) to be subject to an annual capital stress testing regime on a consolidated basis by its home country supervisor, and to provide information about this stress test to the FRB.

As part of finalization of the changes to FR Y-7, the FRB clarified several key points raised by commenters:

  • In response to whether an FBO would meet the home country stress test requirements upon a satisfactory completion of an Internal Capital Adequacy Assessment Process (ICAAP), the FRB clarified that, if an ICAAP satisfies the underlying requirements for a capital stress test, satisfactory completion of the ICAAP “would be sufficient to satisfy these requirements.”
  • In addition, the FRB clarified that only an annual supervisory stress test would satisfy the requirements of Regulation YY (i.e., a biannual stress test, for example, would not satisfy the requirement).
  • With respect to how an FBO should report when the home country uses fewer or different planning horizons for the liquidity stress test, the FRB noted that an FBO may choose to provide an internal liquidity stress test for just the combined US operations.
  • The FRB also clarified that an FBO’s completion of the FR Y-7Q on a quarterly basis “would satisfy both the requirement to report and the requirement to certify to the [FRB] its compliance with capital adequacy measures that are consistent with the Basel Capital Framework.”

As further developments occur, Deloitte will issue additional updates as appropriate.

Organizations may contact Deloitte with questions about the changes and activities to support planning, preparation, and compliance.

Contacts

David Wright
Managing Director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Dmitriy Gutman
Managing Director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Craig Brown
Managing Director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Irena Gecas-McCarthy
Principal | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Ken Lamar
Independent Senior Advisor to Deloitte & Touche LLP
Deloitte & Touche LLP

Edward Hida
Partner| Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Chris Spoth
Managing Director | Deloitte Risk and Financial Advisory
Executive Director, Center for Regulatory Strategy, Americas
Deloitte & Touche LLP

Alex LePore
Senior Consultant | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

1Federal Reserve System, Agency Information Collection Activities; Announcement of Board Approval under Delegated Authority and Submission to OMB, 83 Fed. Reg. 3141, (January 23, 2018), available at https://www.gpo.gov/fdsys/pkg/FR-2018-01-23/pdf/2018-01153.pdf.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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Copyright © 2018 Deloitte Development LLC. All rights reserved.

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