Navigating “Year Two”: Regulatory landscape and challenges for foreign banks and their IHCs

After the July 1, 2016 compliance deadline for foreign banking organizations (FBOs) to establish US intermediate holding companies (IHCs) and implement the enhanced prudential standards,1 we noted that, although the effective date marked a key milestone on the journey toward effective compliance, the “long road to operationalizing run-the-bank (RtB) functions has just begun.”2 Heading into Year Two, FBOs with their US IHCs and broader combined US operations (CUSO) contend with the reality that there is a significant road yet to be traveled in a regulatory environment focused on local/jurisdictional implementation that challenges the global model.

Four key focus areas underpinning the supervisory strategy

Although FBOs have made notable progress leading up to and after last year’s “go-live” date under Regulation YY, they continue to face substantial challenges across aspects of the Federal Reserve Board’s (FRB) four key supervisory focus areas:

Continue reading “Navigating “Year Two”: Regulatory landscape and challenges for foreign banks and their IHCs”

Modernizing risk & compliance and Regulation YY implementation

In our previous blogs on foreign banking organizations (FBOs), we highlighted our thoughts on some of the next set of challenges for large FBOs following the July 1, 2016 compliance deadline to establish Intermediate Holding Companies (IHCs). We recognize the long road to operationalizing run-the-bank (RtB) processes has just begun and the true “use” tests of the IHCs and their combined US Operations will be unfolding for some time. FBOs have experienced a significant period of change for more than three years, and the baton has now been passed from large change programs to implementation programs. The focus has shifted to embedding the IHC/Regulation YY requirements into businesses to execute, control functions (i.e., second line functions) to monitor and test, and internal audit to validate.

It is critical that FBOs operationalize and then sustain their RtB processes, and reinforce and/or enhance the Three Lines of Defense (3 LoD) governance models currently in place. The ability of these functions working end-to-end and across siloes to do their jobs will be a critical point for enabling risk identification, monitoring and mitigation, ensuring a robust risk and compliance culture, and providing a US-centric view of the FBO’s operations and risk profile. The regulatory spotlight, especially over the course of the next year, will be on risk, compliance and internal audit, and the effectiveness of these second and third lines of defense to identify whether the processes are working.

Continue reading “Modernizing risk & compliance and Regulation YY implementation”

Regulatory change: Challenges continue, but opportunities exist

Posted by Irena Gecas-McCarthy, Advisory Principal, Deloitte & Touche LLP, Chris Spoth, Advisory Managing Director, Deloitte & Touche LLP, David Wright, Advisory Managing Director, Deloitte & Touche LLP, Monica Lalani, Advisory Principal, Deloitte & Touche LLP Ken Lamar, Independent Senior Advisor to Deloitte & Touche LLP, Richard Rosenthal, Advisory Senior Manager, Deloitte & Touche LLP, and Alex LePore, Advisory Senior Consultant, Deloitte & Touche LLP on August 30, 2016

Overview

Regulators have consistently communicated their high expectations for large foreign banking organizations (FBOs) operating in the US.  Underlying these expectations is the assumption that FBOs will understand, appropriately respond to, and comply with regulations and guidance affecting the totality of their US operations, now in the forms of Intermediate Holding Companies (IHCs) and US branches and agencies.  To have sufficient time to respond to, and integrate, new requirements, FBOs should gain an early understanding of new regulatory developments at the proposal stage, evaluate their impact on US operations, comment, and, when finalized, shift to an implementation mode that builds and integrates these new capabilities into business-as-usual operations.

Large FBOs, in particular, are already subject to recovery and resolution planning (RRP), liquidity reporting, liquidity stress testing, governance, and risk management requirements, among others, and are expected to holistically meet regulatory reporting, capital planning, and stress testing requirements.  The Federal Reserve Board’s (FRB) final rule1 establishing enhanced prudential standards significantly raised the stakes for FBOs to effectively meet regulatory requirements.

Continue reading “Regulatory change: Challenges continue, but opportunities exist”

Marketplace transparency and reporting readiness

Posted by Irena Gecas-McCarthy, Advisory Principal, Deloitte & Touche LLP, David Wright, Advisory Managing Director, Deloitte & Touche LLP, Dmitry Gutman, Advisory Managing Director, Deloitte & Touche LLP, Dilip Krishna, Advisory Managing Director, Deloitte & Touche LLP,  Ken Lamar, Independent Senior Advisor to Deloitte & Touche LLP, Richard Rosenthal, Advisory Senior Manager, Deloitte & Touche LLP, Claudio Rodriguez, Advisory Senior Manager, Deloitte & Touche LLP, Pranav Shanghvi, Advisory Senior Manager, Deloitte & Touche LLP,  Mike Thakkar, Advisory Senior Manager, Deloitte & Touche LLP, and Alex LePore, Advisory Senior Consultant, Deloitte & Touche LLP on August 10, 2016

Introduction

Federal Reserve Board (FRB) officials have made clear in communications with the industry that they expect the foreign banking organizations (FBOs) similar to the US bank holding companies to have the capabilities to access and provide high-quality data, including credible internal reporting/MIS and regulatory reporting data from the outset.1  They point out that FBOs have had more than three years to come into compliance with enhanced prudential standards (after the initial rule proposal) and believe that effective internal MIS and regulatory reporting processes should be in place by now.  This expectation—coupled with increased transparency provided by the public disclosure of several regulatory reports—places pressure on FBOs to ensure that their end-to-end data production processes and control frameworks produce accurate and complete reporting.  There are additional regulatory reporting requirements that have been proposed and will be finalized as the industry comment periods end and the FRB processes are finalized.  These include the attestation of the FR Y-14 reports for the FBO Intermediate Holding Companies (IHC).

Building clear process and control documentation, data governance, and quality assurance processes are critical to demonstrating credible MIS and regulatory reporting implementation.  Establishing confidence in reporting will be especially critical to meeting IHC capital planning expectations related to the April 2017 Comprehensive Capital Analysis and Review (CCAR) submissions (the non-public “dry run”). The bar is high.  FBOs face reputational risk as a result of the increased transparency provided by the public disclosure of regulatory reporting filings (most notably the FR Y-9C, which will disclose IHCs’ capital ratios, balance sheet information, and financial performance, among other information, as well as public disclosure of CCAR results).

Continue reading “Marketplace transparency and reporting readiness”

Evaluating global booking models after the Brexit

Posted by Irena Gecas-McCarthy, Advisory Principal, Deloitte & Touche LLP, David Wright, Advisory Managing Director, Deloitte & Touche LLP, Monica Lalani, Advisory Principal, Deloitte & Touche LLP, Ken Lamar, Independent Senior Advisor to Deloitte & Touche LLP, Simon Brennan, Director, Deloitte UK, Vishal Vedi, Partner, Deloitte UK, Richard Rosenthal, Advisory Senior Manager, Deloitte & Touche LLP, and Alex LePore, Advisory Senior Consultant, Deloitte & Touche LLP on July 27, 2016

In light of the recent United Kingdom (UK) referendum to leave the European Union (EU), strategic decisions about foreign banking organizations’ (FBOs) business models are as critical as ever. You might be wondering, in a blog series focused on Enhanced Prudential Standards (EPS), why we would lead with a discussion of FBOs’ booking models and the Brexit?  This is important, because underpinning the EPS framework was the construction of an explicit ring-fence through the establishment of an Intermediate Holding Company (IHC).1 The IHC forced large FBOs to locally inject and maintain capital and liquidity resident in the US IHC entity. The consequences of this ring-fencing will only ramp up in intensity as CCAR and stress testing requirements become effective and force FBOs to hold additional capital. The net effect of these changes is substantial. Increased and localized capital requirements force FBOs to rethink what businesses are profitable and can be sustained in the current regulatory and market environment within and outside the US. FBO executives have recognized the significance of these issues.2 The question now becomes: how do they continue to demonstrate progress and adapt to change?

Continue reading “Evaluating global booking models after the Brexit”

Enhanced Prudential Standards for Foreign Banks: What’s after the compliance deadline?

Posted by Irena Gecas-McCarthy, Advisory Principal, Deloitte & Touche LLP, David Wright, Advisory Managing Director, Deloitte & Touche LLP, Richard Rosenthal, Advisory Senior Manager, Deloitte & Touche LLP, and Alex LePore, Advisory Senior Consultant, Deloitte & Touche LLP on July 13, 2016

Introduction

Although the July 1, 2016 compliance deadline for foreign banking organizations (FBOs) to establish Intermediate Holding Companies (IHCs) has passed, the long road to operationalizing run-the-bank (RtB) functions has just begun. Rather than viewing July 1, 2016 as the “finish line,” FBOs and their IHCs should see it as Mile 13 of a marathon.  These large FBOs must demonstrate that they can govern and manage risk for their Combined US Operations (CUSO) on a self-sufficient and sustainable basis. It will come down to how the US Management and the US IHC Board of Directors (BoD) work through key issues and decisions such as budget approvals, capital planning, and crisis management, as well as navigate their shareholders, their parent organizations, and the parameters between global consolidated efficiency and a regional, legal entity focus. Continue reading “Enhanced Prudential Standards for Foreign Banks: What’s after the compliance deadline?”

Fed FAQs for FBOs

The Securities and Exchange Commission Reforms Money Market Rules

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.

Continue reading “Fed FAQs for FBOs”