Senate passes financial services regulatory reform bill, would amend key Dodd-Frank thresholds

On March 14, 2018, the Senate passed, by a vote of 67 to 31, S. 2155 (the “Economic Growth, Regulatory Relief, and Consumer Protection Act”), which marks the most significant changes to the Dodd-Frank Act since its enactment in 2010.

Most notably, the bill would raise the statutory asset thresholds related to the imposition of enhanced prudential standards (EPS) and the Dodd-Frank Act stress tests (DFAST):

  • EPS – The threshold would be raised from $50 billion to $250 billion, though the Federal Reserve Board (FRB) would retain the authority to impose EPS on banks with between $100 billion and $250 billion in assets.
  • DFAST – The threshold for the FRB’s annual supervisory stress test would be raised from $50 billion to $250 billion and the threshold for the company-run stress test would be raised from $10 billion to $250 billion, though the FRB would be required to conduct a separate, periodic supervisory stress test of banks with between $100 billion and $250 billion in assets.

Below are several key takeaways with respect to the bill’s potential impact on regulatory thresholds.

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FRB, FDIC provide resolution plan feedback to 19 FBOs, tailor supervisory expectations

On August 8, 2017, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) extended, from December 31, 2017 to December 31, 2018, the resolution plan deadline for 21 firms, including 19 foreign banking organizations (FBOs).

On January 29, 2018, the agencies issued firm-specific feedback to these 19 FBOs based on their last resolution plans filed in 2015.1 Although the feedback letters do not identify any deficiencies or shortcomings with respect to the 2015 plans,2 they outline key supervisory expectations that must be met as the FBOs prepare to file their next plans.

FBOs with US IHCs

Eight of the 19 FBOs were required to establish US intermediate holding companies (IHCs) as of July 1, 2016.3 Accordingly, these FBOs are required to describe any changes they have made to their resolution plan resulting from the implementation of the IHC requirement.

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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.

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Is your resolution plan enough?

Enhancing the second line of defense framework

Over the past several years, the Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation (FDIC) (collectively, “the Agencies”) have shifted their focus on resolution planning, now emphasizing the capabilities that banks must demonstrate in order to have a credible plan. Through their feedback letters to institutions, guidance, and FAQs, it is evident that the Agencies are emphasizing plan execution rather than conceptual strategy.

Banks’ first lines of defense (FLOD) should demonstrate that they can execute the plan to the Agencies. By using the second lines of defense (SLOD) to review controls, manage internal testing, and provide credible challenge, banks may be able to reduce the chances of the Agencies finding a firm’s plan “non-credible.” Ultimately, banks should demonstrate that required actions are replicable in order to reduce exposure to agency criticism.

One key to success? Accurate and precise data. Banks have the opportunity to leverage data to improve resolution planning processes continuously, which captures data that demonstrates they can execute their preferred resolution strategy. That same data can be used to improve efficiencies and avoid potential identified shortfalls or deficiencies.

By embracing resolution planning’s complexity, banks can accelerate their performance to lead the industry and better navigate resolution planning challenges, especially as changes occur.

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Regulatory reporting: Revisions to Call Report and other related reports

The Federal Financial Institutions Examination Council (FFIEC) recently announced significant changes to bank regulatory reporting requirements (including the “Call Report”) that are expected to result in reduced reporting burden.  The changes originated in December 2014, when the FFIEC launched an initiative to reduce burdens associated with the Call Report. Since then, the FFIEC and its member agencies—the Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Consumer Financial Protection Bureau (CFPB), and National Credit Union Administration (NCUA)—have taken several actions to meet this goal, including the creation of a new streamlined Call Report for smaller institutions (FFIEC 051) that took effect with the March 31, 2017 report date.

The goals underlying this initiative coincide with a focus on simplifying, rationalizing, and recalibrating aspects of the regulatory framework, including regulatory reporting.  In support of the burden efforts, the Treasury Department urged regulators to “streamline current regulatory reporting requirements for all community financial institutions” by focusing their efforts on the applicability of each line item.1

Below is an overview of three recent developments with respect to the Call Report,2 the FFIEC 002 (Report of Assets and Liabilities of US Branches and Agencies of Foreign Banks) and FFIEC 002S (Report of Assets and Liabilities of a Non-US Branch that is Managed or Controlled by a US Branch of Agency of a Foreign (Non-US) Bank),3 and the FR Y-9C (Consolidated Financial Statements of Holding Companies), as well as the key takeaways for covered institutions.4

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FRB proposes new supervisory expectations for senior management, business line management, independent risk management and controls of large financial institutions

In connection with its August 2017 proposal to establish a new rating system for large financial institutions (LFIs)1, the Federal Reserve Board (FRB) issued proposed guidance on January 4, 2018 outlining supervisory expectations for senior management, business line management, and independent risk management (IRM) and controls in the form of principles.2

Once finalized, the guidance will help inform the FRB’s overall evaluation of a firm’s governance and controls (i.e., one of the three components of the new rating system, along with capital planning and positions and liquidity risk management and positions).  The proposed guidance is generally consistent with a high-level preview of expectations provided in the August rating system proposal, though the guidance would now also extend to the US operations of foreign banking organizations (FBOs).3

The proposed guidance would apply to US bank holding companies (BHCs), savings and loan holding companies (SLHCs), and the combined US operations of FBOs with more than $50 billion in total assets, as well as state member bank subsidiaries of these organizations and nonbank financial companies designated for enhanced supervision by the Financial Stability Oversight Council.

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FRB, FDIC issue feedback on 2017 US G-SIB resolution plans, find no deficiencies

On December 19, 2017, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) announced credibility determinations and released firm-specific feedback on the 2017 resolution plans submitted by the eight US global systemically important banks (G-SIBs) under Section 165(d) of Dodd-Frank.1

Notably, the agencies announced that none of the plans had deficiencies,2 which reflects the “significant progress made in recent years.”

However, the agencies found that four of the plans had shortcomings3 related to derivatives and trading activities, separability, and legal entity rationalization (each plan had a single shortcoming).  In addition, the agencies identified four areas in which “more work needs to be done by all firms to continue to improve their resolvability”:

  1. intra-group liquidity,
  2. internal loss-absorbing capacity,
  3. derivatives, and
  4. payment, clearing, and settlement activities.

The agencies also expect firms to “remain vigilant in considering the resolution consequences of their day-to-day management decisions.” For a detailed analysis of the agencies feedback, click here.

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FRB applies global market shock to IHCs

Nearly one year after the Federal Reserve Board (FRB) subjected certain intermediate holding companies (IHCs) to the CFO attestation requirement for the FR Y-14A/Q/M regulatory reports, it further amended the reports by, among other things, modifying the scope of the global market shock (GMS) component of the Dodd-Frank Act stress tests (DFAST) to include certain IHCs.

GMS applicability

Specifically, the FRB amended the application of the GMS to include any firm that (1) has aggregate trading assets and liabilities of $50 billion or more, or aggregate trading assets and liabilities equal to 10 percent or more of total consolidated assets, and (2) is not a “large and noncomplex firm” under its capital plan rule.1 As a result of this change, the FRB expects that six IHCs will become subject to the GMS, and the six US bank holding companies that meet the current materiality threshold will remain subject to the requirement.

Although the FRB finalized the amendment to the GMS threshold as proposed, it decided to delay the application of the GMS to firms that will become newly subject to it (i.e., the six IHCs) until the 2019 Comprehensive Capital Analysis and Review (CCAR) and DFAST exercises (rather than the 2018 exercises, as originally proposed).  The FRB explains that it “recognizes the challenges associated with building the systems necessary to report the data in the trading schedule.”2

However, the FRB emphasized that the “materiality of trading exposures and counterparty positions to US IHCs may warrant applying an additional component to firms that meet such criteria.”  Accordingly, it noted that it may apply such components or scenarios under the 2018 DFAST exercise.

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President Trump nominates FRB Governor Powell to be next Chair

Following President Trump’s nomination of FRB Governor Jay Powell to succeed Janet Yellen as the next Chair, many questions have arisen about the implications for regulatory policy.

Although Governor Powell’s views on specific financial regulatory policy issues will become clearer in the coming days and weeks—especially during his nomination hearing before the Senate Banking Committee—a look at his previous statements on key issues may provide important context for his outlook and approach.

Below is our take on Governor Powell’s “top ten” most significant recent statements covering the post-crisis regulatory framework (including possible amendments), capital planning and stress testing, the enhanced supplementary leverage ratio, resolution planning, the Volcker Rule, housing finance reform, and expectations for bank boards, among others.

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A new ratings framework aligned to regulatory reform priorities

On August 3, 2017, the Federal Reserve Board (Fed) released a notice of proposed rulemaking that would establish a new rating system for large financial institutions (LFIs). Specifically, the new rating system would apply to bank holding companies (BHCs) and non-insurance, non-commercial savings and loan holding companies (SLHCs) with more than $50 billion in total assets, as well as intermediate holding companies (IHCs) of foreign banking organizations.

The proposal includes a new rating scale under which component ratings would be assigned for:

  1. Capital planning and positions,
  2. Liquidity risk management and positions, and
  3. Governance and controls.

In essence, the Fed is revamping its rating system for LFIs to catch up with the Fed’s post-crisis heightened supervisory expectations and approach to LFI supervision.  The Fed proposes to assign initial ratings under the new rating system during 2018.

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