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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A new age for governance

On August 3, 2017, the Federal Reserve Board (Fed) proposed guidance that would significantly revise its expectations for boards of directors by laying out its view of the five key attributes that describe an effective board.  The proposal would also set in motion efforts to better delineate the roles, responsibilities, and accountabilities among senior management and the board by rescinding or revising past guidance and rules.  The proposed guidance on board effectiveness would apply to US bank holding companies (BHCs), savings and loan holding companies (SLHCs), and nonbank financial companies designated by the Financial Stability Oversight Council (FSOC) as systemically important.  The proposed guidance would not apply to intermediate holding companies (IHCs) of foreign banking organizations or state member banks, but the Fed noted that it anticipates proposing guidance on board effectiveness for IHCs at a later date, and requested feedback on how the guidance should be adapted to apply to IHCs and state member banks. The proposed guidance would also be used as part of the Fed’s supervisory assessment of board effectiveness outlined in a companion proposal on a new rating system for large financial institutions (LFIs).1

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FRB finalizes public disclosure requirement for LCR

Introduction

On December 19, 2016, the Federal Reserve Board (FRB) finalized a rule requiring covered institutions to publicly disclose their Liquidity Coverage Ratio (LCR), including quantitative and qualitative information underlying the LCR.1 Relative to the proposal, the final rule did not revise the reporting frequency or quantitative data requirements.   However, it did amend the qualitative information requirements.

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Federal Reserve Board issues guidance on illiquid funds under the Volcker Rule

Since the December 2013 finalization of an interagency rule implementing Section 619 of Dodd-Frank (i.e., the Volcker Rule), covered banking entities have sought guidance on many related interpretive issues. The agencies have issued 21 responses to Frequently Asked Questions (FAQs) during this period,1 but none of the FAQs addressed key questions about investments in illiquid funds.

On December 12, 2016, the Federal Reserve Board (FRB) issued guidance—in the form of a statement of policy2 and Supervision and Regulation (SR) Letter 16-183 —regarding how banking entities may seek an extension to conform their investments in illiquid funds to the requirements of the Volcker Rule.

Section 619 of Dodd-Frank permits the FRB to provide a banking entity up to five years from the end of the conformance period (i.e., five years from July 21, 2017) to conform investments in certain illiquid funds.4

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Federal banking agencies issue proposal on cyber risk management standards

Nearly one month after the New York State Department of Financial Services issued a proposal to establish prescriptive cyber requirements for New York-domiciled financial institutions,1 three three federal banking agencies—the Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) (collectively, the “agencies”)—issued an advance notice of proposed rulemaking (ANPR) on enhanced cyber risk management and resilience standards for large banking organizations.2

Specifically, the enhanced standards would apply to US bank holding companies, the US operations of foreign banking organizations, and US savings and loan holdings companies with more than $50 billion in total assets, as well as nonbank financial companies and financial market utilities designed for FRB supervision by the Financial Stability Oversight Council (FSOC), among others.

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FRB, FDIC release public sections of 2016 Resolution Plans of eight US G-SIBs

On October 4, 2016, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) (collectively, “the Agencies”) released the public sections of the “targeted submissions” that fulfill the 2016 resolution planning requirement for each of the eight US global systemically important banks (G-SIBs).1 Although these public sections are, on balance, slightly shorter than the 2015 public sections submitted in connection with the last full submissions, they contain significant new details about completed and forthcoming enhancements to resolution planning capabilities to address regulatory concerns.

In April 2016, the Agencies determined that the 2015 plans submitted by five of the eight US G-SIBs were “not credible or would not facilitate an order resolution under the Bankruptcy Code.” These institutions were required to remediate the identified deficiencies by October 1, 2016.2 In addition, the Agencies identified shortcomings in the plans submitted by the remaining three US G-SIBs, which were required to submit plans to address these issues by October 1, 2016.3 The next full plan submissions for all eight US G-SIBs are due by July 1, 2017.

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Regulatory reporting elements of new proposed rules on physical commodities and capital planning

Although large banking organizations are likely aware of the Federal Reserve Board’s (FRB) recent proposed rules to impose prudential requirements and limitations on certain physical commodity activities1 and modify the capital planning and stress testing rules for “large and noncomplex” firms,2 they may not have paid sufficient attention to the regulatory reporting components of the proposals.

Importantly, these two proposals would make changes to the following reports:

  • FR Y-9C, which collects consolidated financial statements for holding companies;
  • FR Y-9LP, which collects parent-only financial statements for large holding companies; and
  • FR Y-14A/Q/M series related to capital assessments and stress testing.

In addition to understanding the impact of the FRB’s proposals on their businesses, covered US and foreign banking organizations should carefully review the proposed changes to these key regulatory reports and understand what actions are required in order to comply.

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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).

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FRB proposes amendments to FR Y-14 reports, CFO attestation requirement for LISCC IHCs

Posted by Dmitriy Gutman, Advisory Managing Director, Deloitte & Touche LLP, Irena Gecas-McCarthy, Advisory Principal, Deloitte & Touche LLP,  Chris Spoth, Advisory Managing Director, Deloitte & Touche LLP, Ken Lamar, Independent Senior Advisor to Deloitte & Touche LLP,  and Alex LePore, Advisory Senior Consultant, Deloitte & Touche LLP on July 29, 2016

Less than a month after large foreign banking organizations (FBOs) established their intermediate holding companies (IHCs), the largest of these firms must now prepare to meet a new requirement: an attestation by their CFOs to the accuracy of their reports for capital assessments and stress testing.

On July 28, 2016, the Federal Reserve Board (FRB) published a proposal1 in the Federal Register that, among other changes, would amend the FR Y-14A/Q/M reports to apply the CFO attestation requirement to IHCs in the FRB’s Large Institution Supervision Coordinating Committee (LISCC) portfolio beginning with the reports as of December 31, 2017 and becoming fully effective with the reports as of December 31, 2018.

Earlier this year, the FRB applied this requirement to US bank holding companies (BHCs) in the LISCC portfolio, reflecting its ongoing concerns with data quality, governance, controls, and accountability over reporting.  The extension of this requirement to IHCs—which have not yet participated in the FRB’s annual Comprehensive Capital Analysis and Review (CCAR) program and related stress tests—is a further indication of increased regulatory expectations on accuracy and control environment for these data.
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FRB finalizes regulatory reporting requirements for IHCs, clarifies that IHC subsidiaries of LISCC FBOs are not yet subject to CFO attestation requirement

Reporting
Posted by Craig Brown, Deloitte Advisory managing director, Deloitte & Touche LLP, on June 2, 2016

As large foreign banking organizations (FBOs) prepare for the July 1, 2016 compliance date to establish their intermediate holding companies (IHCs) under Regulation YY, regulatory reporting has become a key area of focus.  Regulators have increased their expectations with respect to governance, controls, data, and ownership over reporting, especially in connection with the FR Y-14 reports related to capital assessments and stress testing.  Although many IHCs will be subject to certain of the Federal Reserve Board’s (FRB) regulatory reports for the first time, these firms should be prepared to meet regulators’ heightened expectations across their US operations.

On May 31, 2016, the FRB finalized the initial application of several regulatory reports to IHCs—including the FR Y-14 series, the FR Y-9C (Consolidated Financial Statements for Holding Companies), and the FR Y-15 (Banking Organization Systemic Risk Report)—beginning with the reporting period ending on September 30, 2016.  In addition, IHCs must comply with the information collections associated with applicable regulatory capital rules beginning on the July 1, 2016 IHC compliance date.

Although the FRB adopted the regulatory reporting framework for IHCs largely as proposed in February 2016, there are certain key changes and clarifications that IHCs should understand now.

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