The significant changes in the accounting for credit losses (e.g., Current Expected Credit Losses or “CECL”, and International Financial Reporting Standards 9 or “IFRS 9”) can have a unique effect on the US branches and agencies of foreign banking organizations (FBOs). As US banking institutions are in the process of getting ready for the upcoming requirement, this may also be a good time to discuss the relevant Allowance for Loan and Lease Losses (ALLL) considerations for the US branches and agencies of the FBOs. In this article, we consider the current reporting, common problems, and issues to be considered concerning the adoption of CECL.
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.
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.
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.
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.
The Federal Reserve (“Fed”) released the results of its Comprehensive Capital Analysis and Review (CCAR) for 2017 on June 28. Key Facts:
- For the first time in CCAR’s seven-year history, the Fed did not object to any of the capital plans or capital distributions.
- One firm, Capital One, was required to resubmit its capital plan to address certain capital planning process weaknesses.
- The aggregate quantitative results were very similar to last year’s test, with all 34 firms exceeding required minimums.
- Two firms, American Express and Capital One, adjusted their original requested capital distributions taking advantage of a so called “mulligan” to fine tune their capital levels.
The prior week’s release of the Dodd-Frank Act Stress Test (DFAST) results provided more detailed information on the Fed’s stress test. Compared to CCAR, those results exclude buybacks and capital issuances and hold past common dividends constant.
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.
On March 24, 2017, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC)1 (collectively, the “agencies”) issued guidance to four foreign banking organizations (FBOs) for their next resolution planning submissions (the “2018 Guidance”) and announced credibility determinations for 16 resolution plans submitted by US bank holding companies (BHCs) in 2015.2
Notably, the agencies extended—from July 1, 2017 to July 1, 2018—the date by which the FBOs must submit their next resolution plans, but did not release credibility determinations for the FBOs’ 2015 resolution plans.
The agencies did not identify deficiencies in any of the plans submitted by the 16 US BHCs, but did identify shortcomings in one of the plans.
For a more detailed analysis of the credibility determinations for the resolution plans submitted by the 16 US BHCs, please click here.
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.
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.