CCAR: Reaching the summit

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.

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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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FRB, FDIC issue resolution planning guidance, one-year extension to four FBOs; Issue evaluation of 16 US BHC resolution plans

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.

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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.

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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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A strategic approach to regulatory risk management

Overview

A recognition has emerged among both domestic and foreign banks that regulatory risk is a critical part of an organization’s risk framework.  Regulatory risk extends beyond the colloquial definition of a change in laws, rules, and regulations that may impact how business is conducted to include monitoring of the regulatory rulemaking environment, impact on policymaking, and overall regulatory relations management—that is, managing relationships with your regulators. Such relationship management extends beyond tactical examination flow and responding to requests; instead, it embraces a larger, more significant role that includes a comprehensive regulatory policy, and regulatory strategy approach. Accordingly, it becomes perhaps more important than ever that foreign banking organizations (FBOs) gain an early understanding of new regulatory developments at the proposal stage and work with the business to understand how to build the requisite capabilities for new regulatory requirements while continuing to meet the business’ strategic objectives.  While doing this, it is important to inform your regulator of how your business and risk strategy are aligned to execute requirements to sustainability (that is, how you will get there).

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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.

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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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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?

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