Summary

On December 17, 2012, the staff of the Federal Reserve issued a Supervision and Regulation (“SR”) letter describing the Federal Reserve’s new framework for consolidated supervision of large financial institutions. SR letters address significant policy and procedural matters related to the Federal Reserve’s supervisory responsibilities.

Under the new framework, the Federal Reserve’s primary supervisory objectives for large financial institutions will be (1) to enhance resiliency of an institution to lower the probability of its failure or its becoming unable to serve as a financial intermediary, and (2) to reduce the impact on the financial system and the broader economy of an institution’s failure or material weakness. These objectives are meant to conform to key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, such as enhanced prudential standards for large financial institutions. Although the Federal Reserve has not previously stated these objectives as its primary supervisory objectives, and the new framework formally integrates areas such as corporate governance and compensation that Federal Reserve staff has been focused on since the financial crisis, changes in specific supervisory expectations are limited. Changes include greater emphasis on recovery planning in the case of financial or operational weakness, and on orderly resolution planning, as required by the Dodd-Frank Act. The Federal Reserve will also engage in greater “macroprudential” supervision to detect systemic risks.

The new framework applies to the largest and most complex financial institutions subject to consolidated Federal Reserve supervision, including nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve; other domestic bank and savings and loan holding companies with consolidated assets of $50 billion or more; and other foreign banking organizations with combined assets of U.S. operations of $50 billion or more.

…continue reading: Federal Reserve Updates Consolidated Supervision Framework for Large Financial Institutions

On November 9, 2012, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) issued instructions and guidance for:

• the Comprehensive Capital Analysis and Review program for 2013 (“CCAR 2013”) applicable to the 19 bank holding companies (“BHCs”) with total assets of $50 billion or more that were previously subject to CCAR and the Supervisory Capital Assessment Program (“SCAP”); and
• the Capital Plan Review program for 2013 (“CapPR 2013”) applicable to an additional 11 BHCs with total assets of $50 billion or more that were not subject to prior CCARs or SCAP, but were subject to CapPR in 2012.

CCAR 2013 and CapPR 2013 are both being conducted under the Federal Reserve’s previously adopted Capital Plan Rule. In addition, elements of CCAR 2013 are being implemented in conjunction with the Federal Reserve’s newly finalized Stress Test Rules adopted pursuant to the separate stress test requirements of sections 165(i)(1) and (2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The following is an outline of certain notable aspects of the CCAR 2013, CapPR 2013 and their respective instructions.

In certain instances, the instructions and guidance for CCAR 2013 and CapPR 2013 contain new provisions, while in others, the new instructions are largely congruous with procedures for previous CCAR and CapPR iterations. Important aspects of CCAR 2013 instructions include:

…continue reading: Capital Plans and Stress Test Rules

Summary

In October 2012, the Board of Governors of the Federal Reserve System (the “FRB”) published in the Federal Register final rules implementing the requirements of Section 165(i)(1) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) concerning supervisory stress tests to be conducted by the FRB (the “Annual Supervisory Stress Test Rule”) and Section 165(i)(2) of Dodd-Frank regarding semi-annual company-run stress tests (the “Semi-Annual Company-Run Stress Test Rule,” and, together with the Annual Supervisory Stress Test Rule, the “Stress Test Rules”). The Stress Test Rules apply to bank holding companies (“BHCs”) with total consolidated assets of $50 billion or more (“Large BHCs”) and nonbank financial companies designated by the Financial Stability Oversight Council (“Designated SIFIs,” and together with Large BHCs, “Covered Companies”). Concurrent with the Stress Test Rules, the FRB, Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corporation (“FDIC,” and together with the FRB and OCC, the “Agencies”) published separate final rules implementing the requirements of Section 165(i)(2) of Dodd-Frank regarding annual company-run stress tests (the “Annual Company-Run Stress Test Rules”) for supervised entities (BHCs, savings and loan holding companies (“SLHCs”) and depository institutions) with average total consolidated assets greater than $10 billion other than Covered Companies (together “Covered Institutions”). The Stress Test Rules and Annual Company-Run Stress Test Rules have substantial implications for capital planning, including capital distributions.

The specific application of the rules generally depends on the type of entity involved (for example, BHC, depository institution, or SLHC), the size of the institution and its applicable regulator. In summary, the requirements of the Stress Test Rules and Annual Company-Run Stress Test Rules are as follows:

…continue reading: Supervisory and Company-Run Stress Test Requirements

On August 30, 2012, the Board of Governors of the Federal Reserve System (the “FRB”), the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the “Agencies”) published in the Federal Register three notices of proposed rulemaking (the “NPRs”, and the rules proposed by the NPRs, the “Proposed Rules”) [1] that seek to amend the U.S. risk-based capital rules for banks [2] and implement final amendments to the market risk rules (the “Market Risk Amendments”). Initial versions of the NPRs and the Market Risk Amendments were first issued by the FRB on June 7, 2012 (such initial version of the NPRs, the “Initial NPRs”). [3]

Based on a preliminary review of the NPRs as published in the Federal Register, the Agencies appear to have made few noteworthy changes to the Initial NPRs from June. The changes include:

…continue reading: Federal Banking Agencies Publish Federal Register Versions of Capital NPRs

Recently, the Board of Governors of the Federal Reserve System (the “FRB”) approved for publication three notices of proposed rulemaking (the “NPRs”) substantially amending the risk-based capital rules for banks. [1] The FRB also approved final amendments to the market risk rules (the “Market Risk Amendments”), often referred to as “Basel II.5”. [2] The NPRs and Market Risk Amendments are meant to be joint rulemakings with the Office of the Comptroller of the Currency (the “OCC”) and the Federal Deposit Insurance Corporation (the “FDIC” and, together with the OCC and the Federal Reserve the “Agencies”) and will be published in the Federal Register after approval by the OCC and the FDIC, which is expected during the next several weeks.

The changes to the Agencies’ capital rules proposed in the NPRs and finalized in the Market Risk Amendments when implemented, taken together, will represent the most substantial revisions to the Agencies’ capital rules since the adoption in 1989 of risk-based capital standards based on the Basel Committee on Banking Supervision’s (“BCBS”) 1988 Accord, known as “Basel I”. Among other things:

…continue reading: Federal Reserve Proposes Revised Bank Capital Rules

Recently, the Financial Stability Oversight Council (“Council”) unanimously approved a final rule (the “Final Rule”) and related interpretive guidance (the “Final Guidance”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), [1] regarding the designation of systemically important nonbank financial companies (often referred to as nonbank “SIFIs”). The Final Rule and Final Guidance describe how the Council will apply the statutory designation standards and the procedures it intends to employ in exercising this authority. Designated companies are required to comply with enhanced prudential standards and are subject to consolidated supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Federal Reserve’s recent proposal regarding these enhanced standards suggests that this will be a comprehensive and rigorous regulatory regime. [2]

The Final Rule and Final Guidance, which are substantially similar to the Council’s October 2011 proposed rule and guidance (the “October 2011 Proposal”), [3] do not provide significant new insight as to which companies will ultimately be designated. Nonetheless, it is an important initial procedural step to enable the actual designation process to begin. Secretary of the Treasury Geithner, who chairs the Council, has indicated that the first of these designations will be made this year.

…continue reading: Final Rule on Designation of Systemically Important Companies

A recent acquisition approval order of the Board of Governors of the Federal Reserve System (the “FRB”) provides the first analysis of the “financial stability” factor in Section 604(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This section amended Section 3(c) of the Bank Holding Company Act of 1956 (“BHC Act”) to require the FRB, when evaluating a proposed bank acquisition, merger, or consolidation, to consider “the extent to which [the] proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system”. Section 604(e) of the Dodd-Frank Act similarly amended Section 4(j)(2) of the BHC Act to require the FRB to consider financial stability concerns when reviewing notices by bank holding companies to engage in nonbanking activities.

On December 23, 2011, the FRB issued an order (the “Order”) explaining its reasons for approving the acquisition of RBC Bank (USA) (“RBC Bank”) by The PNC Financial Services Group, Inc. (“PNC”). (The FRB announced its approval of the transaction on December 19, 2011 but, unusually, the Order was not released until several days later.) The Order constitutes the first articulation by the FRB of how it will analyze proposed transactions under the new financial stability factor. The FRB stated in the Order, however, that it expects to issue a notice of proposed rulemaking implementing this change to Section 3(c) of the BHC Act as well as other provisions of the Dodd-Frank Act that require the FRB to consider the effect on financial stability of other proposals by financial institutions, and that this will afford the public an opportunity to provide comments on how the FRB should take financial stability into account when reviewing applications and notices.

…continue reading: “Financial Stability” Analysis in Bank M&A

The Federal banking agencies have recently issued three notices of proposed rulemaking (and applicable related guidance) in connection with the implementation of Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Section 939A generally requires that all Federal agencies remove from their regulations references to and requirements of reliance on credit ratings and replace them with appropriate alternatives for evaluating creditworthiness.

Market Risk Capital NPR:

The Office of the Comptroller of the Currency (the “OCC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Federal Deposit Insurance Corporation (the “FDIC” and, together with the Federal Reserve and the OCC, the “agencies”) issued a joint notice of proposed rulemaking (the “Market Risk Capital NPR”) concerning their market risk capital rules applicable to certain U.S. banking organizations with significant trading operations by proposing standards of creditworthiness to be used in place of credit ratings when calculating the specific risk capital requirements for covered debt and securitization positions, including the following:

…continue reading: Proposed Federal Rules Regarding Alternatives to Credit Ratings

The Commodity Futures Trading Commission (“CFTC”) adopted interim and final rules on positions limits applicable to option, futures, swap and swaption contracts related to 28 agricultural, metal and energy commodity contracts (the “Final Rules”). The Final Rules impose position limits on a spot-month basis as well as on an all-month and any-month basis. Exemptions are provided from these limits, including a narrow set for bona fide hedging transactions. The Final Rules also exempt certain preexisting positions. Market participants are required to aggregate their interests in commodity contracts across accounts and positions that they control or own, subject to limited exemptions. In addition, the Final Rules impose position visibility requirements with respect to energy and metal contracts. The Final Rules result in radical changes to the CFTC’s long-established position limit regime by, inter alia, taking over responsibility for position limits from the exchanges, expanding limits to include swaps, narrowing exceptions and expanding aggregation requirements.

…continue reading: CFTC to Impose Position Limits on Some Commodity Derivatives

On October 11, 2011, the Financial Stability Oversight Council unanimously approved a second notice of proposed rulemaking and related interpretive guidance under the Dodd-Frank Act regarding the designation of systemically important “nonbank financial companies.” The new proposal, which was published in today’s Federal Register, describes the manner in which the Council proposes to apply the relevant statutory standards and the processes and procedures it intends to employ in carrying out its authority to designate systemically important nonbank financial companies. These designated companies are required to comply with enhanced prudential standards and are subject to consolidated supervision by the Board of Governors of the Federal Reserve System. Comments on the Council’s proposal are due by December 19, 2011.

Among the nonbank financial companies potentially subject to a systemically important designation by the Council are savings and loan holding companies, insurance companies, private equity firms, hedge funds, asset management companies, financial guarantors, and other U.S. and non-U.S. nonbank companies deemed to be “engaged primarily” in activities that are financial in nature.

…continue reading: Designation of Systemically Important Nonbank Financial Companies Under Dodd-Frank