InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Chopra discusses SIFI risks
On November 9, CFPB Director and FDIC Board Member Rohit Chopra delivered remarks before the FDIC Systemic Resolution Advisory Committee to discuss challenges facing systemically important financial institutions. Chopra began by raising concerns related to domestic systemically important banks (DSIBs) and the potentially disruptive impact facing consumers and small businesses should one of these bank fail. Chopra explained that, because DSIBs are heavily involved in retail banking with large consumer businesses and carry relatively high levels of uninsured deposits, “DSIB resolutions could pose serious technical challenges for the FDIC” that would necessitate serious consideration. Chopra also pointed out concerns raised by many experts that a large number of nonbank systemically important financial institutions (which have not yet been formally designated by the Financial Stability Oversight Council) pose systemic risk to the financial system. “Absent a designation, these institutions are not required to file a resolution plan,” Chopra said, noting that “[r]esolving these institutions without a plan would be an enormous challenge.” He also emphasized the importance of finding ways to eliminate bailout risks for global systemically important banks.
Fed, FDIC to consider enhancing large bank resolution requirements
On October 18, the FDIC Board of Directors approved the publication of an advance notice of proposed rulemaking (ANPRM) seeking comments on whether new requirements should be drafted to enhance the regulators’ ability to resolve large banks in an orderly way should they fail. The jointly proposed FDIC/Federal Reserve Board ANPRM seeks feedback on several new possible requirements, including a long-term debt requirement, that could be used for the orderly resolution of domestic large banking organizations in Categories II and III (which generally exceed a threshold of $250 billion in total consolidated assets) to help prevent customer and counterparty disruption. According to a Fed memo, the regulators are exploring whether certain bank resolution standards applicable to global systemically important banks (GSIBs) should be extended to other large banks that, while not as large as GSIBs, “could have very large or complex operations” and have expanded in size due to mergers and “organic growth.” The ANPRM, among other things, also seeks comment on the costs associated with such a proposal, recognizing that “a long-term debt requirement could impact the cost and availability of credit.” The regulators are also evaluating whether they should establish separability requirements, “such as the sale, transfer, or disposal of significant assets, portfolios, legal entities or business lines on a discrete product line or regional basis,” for some or all large banks to aid recovery or resolvability. Comments on the ANPRM are due within 60 days following publication in the Federal Register.
“As the banking system changes, policymakers must continuously evaluate whether resolution-related standards and prudential standards for large banks keep pace,” Fed Vice Chair for Supervision Michael S. Barr said in an announcement issued by the Fed earlier in the week. He explained that the regulators are evaluating whether capital requirements for large banks (including GSIBs), as well as other elements of the prudential framework, should be updated.
Expressing support for the joint ANPRM, acting Comptroller of the Currency Michael J. Hsu stressed that “[e]xploring the development of a rule that can ensure the resolvability of large, domestically-systemic banks will promote financial stability by guarding against the rise of non-GSIBs that may become too-big-to-fail, while enabling true competition amongst the largest banks.” CFPB Director and FDIC Board Member Rohit Chopra also expressed his support for the ANPRM. However, Chopra cautioned that if rulemaking is pursued, it “should not serve as a rationale for continuing a lax and opaque merger review process.” Chopra also advised that efforts “to reduce the risk of bailouts or increased concentration upon the failure of domestic systemically important banks should be complemented by efforts to reduce the probability of their failure,” and that the “increased attention on domestic systemically important banks should not be interpreted to mean that it is ‘mission accomplished’ when it comes to” GSIBs.
OCC’s Hsu discusses large bank resolvability
On April 1, acting Comptroller of the Currency Michael J. Hsu delivered remarks before the University of Pennsylvania Wharton School of Business focusing on financial stability and large bank resolvability. In his remarks, Hsu described gaps in resolvability for the largest non-global systemically important banks, potential solutions, and the subsequent effect on financial stability. Hsu stated that he has been involved in every “systemically important” financial stability event since 2008, and that the dangers posed by too-big-to-fail firms “are not a theoretical matter” to him. While the resolvability of the eight global systemically important banks (GSIB) is “logica[lly]” regulated under Title I of the Dodd-Frank Act, Hsu warned that the largest non-GSIB banks are not subject to these "heightened standards.” Hsu pointed out that the four largest non-GSIB banks have total consolidated assets greater than $500 billion, and questioned that “if one were to fail, how would it be resolved?” Noting that the likely resolution would be the absorption of the failing non-GSIB bank by one of the GSIBs, Hsu stated that this is not a “terrible outcome” from a “traditional financial stability perspective.” However, “a GSIB would be forced through a shotgun marriage to be made significantly more systemic, with minimal due diligence and limited identification of integration challenges, which for firms of this size are significant,” he stated. Hsu advocated for utilizing a “single-point-of-entry,” which is the same strategy to which GSIBs are currently subject under their resolution planning framework. Hsu explained that with this approach, “only the parent holding company is supposed to file for bankruptcy or be taken into receivership; all of the material subsidiaries are expected to continue to operate and function, thus avoiding the chaos of multiple proceedings.”
Federal agencies allow supplementary leverage ratio flexibility
On May 15, the FDIC, Federal Reserve Board (Fed), and the OCC announced an interim final rule (IFR) that temporarily permits depository institutions to choose to exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the supplementary leverage ratio (SLR) to provide flexibility during the Covid-19 pandemic. The exclusion would enable depository institutions to expand their balance sheets to provide additional credit to households and businesses. The SLR and the IFR apply to depository institution subsidiaries of U.S. systemically important bank holding companies and depository institutions subject to Category II or Category III capital standards. According to the FDIC’s Financial Institution Letter FIL-57-2020, if a depository institution elects to exclude U.S. Treasury securities and deposits from the SLR, it, among other things, (i) must notify its primary federal banking regulator within 30 days after the IFR is effective; (ii) may choose to reflect the exclusion as if the IFR has been in effect the entire second quarter of 2020; and (iii) must obtain approval from its primary federal banking regulator before making a distribution or creating an obligation to make a distribution, beginning in the third quarter of 2020 through March 2021, so long as the temporary exclusion is in effect. The IFR goes into effect upon publication the Federal Register and is effective through March 31, 2021.
See also OCC Bulletin 2020-52 and additional questions for feedback by the Fed.
Fed extends initial compliance dates for certain parts of SCCL
On May 1, the Federal Reserve Board (Fed) announced it would extend the initial compliance dates for certain parts of its single-counterparty credit limit rule (SCLL), which was approved in 2018 and limits a U.S. bank holding company’s or foreign banking organization’s credit exposure to another counterparty. As previously covered by InfoBytes, the Fed initially proposed the extension last November. Under the extension, the largest foreign banks subject to the single-counterparty credit limit rule will have until July 1, 2021 to comply, while smaller foreign banks will not be required to comply until January 1, 2022.
Fed giving foreign banks more time to comply with SCCL
On November 8, the Federal Reserve Board announced a proposal to extend the initial compliance dates for foreign banks subject to its single-counterparty credit limit rule by 18 months, which would require the largest foreign banks to comply by July 1, 2021 and smaller foreign banks to comply by January 1, 2022.
As previously covered by InfoBytes, in June 2018, the Federal Reserve Board approved a rule to establish single-counterparty credit limits for U.S. bank holding companies with at least $250 billion in total consolidated assets, foreign banking organizations operating in the U.S. with at least $250 billion in total global consolidated assets (as well as their intermediate holding companies with $50 billion or more in total U.S. consolidated assets), and global systemically important bank holding companies (GSIBs). The rule, which implements section 165(e) of the Dodd-Frank Act, requires the Board to limit a bank holding company’s or foreign banking organization’s credit exposure to an unaffiliated company. Under the rule, a GSIB’s credit exposure is limited to 15 percent of its tier 1 capital to another systemically important firm. A U.S. bank holding company and other applicable foreign institution is limited to a credit exposure of 25 percent of its tier 1 capital to a counterparty.
Comments on the proposal to extend the compliance dates will be accepted for 30 days after publication in the Federal Register.
Fed proposes supervisory categories
On October 31, the Federal Reserve announced a proposed rulemaking to more closely match certain regulations for large banking organizations with their risk profile. The proposal would establish four risk-based categories for applying the regulatory capital rule, the liquidity coverage ratio rule, and the proposed net stable funding ratio rule for banks with $100 billion or more in assets. Specifically, the Federal Reserve proposes to establish the four categories using risk-based indicators, such as size, cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets, and off-balance sheet exposure. According to the proposal, the most significant changes will be for banks are in the two lowest risk categories:
- Banks with $100 billion to $250 billion in total consolidated assets would generally fall into the lowest risk category and would (i) no longer be subject to the standardized liquidity requirements; (ii) no longer be required to conduct company-run stress tests, and (iii) be subject to supervised stress tests on a two-year cycle.
- Banks with $250 billion or more in total consolidated assets, or material levels of other risk factors, that are not global systemically important banking institutions (GSIBs), would (i) have reduced liquidity requirements; and (ii) only be required to perform company run stress tests on a two-year cycle. These banks would still be subject to annual supervised stress tests.
Banks in the highest two risk categories, including GSIBs, would not see any changes to capital or liquidity requirements. A chart of the proposed requirements for each risk category is available here.
Comments on the proposal must be received by January 22, 2019.
Additionally, the Federal Reserve released a joint proposal with the OCC and FDIC that would tailor requirements under the regulatory capital rule, the Liquidity Coverage Ratio and the proposed Net Stable Funding Ratio to be consistent with the prudential standard changes.
Federal Reserve Board approves final rule setting single counterparty credit limit
On June 14, the Federal Reserve Board approved a rule to establish single-counterparty credit limits for U.S. bank holding companies with at least $250 billion in total consolidated assets, foreign banking organizations operating in the U.S. with at least $250 billion in total global consolidated assets (as well as their intermediate holding companies with $50 billion or more in total U.S. consolidated assets), and global systemically important bank holding companies (GSIBs).
The rule, which implements section 165(e) of the Dodd-Frank Act, requires the Board to limit a bank holding company’s or foreign banking organization’s credit exposure to an unaffiliated company. Under the rule, a GSIB’s credit exposure is limited to 15 percent of its tier 1 capital to another systemically important firm. A U.S. bank holding company and other applicable foreign institution is limited to a credit exposure of 25% of its tier 1 capital to a counterparty.
GSIBs will be required to comply with the final rule on January 1, 2020, while other covered entities will have through July 1, 2020 to comply. The final rule was published in the Federal Register on August 6 and will take effect October 5.
Fed Finalizes Debt-Minimum Rule to Help Banking System Weather Shocks
On December 15, the Fed finalized a rule requiring the biggest global banks to guard against potential collapse by holding minimum amounts of long-term debt and regulatory capital. The rule applies to bank holding companies, U.S. global systemically important banks (GSIB), as well as U.S. branches of foreign banks, and aims to shift the costs of bank failure to shareholders rather than taxpayers by requiring lenders to maintain sufficient amounts of long-term debt, which can be converted to equity to keep a failing bank’s key operations afloat. Specifically, the measure will establish minimum required levels for long-term debt and total loss-absorbing capacity, as well as restrictions on certain short-term debt financing arrangements by parents of GSIB-designated financial institutions. In prepared opening remarks, Fed Chair Janet Yellen explained that “[t]he rule is guided by common sense principles: bank shareholders and debt investors should place their own money at risk so depositors and taxpayers are well protected, and the biggest banks must bear the costs that come with their size.”
In a memorandum to the Board of Governors, the Fed’s staff noted that covered banks are currently about $70 billion short altogether of the new requirements. The Fed staff estimated that the aggregate increased funding of approximately $680 million to $2 billion annually would be required to make up the shortfall.
Fed Proposal Would Modify Stress Tests for Large, Noncomplex Bank Holding Companies
On September 26, the Federal Reserve released a proposed rule that would essentially remove bank holding companies defined to be “large and noncomplex” from the qualitative portion of annual Comprehensive Capital Analysis and Review (CCAR) assessment process (“stress tests”). Under the proposed rule, large and noncomplex bank holding companies are those with total consolidated assets of at least $50 billion, but less than $250 billion, less than $10 billion in foreign exposure, and less than $75 billion in average nonbank assets. Currently, the Fed applies the CCAR process to bank holding companies with more than $50 billion in total consolidated assets. Fed Governor Daniel Tarullo indicated that the Fed was also considering adoption of a “stress capital buffer” approach for larger, global systemically important banks (GSIB). The new approach would replace the uniform 2.5-percent capital conservation buffer, and would instead require GSIBs to retain capital “equal to the maximum decline in a firm's common equity tier 1 capital ratio under the severely adverse scenario of the supervisory stress test before the inclusion of the firm's planned capital distributions.”