The Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System (“FRB”) issued a letter titled Principles and Practices for Recovery and Resolution Preparedness to clarify the heightened supervisory expectations for recovery and resolution preparedness for eight domestic bank holding companies that may pose elevated risk to U.S. financial stability. The letter states that the eight bank holding companies should have effective processes for the management, identification, and valuation of collateral received. Additionally, the letter sets out specific guidance which includes the following:
- effective processes for managing, identifying, and valuing collateral it receives from and posts to external parties and affiliates;
- a comprehensive understanding of obligations and exposures associated with payment, clearing, and settlement activities;
- the ability to analyze funding sources, uses, and risks of each material entity and critical operation, including how these entities and operations may be affected under stress;
- demonstrated management information systems capabilities for producing certain key data on a legal entity basis that is readily retrievable, with controls in place to ensure data integrity and reliability; and
- robust arrangements in place for the continued provision of shared or outsourced services needed to maintain critical operations that are documented and supported by legal and operational frameworks.
Lofchie Comment: Although the guidance is only legally binding on the eight bank holding companies, it makes sense for all firms that are dependent on the receipt or delivery of collateral to review the recommendations of the banking regulators.