Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations

The Board of Governors of the Federal Reserve System (“FRB”) approved final amendments to Regulation YY to implement certain of the enhanced prudential standards required to be established under Dodd-Frank Section 165 (“Enhanced Supervision and Prudential Standards for Nonbank Financial Companies Supervised by the Board of Governors and Certain Bank Holding Companies”).

The enhanced prudential standards include risk-based and leverage capital requirements, liquidity standards, requirements for overall risk management, stress-test requirements, and a 15-to-1 debt-to-equity limit for companies that, the FSOC has determined, pose a grave threat to financial stability.  The final rule strengthens the supervision and regulation of large U.S. bank holding companies and foreign banking organizations with total consolidated assets of $50 billion or more.

The amendments also establish risk committee requirements and capital stress testing requirements for certain bank holding companies and foreign banking organizations with total consolidated assets of $10 billion or more. The rule does not impose enhanced prudential standards on nonbank financial companies designated by the FSOC for supervision by the FRB.

The final regulation extends the initial compliance date for foreign banking organizations to July 1, 2016, a year later than originally proposed.  The final rule generally also defers the application of the leverage ratio to foreign-owned U.S. intermediate holding companies until 2018.

U.S. bank holding companies subject to the rule will need to comply by January 1, 2015.

With respect to foreign banks, the final regulations reflect only a modest relaxation from the initial proposal. The final regulations raise the threshold for mandatory creation of an “intermediate holding company” (IHC) from $$10 billion in nonbranch U.S. assets to $50 billion, delay the leverage capital requirement for IHCs until 2018, and delay the mandatory compliance date for all other requirements until July 1, 2016 (originally, July 1, 2015)).  However, the final regulations require a foreign bank subject to the Section 165 regulations to prepare written implementation plans by January 1, 2015, documenting the foreign bank’s plans for coming into compliance with the Section 165 regulations.  This implementation planning process is, of course, in addition to the conformance planning process required under the Volcker Rule, which goes into effect on July 21, 2015.

See:  FRB Press Release; Text of Final Rule.