Category Archives: Bank Capital & Liquidity Rules

Bank Capital & Liquidity Rules

FDIC Approves Final Rule Regarding Deposits at Foreign Branches of US Banks

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The Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) approved a final rule clarifying that deposits in foreign branches of U.S. banks are not FDIC-insured, even though they may be deposits for purposes of the national depositor preferences statute enacted in 1993. According to the FDIC, the purpose of the final rule is to protect the Deposit Insurance Fund against the liability that it would otherwise face as a potential global deposit insurer.

Lofchie Comment: Depositors should be mindful of the preference and insurance rules that govern the branch at which the deposit is “booked” (or “made”), whether it is a U.S. bank or a bank organized in another jurisdiction. It is not uncommon that different rules and a different set of preferences apply to the branches of various banks, and that branches outside of the home jurisdiction may be treated differently than branches within the home jurisdiction.

See: FDIC Press Release; FDIC Final Rule.

 

Agencies Provide Model Template for Submission of Tailored Resolution Plans

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The Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”) released a model template for tailored resolution plans. Dodd-Frank requires that bank-holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated for enhanced prudential supervision by the Federal Stability Oversight Council submit resolution plans to the Federal Reserve and the FDIC. Firms are not required to use the model form.

See: Model Template; Federal Reserve and FDIC Press Release.

OCC, FRB and FDIC Seek Comment on Notice of Proposed Rulemaking on Supplementary Leverage Ratio for G-SIBs (Fed. Reg.)

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The Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System (“FRB”), and the Federal Deposit Insurance Corporation (“FDIC”) seek comment on a notice of proposed rulemaking (“NPR”) to strengthen the leverage ratio standards for the largest, most systemically significant U.S. banking organizations. The NPR was published in the Federal Register on August 20, 2013, with a 60-day comment period.

See: OCC News Release; 78 FR 51101.
See also: FRB, FDIC and OCC Issue Notice of Proposed Rulemaking on the Supplementary Leverage Ratio for G-SIBs (July 10, 2013).

Federal Reserve Paper: Capital Planning at Large Bank Holding Companies: Supervisory Expectations and the Range of Current Practice

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The Board of Governors of the Federal Reserve System issued a paper evaluating the capital planning process at large bank holding companies. The agency found that while the process has improved, more work needs to be done to enhance practices for assessing the capital necessary to withstand stressful economic and financial conditions. The paper noted various aspects that need the most improvement, including: accounting risks for specific business activities, methods of projecting the effect of certain stresses on capital needs, and governance of the capital-planning process.

See: Capital Planning at Large Bank Holding Companies.
See also: Federal Reserve Press Release.

Three Federal Bank Agencies Seek Comment on Dodd-Frank Act Stress Test Guidance for Medium-Sized Firms

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The FDIC, OCC, and Federal Reserve Board (“FRB”) are seeking comment on proposed supervisory guidance describing supervisory expectations for stress tests conducted by financial companies with total consolidated assets between $10 billion and $50 billion. These medium-sized companies are required to conduct stress tests beginning in the fall under agency-issued rules implementing a provision of the Dodd-Frank Act. The public comment period will be open until September 25, 2013.

See: Proposed Supervisory Guidance.
See also: FDIC Press Release; OCC Press Release; FRB Press Release.

U.S. GAO’s Report to Congressional Committees on Need to Further Consider Proposals’ Impact on Systemic Risk

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The report was compiled in accordance with Dodd-Frank’s mandate in Section 202, paragraph (e) (“Study of Bankruptcy and Orderly Liquidation Process for Financial Companies”), that the GAO continually report on ways for the Bankruptcy Code to more effectively provide for a resolution to systemic risk. The principal recommendation made by the report was that the Financial Stability Oversight Counsel consider the benefits and disadvantages of various changes to the Bankruptcy Code with respect to financial institutions and qualified financial contracts.  The report did not express a view as to whether such changes were needed or not, and in particular noted that the persons whom it consulted were divided on the appropriate treatment of qualified financial contracts.

Lofchie Comment:  Interestingly, the report (from page 34 on) could be read as critical of the “orderly liquidation process” established by Dodd-Frank, actually increasing the uncertainty as to what will happen in the bankruptcy of a financial institution.

See:  GAO Full Report; GAO Report Summary.

Financial Services Committee Hearing: “Examining Constitutional Deficiencies and Legal Uncertainties in the Dodd-Frank Act”

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The Financial Services Committee held a hearing concerning potential legal uncertainties in the Dodd-Frank Act.  Congressman Patrick McHenry (R-NC), Chairman of the U.S. House Subcommittee on Oversight and Investigations, opened the hearing by expounding his view that the Dodd-Frank Act did not end “Too Big to Fail” and that Title I (“Financial Stability”) and Title II (“Orderly Liquidation of Authority”) raise several constitutional and legal uncertainties.  Following that statement, a panel of constitutional scholars testified at the subcommittee hearing, two of whom expressed constitutional concerns about Dodd-Frank:

  • The Honorable C. Boyden Gray testified that Dodd-Frank has entrenched “Too Big to Fail” and violates the separation of powers by giving effective open-ended power to regulators;
  • Professor Thomas Merrill testified on the constitutional issues raised by the powers bestowed upon the Orderly Liquidation Authority in Title II of Dodd-Frank; and
  • Mr. Timothy McTaggart testified on the possible constitutional issues raised by Dodd-Frank, but stated that the bill did not violate the separation of powers or due process of law.

See:  Hearing Memorandum; Webcast of Hearing.

FRB, FDIC and OCC Issue Notice of Proposed Rulemaking on the Supplementary Leverage Ratio for G-SIBs

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The Federal Reserve Board, the FDIC and the OCC proposed a rule to strengthen the leverage ratio standards for the eight largest, most systematically significant U.S. banking organizations. Under the proposed rule:

  • Bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody (“covered BHCs”) would be required to maintain a tier 1 capital leverage buffer of at least 2 percent above the minimum supplementary leverage ratio requirement of 3 percent, for a total of 5 percent, the failure of which would subject covered BHCs to restrictions on discretionary bonus payments and capital distributions; and 
  • Insured depository institutions of covered BHCs would be required to meet a 6 percent supplementary leverage ratio to be considered “well capitalized” for prompt corrective action purposes.

See:  Complete Rulemaking.
See also:  Federal Reserve Board Press Release and NYT article by Peter Eavis which explains the difference between a risk-weighted asset ratio (current Basel standard) versus the proposed leverage ratio.

FDIC and OCC Adopt Rules Regarding the Implementation of Basel III Capital Requirements

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The FDIC approved an interim final rule and the OCC approved a final rule regarding implementation of Basel III capital requirements. The FDIC and OCC rules are substantially identical to the final rules issued by the Federal Reserve Board on July 2, 2013. 

See:  FDIC Interim Final Rule; OCC Final Rule.
See also:  FDIC Press Release; OCC Press Release; Delta Strategy Group: Summary of New Basel Capital Proposals.

The House Financial Services Committee Passes Two Bills

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The House Financial Services Committee passed two bills intended to reduce what the Chairman of the Committee described as certain unforeseen consequences of the Dodd-Frank Act.

  • H.R. 1564, the Audit Integrity and Job Protection Act prohibits the PCAOB from mandating the automatic rotation of a public company’s independent external auditor.
  • H.R. 1341, the Financial Competitiveness Act of 2013 requires the Financial Stability Oversight Council to examine how differences in the international implementation of Basel III derivatives-related capital rules will affect the U.S. financial system and require U.S. regulators to report to Congress with recommendations on developing greater uniformity in the standards and on how to minimize any adverse impact on U.S. financial institutions and the end users of derivatives.

See:  House Financial Services Committee Press Release.