FEDERAL FINANCIAL REGULATORY AGENCIES SEEK COMMENTS ON REDUCING REGULATORY BURDENS

The Economic Growth and Regulatory Paperwork Reduction Act of 1996 requires the banking agencies to review their regulations at least once every ten years to identify outdated, unnecessary, or unduly burdensome regulations, and to determine how best to reduce the regulatory burden on insured depository institutions.

On 4 June 2014, the banking agencies announced that over the next two years they will be reviewing regulations in twelve categories and accepting comments, until 2 September 2014, on the first three categories, Applications and Reporting; Powers and Activities; and International Operations. Commenters are invited to identify regulatory requirements for insured depositories and their holding companies that are outdated, unnecessary, or unduly burdensome. The notice of regulatory review includes a chart identifying the regulations that are under review to assist commenters in citing specific provisions.

CONCENTRATION LIMITS FOR LARGE FINANCIAL COMPANIES

On 8 May 2014, the Federal Reserve Board released a notice inviting comment on a proposed rule to implement section 622 of the Dodd-Frank Act. Section 622 created a new section 14 to the Bank Holding Company Act and generally prohibits financial companies from merging, consolidating with, or acquiring another company (a “covered acquisition”) if the resulting company’s liabilities would exceed ten percent of the aggregate liabilities of all financial companies in the US. Section 622 defines the financial companies subject to the concentration limit to include insured depository institutions, bank holding companies, savings and loan holding companies, other companies that control an insured depository institution, and foreign financial companies with a US branch or agency or that control an insured depository institution in the US. Covered financial companies also include any nonbank company designated as systemically important by the Financial Stability Oversight Council, which currently includes AIG, GE Capital Corporation, and Prudential Financial, Inc. The definition excludes companies that are not affiliated with an insured depository institution, such as stand-alone broker-dealers and insurance companies, unless they are designated as systemically important.

For the purpose of the concentration limit, the liabilities of a US financial company subject to consolidated risk-based capital rules is equal to the company’s total risk- weighted assets plus an adjustment to reflect exposures deducted from regulatory capital, minus total regulatory capital. For financial companies not subject to the consolidated risk-based capital rules, liabilities are measured according to US GAAP standards. Aggregate liabilities for a US financial company will take into account worldwide operations, but aggregate liabilities for foreign financial companies will only include US operations. Given this definition, there is a focus on the potential disparate treatment between US and foreign firms because a foreign financial company with a small US presence could complete a covered acquisition that a similarly sized US financial company may be prohibited from making. This position was raised in a January 2011 report from the US Financial Stability Oversight Council (“FSOC”) that provided recommendations to the Federal Reserve Board regarding the concentration rule. FSOC recommended that the Federal Reserve Board continue to monitor and report on the effect of the concentration limit on the ability of US firms to compete with foreign banking organizations. FSOC also noted that it would make a recommendation to Congress to address these issues, if it determined that disparate treatment under the rule would have significant negative effects.

The Federal Reserve Board’s notice of proposed rulemaking solicits comments on several questions, among them how to best calculate liabilities for financial companies, and whether the calculation of a foreign company’s liabilities should be revised to include some measurement of its non-US operations. Comments must be received no later than 8 July 2014.

US REGULATORS ADOPT ENHANCED LEVERAGE STANDARDS FOR LARGE  BANKS

On 8 April 2014, the Federal Reserve Board, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (the “banking agencies”), announced a final rule on the enhanced supplementary leverage ratio standards applicable to the largest US banking organizations. The rule becomes effective on 1 January 2018 (the “Final Rule”). The banking agencies also issued a notice of proposed rulemaking to modify the calculation of the supplementary leverage ratio to conform to recent changes agreed to by the Basel Committee on Banking Supervision (the “Proposed Rule”).

Section 165 of the Dodd-Frank Act directed the Federal Reserve Board to develop prudential standards, including enhanced leverage standards, for large bank holding companies and non-bank financial companies supervised by the Federal Reserve. In July 2013, the banking agencies adopted final rules revising the capital framework for US financial institutions, including a four percent tier 1 leverage ratio generally applicable to all insured depositories and their holding companies. The revised framework also included a supplementary leverage ratio (“SLR”) requirement for banking organizations with consolidated assets of $250 billion or more or total consolidated on-balance sheet foreign exposures of $10 billion or more (“advanced approaches institutions”). In contrast to the generally applicable leverage ratio, which is calculated by dividing tier 1 capital by total on-balance sheet assets, the SLR is calculated by dividing an institution’s tier 1 capital by its total leverage exposure, a term defined to include both on-balance sheet assets and certain off-balance sheet items. An advanced approaches institution is required to begin reporting its SLR in 2015, and must maintain an SLR of three percent starting on 1 January 2018.

The Final Rule imposes an additional leverage requirement, referred to as the enhanced supplementary leverage ratio (“eSLR”), with few changes from the 2013 proposed rule. The eSLR will apply to any US top-tier bank holding company with more than $700 billion in total consolidated assets or more than $10 trillion in assets under custody (“covered BHC”) and their insured depository subsidiaries. Covered BHCs will be required to maintain an eSLR of two percent above the SLR, for a total supplementary ratio of five percent. A covered BHC’s subsidiary insured depository institutions will be required to maintain an SLR of at least six percent in order to be considered well capitalized. The eSLR is calculated in the same manner as the SLR. According to estimates by the banking agencies, the difference in the denominator between the generally applicable leverage ratio and the SLR means that, on average, a five percent total supplementary leverage ratio corresponds roughly to a 7.2 percent generally applicable leverage ratio. Covered BHCs and their insured depository institution subsidiaries will be required to meet the eSLR requirements by 2018. Following the effective date, a covered BHC that fails to meet the eSLR requirements will be subject to restrictions on capital distributions and discretionary bonus payments.

The Proposed Rule makes certain changes to the calculation of the SLR and eSLR under US law in order to conform more closely to changes adopted in Basel III. The changes revise the Basel III definition of total leverage exposure by including the effective notional principal amount of credit derivatives and similar instruments through which a banking institution provides credit protection, modifying the calculation of total leverage exposure for derivatives and repo-style transactions, and revising the credit conversion factors applied to certain off-balance sheet exposures. The comment period for the Proposed Rule closed on 13 June 2014.