On October 10, 2019, the Board of Governors of the Federal Reserve System ("Board") released two final rules to tailor and modify the applicability of enhanced prudential standards for bank holding companies ("BHCs"), savings and loan holding companies that are not substantially engaged in insurance underwriting or commercial activities ("Covered SLHCs"), foreign banking organizations ("FBOs"), and the U.S. intermediate holding companies of FBOs ("IHCs"). One final rule, issued solely by the Board, focuses on the Board's enhanced prudential standards, and the other final rule, to be issued jointly with the Office of the Comptroller of the Currency ("OCC") and Federal Deposit Insurance Corporation ("FDIC"), focuses on interagency standards such as standardized liquidity requirements.
As in the agencies' October 2018 and April 2018 proposals, the final rules subject banking organizations to various enhanced prudential standards based on institution categories that are defined by size and activity thresholds, as follows:
The Appendix to this client alert summarizes the requirements that apply to each category of organization under the final rules.
Compared to the agencies’ proposals, the final rules include the following notable changes:
- Application of Standardized Liquidity Rules and Single Counterparty Credit Limits to IHCs. In the final rules, the agencies have made a single significant change to the proposals: applying the Liquidity Coverage Ratio (“LCR”) requirement, proposed Net Stable Funding Ratio (“NSFR”) requirement, and Single Counterparty Credit Limits (“SCCL”) to an IHC on the basis of the IHC’s own footprint, rather than the footprint of its parent FBO’s combined U.S. operations (“CUSO”) as had been proposed. This change should meaningfully reduce the regulatory burden on certain FBOs that have relatively small IHCs compared to their U.S. branch and agency networks.
- LCR and NSFR Calibration. The proposals sought comment on calibrating the LCR and NSFR in the range of 70 to 85 percent for Category III organizations and certain Category IV organizations. The final rules set the LCR and NSFR requirements at 70 percent for Category III organizations with less than $75 billion in weighted short-term wholesale funding (“wSTWF”) and Category IV organizations with $50 billion or more in wSTWF, and at 85 percent for Category III organizations with $75 billion or more in wSTWF.
- Highly Liquid Assets Criteria Under Regulation YY. The final rules amend the definition of highly liquid assets (“HLA”) for purposes of Regulation YY’s liquidity buffer and liquidity stress testing requirements in three respects:
- First, a banking organization must satisfy certain of the operational eligibility criteria for high quality liquid assets (“HQLA”) under the LCR for assets to qualify as HLA under Regulation YY.
- Second, all HQLA under the LCR qualify as HLA under Regulation YY.
- Finally, a banking organization is required to obtain Board approval to count as HLA any asset that is not HQLA under the LCR.
- FR Y-15 Reporting for FBOs. The final rules extend the FR Y-15 reporting requirement to an FBO’s CUSO and IHC, but not, as had been proposed, to its U.S. branch and agency network on a standalone basis. Additionally, the CUSO will not be required to report its average risk-weighted assets.
- 2052a Reporting for Category IV FBOs. The final rules allow Category IV FBOs (but not Category II or III FBOs) to file 2052a reports on a T+10 basis, rather than a T+2 basis as had been proposed. This change provides Category IV FBOs with 10 days after the monthly as-of date to report their liquidity metrics to the Board.
- Reservation of Authority on Stress Testing Frequency. Like the proposals, the final rules eliminate the mid-cycle stress test requirement for all banking organizations and provide for biennial supervisory stress testing for Category IV organizations. However, the final rules contain a reservation of authority that permits the Board to increase the frequency at which a banking organization must conduct a stress test based on its financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy.
- Treatment of Sovereign-Owned FBOs. The final rules contain a reservation of authority that authorizes the Board to permit an FBO to comply with the rules through a subsidiary. The preamble to the Board rule suggests that this authority could be used where a sovereign wealth fund is an FBO because it controls a foreign bank.
In addition, the preambles to the final rules suggest that the Board is actively considering several future rulemakings: •
- Standardized Liquidity Requirements for FBOs’ U.S. Branches. In the interagency proposal, the agencies requested comment on the application of standardized liquidity requirements to the U.S. branches and agencies of FBOs. The final rules do not establish such requirements, but the preamble to the Board’s rule states that the Board will continue to evaluate the issue, including through discussions at the international level, and any future requirement would be subject to notice and comment.
- Capital Planning Regime for Category IV Organizations. The Board intends to issue a separate capital plan proposal, which may address expectations for capital planning in off-cycle years when no supervisory stress tests are required for Category IV organizations. The preamble states that this proposal will provide Category IV organizations with additional flexibility to develop their annual capital plans
- Application of Capital Plan Rule to SLHCs. The preamble to the final rules states that the Board intends to propose to apply capital planning requirements to covered SLHCs as part of a separate proposal.
- NSFR. The final rules do not finalize the NSFR, which the agencies proposed in May 2016. The preamble to the interagency proposal states that the agencies will address comments regarding the NSFR in the context of “any final rule to adopt a NSFR requirement,” suggesting that the agencies do not presently intend to re-propose the NSFR.
- Cross-Jurisdictional Activity. The final rules do not change the definitions of the riskbased indicators, but the preamble to the Board’s rule suggests that the Board may consider future technical changes regarding the cross-jurisdictional activity indicator in a separate rulemaking process.
- Risk-Based Indicator Thresholds. While the final rules do not index the risk-based indicator thresholds to account for inflation, the preamble to the Board’s rule states that the Board will periodically review the thresholds to ensure their appropriateness. However, the Board made similar statements with respect to the fixed Method 2 coefficients in the G-SIB surcharge calculation, and despite a general expansion in the economy since the promulgation of the G-SIB surcharge, the Board has not revisited those coefficients.
- Treatment of GSE Securities Under SCCL. The SCCL exempts transactions with Fannie Mae and Freddie Mac (the “GSEs”) from credit exposure limits for so long as those entities are under U.S. government conservatorship. The Board will consider making changes to the treatment of GSE securities when there are changes to the conservatorship status of the GSEs.
- Reporting of Risk-Based Indicators. The preamble to the Board’s final rule states that the Board will monitor risk-based indicator amounts reported and information collected through supervisory processes to ensure that banking organizations do not adjust their activities at the end of a quarter to stay below the relevant thresholds – particularly, the wSTWF threshold – on a temporary basis. If the Board observes such behavior, it will consider changing the relevant reporting forms.
The final rules will be effective 60 days after their publication in the Federal Register. Banking organizations will be required to calculate their initial categories on the effective date of the final rule, based on averages using the most recent FR Y-15 and FR Y-9LP filings.