The US Office of the Comptroller of the Currency, the Federal Reserve Board and the FDIC issued a proposal to remove two items from Schedule B of form FFIEC 101, the report entitled Risk-Based Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework. The two items proposed for removal collect exposure at default (EAD) information related to credit valuation adjustments (CVAs) that already is captured in a separate item on FFIEC 101 Schedule B. No other changes are proposed to the FFIEC 101.  Comments are due by May 1, 2017.

View the Proposal.

The European Banking Authority published a consultation paper on the specification of the nature, severity and duration of an economic downturn under the Capital Requirements Regulation. The CRR requires firms to use loss given default (LGD) and conversion factor (CF) estimates appropriate for an economic downturn if those are more conservative than the respective long-run average. The EBA consultation paper includes proposed draft Regulatory Technical Standards and amended Guidelines on probability of default (PD) and LGD estimation. The proposed draft RTS set out the downturn conditions that firms must use to estimate the downturn LGDs and conversion factors. In addition, the EBA is proposing to amend the proposed Guidelines on PD and LGD estimation and the treatment of defaulted assets to include a method for firms to use to reflect the downturn conditions into downturn LGD and CF factors. The consultation closes on May 29, 2017.

View the consultation paper.

View the proposed Guidelines on PD and LGD estimation and the treatment of defaulted assets.

The European Central Bank launched a sensitivity analysis of the banking books of directly supervised banks with a focus on interest rate changes. The analysis will be used to inform the ECB’s annual Supervisory Review and Evaluation Process and stress test. Under the Single Supervisory Mechanism, the ECB directly supervises significant banks, and indirectly supervises smaller or “less significant” banks, located in the Eurozone. The ECB is required to organize annual supervisory tests under the Capital Requirements Directive. The ECB will apply six hypothetical interest rate shocks, as set by the Basel Committee on Banking Supervision in the “Standards – Interest rate risk in the banking book”, which was published in April 2016. The ECB notes that the shocks will capture various scenarios with changes in the level and shape of the interest rate curve and will give the supervisors information on how the economic value of the banking book equity and the net interest income projections will change under each shock test. The exercise commenced on February 28, 2017 and the results will be used as part of the SREP assessment in calibrating the Pillar 2 guidance.

View the press release.

View 2017 stress test FAQs.

The European Banking Authority announced that the 2018 EU stress test would be launched at the beginning of 2018 and results would be published mid-2018. The EBA is currently preparing the methodology and templates and intends to discuss these with the industry in Q3 2017.

View the EBA's announcement.

The Prudential Regulation Authority launched a consultation on proposed changes to the Pillar 2A capital framework. The Pillar 2A framework is effectively a layer of regulatory capital beyond standard requirements based on firm-specific quantitative requirements rather than regulatory discretion.

The PRA is proposing to revise the IRB benchmark, adjust the Pillar 2A approach for firms using the standardized approach for credit risk and include additional considerations for firms using both the standardized approach and IFRS as their accounting framework. The proposals are relevant to banks, building societies and PRA-designated investment firms. Responses to the consultation are due by May 31, 2017. The proposed implementation date for the updated Pillar 2A capital framework is January 1, 2018. The PRA will consider whether further changes are needed to the Pillar 2 framework as a result of the Basel Committee on Banking Supervision and the European Commission's related proposals.

View the consultation paper.

The US Federal Reserve Board announced the annual adjustment to the asset-size threshold in Regulation I, which determines the dividend rate that certain member banks earn on their Federal Reserve Bank stock. The updated total consolidated asset threshold is $10,122,000,000.

The Fixing America’s Surface Transportation (FAST) Act of 2015 provides that depository institution stockholders with total consolidated assets above the asset-size threshold shall receive a dividend on paid-in capital stock equal to the lesser of (i) 6 percent or (ii) the most recent 10-year Treasury auction rate prior to the dividend payment. The dividend rate for other member banks remains at 6 percent.

View notice.

The US Federal Reserve Board, the US Office of the Comptroller of the Currency and the US Federal Deposit Insurance Corporation each released revised economic scenarios for use by certain financial institutions with total consolidated assets of more than $10 billion for the 2017 stress tests as required under the Dodd-Frank Act. The agencies had previously issued scenarios on February 6, 2017 however, these scenarios contained incorrect historical values for the BBB corporate yield in 2016.

The scenarios represent baseline, adverse and severely adverse scenarios and include key variables that reflect economic activity, including unemployment, exchange rates, prices, income, interest rates and other relevant aspects of the economy and financial markets. While the baseline scenario represents expectations of private sector economic forecasters, the adverse and severely adverse scenarios are hypothetical scenarios designed to assess the strength and resilience of financial institutions and their ability to continue to meet the credit needs of households and businesses under stressed economic conditions.

View Federal Reserve Board’s revised stress test scenarios.

View OCC’s stress test scenarios.

View FDIC’s revised stress test scenarios.
 

The European Banking Authority published final draft Regulatory Technical Standards on the procedures for excluding transactions with non-financial counterparties established in a third country (which do not hold positions over the clearing threshold, or so called NFC-s) from the own funds requirement for credit valuation adjustment risk. The final draft RTS will supplement the requirements of the Capital Requirements Regulation. The EBA consulted on proposed draft RTS in August 2015. Firms' transactions with any NFC- will be excluded from the own funds requirements for CVA risk under the CRR, whether or not the NFC- is established in the EU. As NFC-s established in non-EU countries are not subject directly to EU regulation, the final draft RTS clarify that firms are responsible for: (i) taking the necessary steps to identify all NFC-s under this exemption and calculating accordingly their own funds requirements for CVA risk; (ii) ensuring that exempt counterparties established outside the EU would qualify as NFC-s if they were established in the EU; and (iii) ensuring that counterparties calculate the clearing threshold according to the relevant provisions in EMIR and do not exceed those thresholds. The EBA has also included an option for firms to verify the status of third country counterparties at the time of trade inception or on a periodic basis to take account of the situation that firms frequently enter into trades with NFC-s established in a third country. The final draft RTS align the treatment of NFC-s established in a non-EU country with the treatment of NFC-s established in the EU as recommended by the EBA in its February 2015 report. The final draft RTS has been submitted to the European Commission for endorsement. 

View the RTS.

A Commission Delegated Regulation, in the form of Regulatory Technical Standards, on additional liquidity outflows corresponding to collateral needs resulting from the impact of an adverse market scenario on an institution's derivatives transactions was published in the Official Journal of the European Union. The Capital Requirements Regulation requires firms to add an additional outflow for collateral needs that would result from an adverse market scenario on a firm's derivatives transactions, financing transactions and other contracts if material. Due to materiality considerations, the EU has adopted the RTS for derivatives transactions first. The rules apply only to collateralized derivative transactions, including those that mature within 30 days. The RTS require that the calculation of the additional collateral outflows be based on the Historical Look Back Approach for market valuation changes developed by the Basel Committee on Banking Supervision. The text of the final RTS does not materially differ from the revised draft RTS, which the European Banking Authority submitted to the European Commission on May 3, 2016. The RTS will enter into force on February 28, 2017 and will apply directly across the EU. 

View the RTS. 

The US Board of Governors of the Federal Reserve System released the scenarios to be used by banks and supervisors for the 2017 Comprehensive Capital Analysis and Review and stress test exercises (DFAST) mandated by the Dodd-Frank Act. The Federal Reserve Board concurrently issued instructions to firms participating in CCAR. For the 2017 cycle, a total of 13 of the largest and most complex bank holding companies will be subject to both the quantitative evaluation of their capital adequacy as well as a qualitative evaluation of their capital planning capabilities. The Federal Reserve Board had announced earlier, on January 30, 2017, that 21 firms with less complex operations will no longer be subject to the qualitative portion of CCAR.

Read more.

A Commission Delegated Regulation in the form of Regulatory Technical Standards for benchmarking portfolio assessment standards and assessment-sharing procedures was published in the Official Journal of the European Union. The RTS supplement the Capital Requirements Directive. The CRD requires that national regulators monitor the range of risk-weighted exposure amounts or own funds requirements (except as regards operation risk) for the exposures or those relating to transactions in benchmark portfolios resulting from the internal approaches adopted by firms. Regulators are also required to assess, at least annually, the quality of the relevant approaches adopted by firms. The EBA is required to assist regulators in their assessments. The RTS set out the standards for the assessment by national regulators and procedures for sharing of those assessments with other relevant EU national regulators and with the EBA. The RTS enter into force on February 23, 2017 and will apply directly across the EU. 

View the RTS.

The US Federal Reserve Board adopted a final rule amending the capital plan and stress test rules effective for the 2017 cycle. The final rule removes large and noncomplex firms, specifically those with total consolidated assets of at least $50 billion but less than $250 billion, nonbank assets of less than $75 billion, and that are not deemed, pursuant to the Federal Reserve’s Regulation Q, to be US global systemically important banks, from the qualitative assessment of the Federal Reserve’s Comprehensive Capital Analysis and Review, thereby significantly reducing the burden on such firms. Accordingly, the qualitative review in CCAR is now focused on the 13 largest, most complex financial institutions.

View text of the final rule.

The OCC issued examination procedures to supplement OCC Bulletin 2013-29 entitled “Third-Party Relationships: Risk Management Guidance,” which was originally issued October 30, 2013. These procedures use the concepts and definitions in OCC Bulletin 2013-29 but are designed to help examiners: (i) tailor the examination of each bank commensurate with the level of risk and complexity of the bank’s third-party relationships; (ii) assess the quantity of the bank’s risk associated with its third-party relationships; (iii) assess the quality of the bank’s risk management of third-party relationships involving critical activities; and (iv) determine whether there is an effective risk management process throughout the life cycle of the third-party relationship. The procedures include detailed questions examiners can ask when examining covered national banks and federal savings associations.

View the examination procedures.

The European Banking Authority published translations of the final Guidelines specifying the application of the definition of default in relation to the Internal Ratings Based Approach and the Standardized Approach under the Capital Requirements Regulation. Publication of the translations triggers the date by which national regulators must inform the EBA as to whether they intend to comply with the Guidelines. That notification is due by March 20, 2017. The Guidelines will apply to national regulators and firms from January 1, 2021. However, national regulators have discretion to accelerate implementation of the Guidelines. The CRR sets out the definition of default of an obligor that is used for the purposes of the IRB and Standardized Approaches. The purpose of the Guidelines is to harmonize the definition of default across the EU framework so that EU banks apply regulatory requirements to their capital positions in a more consistent and comparable way, especially in the context of IRB models. 

Read more.

The US Board of Governors of the Federal Reserve System finalized a rule increasing the maximum civil money penalty limits for 2017, as required by law. A civil money penalty is a fine imposed by a federal agency to penalize misconduct.

In November 2015, a law was passed that requires all federal agencies to adjust their maximum civil money penalty limits annually for inflation, rather than every four years as previously required. The maximum civil money penalty limits depend on several factors, including the severity and type of violation. Additionally, the law dictates the annual adjustment formula for federal agencies.

The new penalty amounts apply as of January 15, 2017.

View the final rule.

The European Banking Authority and the European Securities and Markets Authority published a Report on the joint functioning of the Capital Requirements Regulation and the European Market Infrastructure Regulation. The focus of the Report is on capital requirements for central counterparties that also hold a banking license, leverage and liquidity for CCPs, large exposures, difference in application of the margin period of risk and the requirements on a client's exposures to clearing members.

The EBA and ESMA note that although the EMIR and CRR requirements may appear to be redundant for CCPs holding a bank license, because some aspects of the EMIR requirements are more stringent, they are in fact based on different definitions of capital and take into account different types of risks. Therefore, CCPs holding a banking license are subject to both capital requirements as matter of principle, with some exemptions when they are properly justified. There are currently 17 authorized CCPs, of which three hold a banking license - Eurex Clearing AG, LCH Clearnet SA and European Commodity Clearing AG.

Read more.
 

A Commission Delegated Regulation, in the form of Regulatory Technical Standards specifying conditions for data waiver permissions, was published in the Official Journal of the European Union. The Capital Requirements Regulation outlines the requirements specific to own-loss given default (“own-LGD”) for regulators when quantifying the risk parameters to be associated with rating grades or pools. The RTS lays down the mandatory conditions under which national regulators may grant firms permissions to use data covering a period of two years, rather than five years, for probability of default, own-LGD and own-conversion factor estimates as set out in the CRR. The RTS stipulates that exposures to central governments, central banks, banks and investment firms would be eligible for data waiver permissions, subject to certain additional requirements being met. First, exposures to corporates would be eligible for data waiver permissions where they are not structurally characterized by few or no observed defaults. Second, types of exposures which were not included in the bank or investment firm’s portfolio at the time when the firm started to implement the Internal Ratings Based Approach should not be eligible for a data waiver permission. 

Read more.

The European Banking Authority published a Decision of the Board of Supervisors of the EBA, dated December 23, 2016, adopting Rules of Procedure for the investigation of a breach of EU law. The Regulation establishing the EBA gives the EBA the power to investigate an alleged failure by a national regulator to apply the requirements of the Capital Requirements Regulation or the Capital Requirements Directive or their application in a way which appears to be a breach of EU law. The Decision sets out factors, criteria and other related matters that the EBA will take into account when it receives a request from a third party to initiate an investigation or to EBA own initiative investigations.

View the Decision.

The European Banking Authority published an updated recommendation on the equivalence of the confidentiality regimes of third country supervisory authorities. The EU Capital Requirements Directive provides that third country supervisory authorities may participate in a college of supervisors set up for an international cross-border bank if: (i) it is considered appropriate for that authority to participate; and (ii) the authority is subject to confidentiality requirements that are equivalent to those set out in the CRD. The EBA's recommendations only relate to the equivalence of the confidentiality regimes. The appropriateness issue is to be determined by each college of supervisors.

In April 2015, the EBA recommended that the confidentiality regimes of the supervisory authorities in the following countries should be considered as equivalent to the CRD IV requirements: Bosnia-Herzegovina, Brazil, Canada, China, FYR Macedonia, Mexico, Montenegro, Serbia, Singapore, Switzerland, Turkey and the United States. Those recommendations applied from April 2, 2015. The EBA updated the recommendations to include Albania from September 12, 2015.

The EBA has updated the recommendations again adding Australia, Hong Kong, Japan and Kosovo. The latest recommendations applied from January 12, 2017.

View the updated recommendations.

The US Office of the Comptroller of the Currency released its Semiannual Risk Perspective for Fall 2016, which highlights key risks facing national banks and federal savings associations. The report highlighted that strategic risk remains high as banks make changes to their business models and adopt innovative products. The OCC also noted that banks continue to ease underwriting practices to boost loan volume and to respond to competition from bank and nonbank lenders in commercial, commercial real estate and auto lending, according to the report. The credit risk associated with such practices is increasing due to increased risk layering, rising loan policy exceptions and weaker covenant protection. The report cited operational risk as another key risk, particularly cybersecurity threats, increased reliance on third-party relationships and the need for sound governance over sales practices. The report is based on data received from national banks and federal saving associations through June 30, 2016.

View Report.

The European Banking Authority published translations of the final Guidelines on the correction required for the calculation of Modified Duration for debt instruments subject to prepayment risk under the Capital Requirements Regulation. The Guidelines will apply from March 1, 2017.

The CRR establishes two methods to calculate capital requirements for general interest rate risk. The relevant methods are the Maturity-Based calculation and the Duration-Based calculation of general risk. The final Guidelines apply to the Duration-Based calculation. The Duration-Based calculation uses the concept of Modified Duration pursuant to the formula outlined in the CRR. This method is only valid for instruments that are not subject to prepayment risk. The EBA is mandated to issue guidelines establishing how to correct the Modified Duration calculation to reflect prepayment risk. The EBA Guidelines propose two approaches to correct the calculation. One option is to treat the debt instrument with prepayment risk as if it is a combination of a plain vanilla bond and an embedded option. The Modified Duration of the plain vanilla bond is therefore corrected with the change in value of the embedded option, which is estimated according to its theoretical delta, resulting from a 100 basis point movement in interest rates. The other option is to directly calculate the change in value of the whole instrument subject to the prepayment risk resulting from a 100 basis point movement in interest rates.

View the Guidelines.

The Basel Committee on Banking Supervision announced that it had, along with the Group of Central Bank Governors and Heads of Supervision, made progress towards completing the Basel Committee’s post-crisis regulatory reforms, known as Basel III. However, despite the progress, more time is needed to finalize some areas, including the final calibration, before those proposals can be reviewed by the GHOS. This impacts the meeting of the GHOS which had been scheduled for early January, which has been postponed accordingly. The Basel Committee gave no specific date as to when the work would be completed, saying only that it expects to complete the work in the near future.  

View the press release.

The European Banking Authority published a letter, dated December 23, 2016, in which it requests an extension of time from the European Commission for delivering certain draft technical standards which were due to be delivered by December 31, 2016 under the Capital Requirements Regulation and the Capital Requirements Directive. The EBA is requesting an extension for the Regulatory Technical Standards and the Implementing Technical Standards on the authorization of banks because of a combination of its significant workload and considerable resource constraints and issues arising in respect of new entrants and FinTech companies in addition to the need to achieve a balance between allowing Member States to retain their own authorization processes whilst harmonizing the information required. The EBA expects to be able to deliver the ITS and RTS by mid-2017. 

The EBA is also requesting an extension for the RTS on consolidation methods which it has experienced difficulties with because of the interactions with the Basel framework and with the European Commission's recent adoption of legislation to amend CRR. The EBA expects to be able to finalize the draft RTS by the end of 2017. 

Read more.

The US Federal Reserve Board, the OCC and the Federal Deposit Insurance Corporation announced the annual adjustment to the asset-size thresholds used to define small bank, small savings association, intermediate small bank and intermediate small savings association under the Community Reinvestment Act (CRA) regulations.

Read more.

The OCC issued a final rule, 12 C.F.R. § 7.1022, that prohibits national banks and federal savings associations (FSAs) from dealing or investing in industrial or commercial metals.

The final rule covers metal, including alloy, in a physical form primarily suited to industrial or commercial uses, such as copper cathodes and aluminum T-bars. The final rule supersedes a prior OCC determination permitting national banks to trade copper. The rule, however, still recognizes that national banks and FSAs may hold industrial or commercial metal under authorities that are distinct from dealing and investing. For example, national banks and FSAs may acquire industrial or commercial metal through foreclosures on loans and then sell the metal to mitigate loan losses.

The rule carries out an OCC recommendation included in its report to Congress and the Financial Stability Oversight Council under section 620 of the Dodd-Frank Act. Section 620 required the federal banking agencies to conduct a study of the activities and investments that banking entities may engage in under state and federal law and to consider the associated risks and how banking entities mitigate those risks.

The effective date of the final rule is April 1, 2017. Banks with existing holdings of industrial and commercial metal acquired through dealing or investing activities must divest of such metal as soon as reasonably practical, but no later than one year after the effective date of the final rule, subject to four one-year extensions available from the OCC in particular cases.

View the final rule.

The US Federal Reserve published the aggregate global indicator amounts for the purposes of calculating the “Method 1” G-SIB Surcharge for 2016. The Federal Reserve Board’s G-SIB surcharge rule establishes a methodology to identify global systemically important bank holding companies in the United States based on certain indicators that are correlated with systemic importance. Under the G-SIB surcharge rule, a firm must calculate its G-SIB score using a specific formula (“Method 1”).

Read more.

The European Banking Authority published a report on the cyclicality of banks' capital requirements. The report examines whether the EU's risk-sensitive capital requirements create unintended pro-cyclical effects and whether any remedial steps are necessary or justified. The EU's capital requirements framework is set out in the Capital Requirements Regulation and the Capital Requirements Directive, together known as CRD IV. CRR requires the European Commission to prepare a biennial report for the European Parliament and the Council of the European Union on the issue. This report from the EBA is intended to feed into that report. 

The EBA concludes that the impact of the EU capital requirements framework on the EU economic cycle is limited and that there are no strong reasons for shifting from the risk-sensitive framework. The EBA notes that EU banking legislation provides tools for regulators to respond to any pro-cyclicality concerns, as appropriate, and recommends periodic monitoring of the potentially cyclical impact of the EU bank regulatory framework (not only regulatory capital) and further research into the effectiveness and efficiency of counter-cyclical instruments. 

View the EBA's report.

The FDIC released a handbook, developed to facilitate the process of establishing new banks, by offering guidance for navigating the phases of establishing an insured institution. The handbook, titled “Applying for Deposit Insurance—A Handbook for Organizers of De Novo Institutions,” is part of recent efforts by the FDIC to increase transparency and clarity regarding the deposit insurance application process. The standards in the Handbook relax certain requirements that had been imposed as a result of the financial crisis. Comments on the handbook are due February 20, 2017.

View handbook.

A Commission Implementing Decision was published in the Official Journal of the European Union, updating the list of third countries with equivalent regulatory arrangements in relation to prudential requirements for banks and investment firms for the purpose of the treatment of exposures. The Decision lists the countries whose arrangements for supervision and regulation of banks and investment firms are deemed by the European Commission to be equivalent to the standards of the EU as set out in the Capital Requirements Regulation. The Decision is based on assessments that reviewed the supervisory and regulatory arrangements in each country for: (i) banks; (ii) investment firms; and (iii) exchanges. The following nations and territory are now equivalent across categories (i) and (ii): Turkey, New Zealand, the Faroe Islands and Greenland. This Decision will enter into force on January 10, 2016.

View the list of equivalent third countries and territories.

The European Banking Authority published its third impact assessment report for the liquidity coverage ratio requirements under the Capital Requirements Directive and Capital Requirements Regulation, together known as CRD IV. CRR mandates the EBA to prepare the LCR impact assessment report annually. The aim of the report is to assess the impact of the EU's LCR regulation on the EU banking sector. The report indicates a constant improvement of the average LCR across EU banks since 2011. In addition, it states that the average LCR for EU banks at the end of December 2015 was approximately 134%, with an aggregate gross shortfall of EUR 10.9 billion. This increase has been attributed to an increase in liquid assets.

The EBA is also required to report to the European Commission on whether the EU's timeframe should be amended to fit with the Basel III timeline. The report reviews the phasing-in of the liquidity coverage requirements, in particular, assessing whether there is a case for deferring the introduction of the 100% minimum binding standard from January 1, 2018 until January 1, 2019. Under the CRR and related secondary legislation, the EU LCR minimum requirement was set at 60% from October 1, 2015 and is gradually increasing to 100% in January 2018, a year ahead of the Basel implementation date. The EBA concludes that there is no significant evidence to recommend amending the current transitional framework because the existing level of non-compliance with the LCR under full implementation is low.

View the report.

The Joint Committee of the European Supervisory Authorities published a report outlining final joint Guidelines for the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector. The Joint Committee consists of the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority. The final Guidelines follow a consultation on draft guidelines published on July 3, 2015, and will replace previous guidelines published by the ESAs’ predecessors in 2008.

The purpose of the final Guidelines is to provide legal certainty and clarity on assessment processes relating to increases of control and acquisitions of banks, investment firms and insurance firms, bringing a more harmonized, clear and transparent process in prudential assessments by national regulators. In addition, the final Guidelines seek to provide clearer details on what information is required from proposed acquirers. The guidelines cover questions related to: (i) indirect acquisitions of qualifying holdings, persons acting in concert and decisions to acquire; (ii) assessment periods; and (iii) financial soundness of acquirers. The report summarizes the main points and comments that were raised in the twelve responses to its Consultation. 

Read more.

The European Banking Authority published recommendations for harmonizing the EU framework for covered bonds. For banks investing in covered bonds that meet certain criteria, the Capital Requirements Regulation sets preferential risk weights to be applied. The recommendations are set out in a report which builds on the EBA's 2014 Report on EU covered bond frameworks and capital treatment. The aim of the recommendations is to ensure that only financial instruments which comply with certain harmonized structural, credit risk and prudential standards are capable of being covered bonds, and as such have access to the special regulatory and capital treatment provided. Harmonizing the EU framework on covered bonds is part of the Capital Markets Union initiative launched by the European Commission in September 2015

Read more.

The European Banking Authority published for consultation draft Guidelines on supervision of significant branches. The proposed Guidelines set out how the consolidating supervisor, the home supervisor and the host supervisor should cooperate to prudentially supervise and coordinate monitoring of significant branches requiring intensified supervision. An "intensification test" is proposed to assess which branches should be designated as significant-plus branches. Significant-plus branches will be those that are assessed as important for the firm of the group or as performing critical functions or as important for the financial stability of the host Member State. A branch that is assessed to be a significant-plus branch would be subject to intensified supervision which would entail, amongst other things, a separate branch risk assessment, regular on-the-spot checks and inspections, extensive sharing of supervisory intelligence, coordinated application of supervisory and precautionary measures and reflection of the branch in the firm&'s recovery planning. The consultation closes on March 20, 2017.

View the consultation paper.

The US Federal Reserve Board approved a final rule requiring large (generally defined as consolidated assets of $50 billion or more) depository institution holding companies, and certain nonbank financial companies supervised by the Federal Reserve, to publicly disclose their liquidity coverage ratio. The final rule requires these covered financial institutions to publicly disclose quantitative and qualitative information regarding their liquidity coverage ratio calculation on a quarterly basis. The disclosures must be made in a direct and prominent manner on the company’s public internet site or in a public financial or other public regulatory report and must remain available for five years. The Federal Reserve stated that requiring institutions to report their medium-term liquidity position would provide “a better indication of the overall strengths and weaknesses of a company’s liquidity position” rather than an examination of short-term swings in a company’s liquidity position. The final rule is similar to the rule proposed in November 2015; however, the rule as adopted extends the implementation timeline of the public disclosure requirements by nine months. Under the new rule, covered companies, which include those that have $700 billion or more in total consolidated assets or those that have $10 trillion or more in assets under custody, will need to start complying with the public disclosure requirements beginning on April 1, 2017. Other covered companies will be required to comply with the public disclosure requirements beginning on April 1, 2018.

View text of the final rule.

The US Federal Reserve, the FDIC, the US National Credit Union Administration and the OCC issued FAQs to assist institutions in implementing the new accounting standard for credit losses, which was recently issued by the US Financial Accounting Standards Board. The new standard, “Financial Instruments—Credit Losses,” replaces the existing incurred loss methodology in US GAAP and establishes the new current expected credit losses methodology (CECL). The FAQs expand on the “Joint Statement on the New Accounting Standard on Financial Instruments—Credit Losses,” which the agencies issued in June 2016. The agencies plan to continue issuing FAQs regarding the implementation of the CECL methodology.

View notice to the banks.

View FAQs.

The Financial Stability Board published a consultative paper containing draft Guiding Principles on the internal total loss-absorbing capacity or Internal TLAC of global systemically important banks. The FSB is proposing the Guiding Principles to support the implementation of the TLAC Standard. The TLAC Standard is designed to ensure that failing G-SIBs will have sufficient loss-absorbing and recapitalization capacity available in resolution. The FSB committed to develop implementation guidance on the TLAC Standard, in particular for internal TLAC. Internal TLAC is the loss-absorbing resources that a resolution entity commits to its material subsidiaries. The proposed Guiding Principles cover, among other things: (i) the process for identifying material sub-groups, the composition of sub-groups, the distribution of internal TLAC between the entities within material sub-groups and the treatment of unregulated or non-bank entities; (ii) the role of home and host authorities and the factors to be considered when determining the size of the internal TLAC requirement; (iii) practical considerations relating to the issuance and composition of internal TLAC; (iv) the trigger mechanism for internal TLAC; and (v) cooperation and coordination between home and host authorities in triggering the write-down and/or conversion into equity of internal TLAC. Responses to the consultation are due by February 10, 2017. The FSB intends to review the technical implementation of the TLAC Standard by the end of 2019.

View the consultative paper.

The European Central Bank published the outcome of its second Supervisory Review and Evaluation Process in 2016 and updated Recommendations on dividend distribution and remuneration policies for 2017. The ECB comments that SREP outcomes reveal a broadly stable capital demand for 2017 and that any changes in individual bank levels reflect changes in individual bank risk profiles. The aggregate capital demand by directly supervised banks for 2017 is comparable to that of 2016, with an average of around 10% Common Equity Tier 1. The ECB also imposed liquidity measures that require banks to have higher liquidity coverage ratios than the regulatory minimum. 

The updated ECB Recommendations on dividend distribution and remuneration policies are to be adopted in 2017, for the financial year 2016. The ECB has maintained its general stance on both topics whilst accounting for regulatory change on the obligation of the supervisor to differentiate between the types of Pillar 2 capital that a bank is required to hold. 

View the press release. 

View the recommendations.

The US Federal Reserve Board issued a final rule establishing total loss absorbing capacity (TLAC) long-term debt (LTD), clean holding company requirements and regulatory capital deductions for US global systemically important banks (G-SIBs) and the US intermediate holding companies of non-US G-SIBs. While the final TLAC rule is largely consistent with the Federal Reserve Board’s proposed rule issued in October 2015, the Federal Reserve Board made certain adjustments in the final rule in response to comments received. Notably, the Final Rule: (1) lowered certain of the TLAC and LTD requirements; (2) allows certain US intermediate holding companies to issue external LTD rather than require all such LTD to be issued to the foreign parent company or affiliate; (3) allows for the grandfathering of certain long-term debt including debt that was issued prior to December 31, 2016 and contained acceleration clauses or was governed by foreign law; and (4) removed the phase-in periods provided for under the proposed rule. Institutions that meet the relevant thresholds under the final rule would be required to comply with the requirements by January 1, 2019.

View final rule.

The US Office of the Comptroller of the Currency released a final rule to remove outdated or unnecessary provisions of certain rules to reduce regulatory burden. The rule is a result of the OCC’s decennial review of its rules required by the US Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) of 1996. While the OCC is conducting the EGRPRA review jointly with the other federal financial regulatory agencies, the final rule addresses regulations that are exclusive to the OCC. Of note, the final rule: removes notice and approval requirements for certain changes in permanent capital involving national banks; clarifies national bank director oath requirements; removes certain financial disclosure requirements for national banks;  integrates and updates OCC rules for national banks and federal savings associations relating to municipal securities dealers, Securities Exchange Act of 1934 disclosures, securities offering disclosures and insider and affiliate transactions; updates recordkeeping and confirmation requirements for national banks’ and federal savings associations’ securities transactions; and permits the electronic submission of filings required under the Securities Act of 1933 and the Securities Exchange Act. The OCC has also recommended legislative chances that would remove unnecessary burden for national banks and federal saving associations.

View final rule.

The European Banking Authority published final Guidelines on compliance with the regulatory disclosure requirements in the Capital Requirements Regulation. The EBA's Guidelines aim to ensure harmonized implementation of the Basel III Pillar 3 requirements that were released in January 2015. The Guidelines introduce specific guidance and formats for Pillar 3 disclosures, including tables and templates. The Guidelines will apply to Globally and Other Systemically Important Institutions. However, national regulators are able to require other firms to apply the Guidelines when complying with their Pillar 3 disclosure obligations under CRR. The Guidelines apply for year-end 2017 disclosures. However, the EBA recommends that G-SIIs implement these for year-end 2016 disclosures, and strongly encourages implementation of the guidelines for a limited subset of disclosure requirements relating to risk-weighted assets and capital requirements for the year-end 2016 disclosures.

View the final Guidelines. 

The US Federal Deposit Insurance Corporation, Federal Reserve Board and Office of Comptroller of Currency issued interagency final rules that increase the number of small banks and savings associations eligible for an 18-month examination cycle rather than a 12-month cycle. The purpose of the rules is to reduce regulatory compliance costs for smaller institutions, while maintaining safety and soundness protections.

Under the final rules, qualifying well-capitalized and well-managed banks and savings associations with less than $1 billion in total assets are eligible for an 18-month examination cycle. Previously, only firms with less than $500 million in total assets were eligible for extended examination cycle. Qualifying well-capitalized and well-managed US branches and agencies of foreign banks with less than $1 billion in total assets are also eligible.

These rules have been in effect since February 29, 2016, pursuant to interim final rules previously adopted by the agencies. After soliciting comment on interim final rules, the agencies have re-issued them as final rules. Final rules are identical to interim final rules.

View final rules.

The US Board of Governors of the Federal Reserve System issued a statement of policy regarding how banking entities may seek an extension to conform their investments in certain illiquid hedge funds and private equity funds (covered funds) to the requirements of section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the Volcker Rule. As noted below, any such extension requests must be submitted by January 21, 2017.

The Volcker Rule provisions of the Dodd-Frank Act permits the Federal Reserve Board, upon an application by a banking entity, to provide up to an additional five years to conform investments in certain legacy illiquid covered funds where the banking entity had a contractual commitment to invest in the fund as of May 1, 2010. The five-year extension for certain legacy illiquid covered funds is the last conformance period extension that the Federal Reserve Board is authorized to provide banking entities under the statute.

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A Commission Implementing Regulation on the extension of the transitional periods related to own funds requirements for exposures to central counterparties set out in the Capital Requirements Regulation and European Markets Infrastructure Regulation was published in the Official Journal of the European Union. The authorization process for existing CCPs established in the European Union is complete but there are still third-country CCPs, notably some based in the US, that are awaiting recognition status. Without an extension of the transitional periods, banks and investment firms in the EU would need to increase their own funds requirements for their exposures to those CCPs that are not yet recognized. The implementing Regulation extends the transitional period by an additional six months to June 15, 2017. 

The recent proposals to amend the CRR published by the European Commission include an amendment to these transitional provisions. The proposed amendment would remove the need for the European Commission to continuously extend the transitional period by basing the transitional deadline instead on the timing of an application for recognition by a third country CCP. 

View the Implementing Regulation.

View more about the proposed amendments to CRR. 

The US Federal Reserve Board invited comment on a proposal to fully apply the Federal Reserve Board’s existing rating system for bank holding companies to savings and loan holding companies.

The Dodd-Frank Act transferred responsibility for the regulation and supervision of savings and loan holding companies to the Federal Reserve Board, effective July 2011. Since then, the Federal Reserve Board has applied its rating system to savings and loan holding companies on an “indicative” basis that describes how the savings and loan holding company would be rated. However, the assignment of an unsatisfactory indicative rating has not automatically triggered supervisory action.

The Federal Reserve Board’s rating system is in part used to determine the safety and soundness of a financial institution, as well as potential supervisory responses. Fully applying the rating system to both bank holding companies and savings and loan holding companies will help ensure consistent standards and supervision.

The proposal would fully apply the rating system to most savings and loan holding companies supervised by the Federal Reserve Board. However, it would not apply to savings and loan holding companies engaged in significant insurance or commercial activities. These firms would instead continue to receive indicative ratings.

Comments on the proposed rule must be received no later than February 13, 2017.

View proposed rule.
 

The US Federal Reserve announced the approval of technical amendments to its rule regarding risk-based capital surcharges for US-based global systemically important bank holding companies (GSIB surcharge rule), requiring those firms to hold additional amounts of risk-based capital to avoid restrictions on capital distributions and discretionary bonus payments. The changes would not materially alter the underlying rule approved by the Federal Reserve Board in July 2015.

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The European Commission published a report on benchmarking of diversity practices under the Capital Requirements Directive. The CRD requires banks and investment firms to ensure that the composition of management bodies is sufficiently diverse in terms of age, gender, geographical provenance, education and professional background. Firms are required to put in place a policy promoting management body diversity and to publish the report, the firm's objectives, relevant targets (if any) and the extent to which these have been met. The Commission is required to report to the European Parliament and the Council of the European Union on the results achieved as a result of the requirements of CRD and on the appropriateness of benchmarking diversity practices. The Commission found that improvements could still be made, both for having a policy in place and achieving greater diversity and highlighted the need for firms and supervisors to take steps to ensure that the policies are put in place. In addition, the Commission concluded that the benchmarking of diversity practices is a useful tool for assessing the impact and effectiveness of the CRD requirements over time and to monitor for compliance. The Commission does not consider that any legislative amendments are required at this time. 

View the report.

The US Federal Reserve Board published a notice in the Federal Register that it has finalized its proposed revisions to Form FR Y-7Q implementing the home country capital adequacy requirements prescribed in Sections 252.143(b) and 252.154(b) of Regulation YY. These revisions are effective December 31, 2016, except for the three new line items regarding a foreign banking organization’s (FBO) leverage ratio, which are effective March 31, 2018.

The Federal Reserve Board noted that the submission of the information required on Form FR Y-7Q constitutes compliance with both the home country capital adequacy reporting and the certification requirements of Regulation YY. Accordingly, commencing with the FR Y-7Q filings as of December 31, 2016, the Federal Reserve Board will treat each quarterly filing as a certification of the reporting FBO’s home country capital adequacy. The Federal Reserve Board also eliminated the proposed line items for Pillar II buffers and any “other” applicable capital buffer. However, it retained the line item for reporting home country GSIB buffers. Regarding confidentiality, the Federal Reserve Board considers all the required information to be publicly available, but will consider, on a case-by-case basis, requests by individual FBOs for confidential treatment of specific line items.

View the Federal Register notice.

The Prudential Regulation Authority published a Statement of Policy setting out its approach to the implementation of the systemic risk buffer. The SRB is used to prevent and mitigate long term non-cyclical macro-prudential or systemic risks not covered by the Capital Requirements Regulation. It is a firm-specific buffer based on a firm's risk weighted exposures and must be met with Common Equity Tier 1 capital. The Statement of Policy is relevant to ring-fenced bodies under the Financial Services and Markets Act 2000 and large building societies that hold more than £25 billion in deposits. These are jointly referred to as "SRB institutions". The UK Independent Commission on Banking recommended that the UK's systemically important SRB institutions be held to a higher capital standard. In addition to these recommendations, the UK legislation implementing the systemic risk buffer requires that the PRA apply the Financial Policy Committee framework as of January 1, 2019. The FPC's framework for the systemic risk buffer was published in May 2016.

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Federal Reserve Board Governor Tarullo gave a speech defending post-financial crisis efforts to strengthen regulation governing the financial system. Governor Tarullo also criticized recent Republican legislative regulatory reform proposals, including the Financial CHOICE Act’s proposal to raise the leverage ratio of banks to 10% in return for relief from many other prudential requirements, including risk-based capital requirements.

View Governor Tarullo’s remarks.

The US House of Representatives passed a bill (H.R. 6392) that would replace the current supervisory framework under the Dodd-Frank Act that automatically subjects all bank holding companies with $50 billion or more in total consolidated assets to enhanced prudential standards with a system that would authorize the Financial Stability Oversight Council to designate companies on a case-by-case basis if the FSOC makes a final determination that material financial distress at the bank holding company, or the nature, scope, size, scale, concentration, interconnectedness or mix of its activities could threaten the financial stability of the United States. G-SIBs, however, would be treated as if such a determination had been made. In a statement issued in support of the bill, Representative Warren Davidson (R-OH) stated that the bill “prevent[s] the Fed and Treasury from Blindly implementing new regulations proposed by an international entity, whether coming from the [BCBS] or unelected bureaucrats on the Financial Stability Board.” By contrast, Representative Maxine Waters (D-CA) called the legislation the “first step in the Trump agenda to deregulate Wall St.”

View text of HR 6392.