The US BoG of the Federal Reserve System issued a proposed rule modifying the capital plan and stress testing rules for the 2017 test cycle. The proposed changes include eliminating the qualitative portion of Comprehensive Capital Analysis and Review for certain large and noncomplex firms (generally, firms with less than $250 billion in total consolidated assets), along with reduction in the amount of data that such firms are required to submit on the FR Y-14 regulatory reports. Such institutions however, would remain subject to quantitative CCAR requirements and to normal supervision by Federal Reserve Board regarding their capital planning. The proposed rule would be effective for the 2017 CCAR. Comments on the proposal are due by November 25, 2016.

In a speech given the same day, FRB Governor Tarullo stated that the Federal Reserve Board is considering adoption of a “stress capital buffer approach” to setting post-stress capital requirements whereby the G-SIB capital surcharge would be factored into the estimate of the amount of capital required under stress. However, Governor Tarullo emphasized that this was a preliminary proposal and would not apply to the 2017 cycle of CCAR.

View proposal.

View Govenor Tarullo speech.

The Financial Policy Committee of the Bank of England released a statement following its meeting on September 20, 2016. The FPC considers that the current outlook for financial stability in the UK remains challenging following the outcome of the referendum in June for the UK to leave the EU. The FPC has reaffirmed that it expects to maintain a countercyclical buffer rate of 0% until at least June 2017 unless any material changes warrant an amendment. The Prudential Regulation Authority's expectation is that banks should not increase dividends and other distributions as a result of the CCyB being maintained at 0%. 

View the statement.

The European Banking Authority published final draft Implementing Technical Standards on the common procedures, forms and templates for the consultation process between the relevant national regulators when carrying out the prudential assessment relating to proposed acquisitions of qualifying holdings in credit institutions.  The Capital Requirements Directive requires regulators to fully consult with each other when carrying out the assessment of a proposed acquirer of qualifying holdings. The final draft ITS supplements this requirement by setting out the requirements for the designation of contact points by regulators, as well as a timeframe and process for submitting the consultation notice and for providing the response. The final draft ITS provide templates for the response from the regulator from whom information has been requested. It also outlines language requirements and means of communication, as well as how mutual feedback would be carried out. The EBA has made certain amendments to the version of the ITS that it consulted on previously to take into account the final draft ITS prepared on a similar topic under the Markets in Financial Instruments Directive II, which was published by the European Securities and Markets Authority in March 2015. Those amendments seek to align the requirements across sectors. The final draft ITS must be submitted to the Commission for adoption before it can enter into force.  

View the final draft ITS.

The European Banking Authority published a consultation paper proposing draft Guidelines on how to stipulate the minimum monetary amount of professional indemnity insurance required for authorization under the Payment Services Directive II. PSD2 entered into force on January 12, 2016, and will apply from January 13, 2018. The PSD2 recognizes new types of payment services that have emerged in the area of internet payments, such as payment initiation services and account information services. The PSD2 sets out the criteria on how to stipulate the minimum monetary amount of professional indemnity insurance or other comparable guarantee to be held by regulated firms. The draft Guidelines also set out the criteria, indicators, calculation methods and a formula that regulators should use when granting authorization or registration. The consultation paper explains the EBA's proposal for the use of a formula to calculate the minimum monetary amount of professional indemnity insurance or any comparable guarantee, when and how the lowest tier (the default value) should be used when calculating the monetary amount, provides details on indicators for the criteria set out in the PSD2 and the proposed methodology for some of the indicators. Responses to the consultation are due by November 30, 2016. 

View the consultation page. 

FDIC Chairman Martin Gruenberg issued a statement on the release of updated data regarding the FDIC’s Deposit Insurance Fund. (DIF) The DIF balance stood at almost $78 billion, leading to a reserve ratio of 1.17%, an eight-year high. Chairman Gruenberg’s statement noted that the FDIC still intends to reach the statutory minimum ratio of 1.35% set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, before September 30, 2020.

View text of Chairman Gruenberg’s statement.

The US Federal Deposit Insurance Corporation released the semi-annual report of the Global Capital Index. In a concurrent statement, Vice-Chairman Thomas M. Hoenig noted that while Global Systemically Important Banks did increase their equity capital, a beyond-proportionate increase in assets led to a net increase in the overall leverage of G-SIBs. Vice-Chairman Hoenig also noted that asset quality in Europe remains an issue in comparison to the United States, with more than three times as many non-performing loans, and that better-capitalized banks trade at a premium when compared to banks with weaker capital positions. Vice-Chairman Hoenig noted that, while banks are better capitalized now, with average leverage ratios of around 5%, such ratio remains inadequate should banks have to withstand losses similar to the last financial crisis.

View text of Vice-Chairman Hoenig’s statement.

View Global Capital Index.

The Comptroller of the Currency Thomas J. Curry addressed how the US federal banking system has progressed since the Great Recession and the 2008 financial crisis, the strength of US banks today and the need for continued vigilance to manage risks. Among other things, the Comptroller discussed leverage ratios and their role as an additional line of defense, or backstop, to the risk-based capital measures.  Curry criticized the proposals of some to “water down” the ratios by manipulating what is included or excluded from consideration and stressed the need for clear definitions that accurately and transparently capture the leverage of regulated banks.  Curry argued that “weakening the ratio through special exclusions only undermines our original intent and weakens the protection against excessive leverage.” He further noted that while some wish to exclude certain assets from measures of leverage on the grounds that it could affect certain business lines’ profitability, “the essence of assessing a bank’s leverage is about comparing its equity to its assets, and carving out various assets would cut against the very meaning of leverage.”

View the Comptroller's full remarks.

The US Office of the Comptroller of the Currency released its bank supervision operating plan for fiscal year (FY) 2017.  The plan sets forth the foundation for policy initiatives and for supervisory strategies applicable to individual banks. OCC staff members will use this plan to guide their supervisory priorities, planning and resource allocations.

Of note, the agency indicated that it will focus on Bank Secrecy Act/anti-money laundering compliance management in 2017.  Additional supervisory strategies for FY 2017 will focus on: (i) commercial and retail loan underwriting; (ii) business model sustainability and viability; (iii) operational resiliency; and (iv) change management processes to address new regulatory requirements.

The OCC will provide periodic updates about supervisory priorities through the Semiannual Risk Perspective in the spring and fall of 2017, and with a mid-cycle operating plan status report in the third quarter of FY 2017.

View the OCC's Fiscal Year 2017 Operating Plan.

The OCC issued a proposed rule setting forth a framework for placing uninsured national banks regulated by the OCC into receivership.  While the National Bank Act and Federal Deposit Insurance Act specify the Federal Deposit Insurance Corporation as receiver for insured banks and savings associations, the law grants the Comptroller of the Currency broad authority to choose a receiver for uninsured national banks. The proposal would not apply to federal savings associations, all of which are insured, or to uninsured US branch offices of foreign banks.

The proposed rule describes:  (i) the appointment of a receiver and required federal notice; (ii) the process for submitting claims against the receivership; (iii) the order of priorities for payment of administrative expenses and claims; (iv) the powers and duties of the receiver; (v) the payment of dividends on claims; (vi) the sources of funds for payments and claims; and (vii) the status of fiduciary and custodial assets and accounts.

While the OCC has not appointed a receiver for an uninsured national bank in many years, the agency believes that clarifying the framework, process and authority promotes the orderly resolution of such institutions if required and contributes to the broader stability of the federal banking system.

All uninsured national banks are currently trust banks.  However, the OCC noted that it retains discretion to grant new charters for uninsured banks, and the OCC specifically stated that an uninsured federal bank charter may be an appropriate entity for delivering banking procedures in a new way in light of technological innovations in financial services.

The deadline to submit comments on the proposed rule is November 14, 2016.

View the proposed rule.


 

Implementing Technical Standards listing the main indices and recognized exchanges for the use of eligible collateral in accordance with the Capital Requirements Regulation was published in the Official Journal of the European Union.
 
The CRR states that equities or convertible bonds included in a main index may be used by institutions as eligible collateral for credit risk mitigation purposes. One of the eligibility criteria for collateral is that it should be sufficiently liquid. To be considered as main indices for the purposes of the CRR, equity indices should consist mainly of equities that can reasonably be expected to be realizable when an institution needs to liquidate them. Equity indices listed include STOXX Asia/Pacific 600, TSX60, Hang Seng Mainland 100 Index (China), FTSE Europe Index, S&P BMI France, Nikkei 300 and the OMXS60. The convertible bond indices listed as main indices are Exane ECI-Europe, Jefferies JACI Global and Thomson Reuters Global Convertible. 

Read more.

As part of the inaugural Marketplace Lending Policy Summit 2016, US Comptroller of the Currency Thomas J. Curry discussed marketplace lending’s risks and associated policy questions. Of note, Comptroller Curry addressed the OCC’s work around responsible innovation and feedback it has received to date on potentially granting federal banking charters to fintech firms.  Curry noted that if the OCC does decide to grant limited-purpose charters in this area, the institutions who receive the charters will be held to the same strict standards of safety, soundness and fairness that other federally chartered institutions must meet.

View Comptroller Curry's remarks.

The European Central Bank published proposed draft Guidance on non-performing loans. The proposed Guidance addresses the main aspects of strategy, governance and operations for resolving NPLs. Once finalized, the Guidance will apply to all Eurozone Significant Institutions supervised by the ECB in the Single Supervisory Mechanism as well as their international subsidiaries. Eurozone banks will be expected to apply the Guidance proportionately with those banks that have a high level of NPLs taking greater actions. The ECB Banking Supervision emphasizes that an NPL strategy should outline the bank’s approach and objectives regarding the effective management and ultimate reduction of NPL stocks in a clear, credible and feasible manner for each relevant portfolio. The ECB also published the results of a survey which it undertook with eight national supervisory authorities. The survey assesses the legal and supervisory practices of eight of the Eurozone countries. The ECB considers that some of those countries should revise and strengthen the legal framework on NPLs. Responses to the consultation are due by November 15, 2016.
 
View the draft Guidance and related information.
 
View the draft Guidance. 

The European Banking Authority published a report analyzing the core funding ratio across the EU. The report comes in response to a call for advice from the European Commission to explore the possibilities of the core funding ratio as a potential alternative metric for the assessment of EU banks’ funding risk, taking into account proportionality. 

Read more.

On September 8, 2016, the US Board of Governors of the Federal Reserve System, the US Federal Deposit Insurance Corporation and the OCC jointly issued, pursuant to a requirement under Section 620 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a study on the scope of permissible activities and investments engaged in by banking entities, and the associated risks of those activities. The banking entities covered in the study include insured depository institutions and any company that controls an insured depository institution or is treated as a bank holding company.

The report recommends changes to mitigate risks associated with banking activities, including (i) repealing the authority of financial holding companies to engage in merchant banking and commodities activities, (ii) reviewing certain activities to determine whether changes in regulations are needed and (iii) clarifying certain prudential rules and regulations.  If enacted, the Federal Reserve Board’s recommendations relating to merchant banking and commodities activities would significantly restrict the permissible activities of FHCs established under the Gramm-Leach-Bliley Act in 1999.  The Federal Reserve Board also recommended the repeal of exemptions available to owners of industrial loan companies and grandfathered savings and loans.

View the text of the Report.
 

The Federal Reserve Board issued a policy statement setting forth the framework for setting the Countercyclical Capital Buffer for private-sector credit exposures in the United States. The CCyB is a macroprudential tool that is intended to assist banking organizations in absorbing shocks associated with fluctuations in credit conditions. As a general matter, the CCyB applies to large internationally active banking organizations that are subject to the advanced approaches capital rules (i.e., those with more than $250 billion in assets or $10 billion in on-balance-sheet foreign exposures), and to any depository institution subsidiary of such banking organizations. The policy statement describes the types of financial system vulnerabilities and other factors that the Federal Reserve Board may take into account as it evaluates settings for the buffer, which may include: leverage in the nonfinancial and financial sectors, maturity and liquidity transformation in the financial sector and asset valuation pressures.  However, the range of indicators and models that may be considered will likely change over time. Once activated, the CCyB imposes heightened capital requirements on such covered institutions, which heightened requirements may be removed or reduced by the Federal Reserve Board upon determination that financial conditions that led to the activation of the CCyB have abated or lessened. In addition, the policy statement notes that the Federal Reserve Board will provide notice and seek comment from the public on the proposed level of the CCyB as part of making any final determination to change the CCyB.

View Federal Reserve Board policy statement.

The US Board of Governors of the Federal Reserve System adopted revisions to the FR Y-9C reporting form, a standardized financial statement for consolidated bank holding companies. The Federal Reserve Board revised the FR Y-9C to, among other things, delete existing data items, increase existing thresholds for certain data items, and clarify certain instructional items. The changes were originally proposed to take effect on March 31, 2016.  In response to comments, the Federal Reserve Board is generally delaying the effective date for implementation for certain changes to September 30, 2016, while others will become effective March 31, 2017.

View the text of adopting release

A Commission Delegated Regulation amending the Regulatory Technical Standards specifying the methodology for the identification by national regulators of global systemically important institutions and the definition of subcategories of GSIIs was published in the Official Journal of the European Union. The RTS specify quantifiable indicators forming the five categories to be used when measuring the systemic significance of a bank. The RTS is based on international standards developed by the Basel Committee on Banking Supervision to assess global systemically important banks and on the higher loss absorbency requirement. This methodology is regularly updated. The Amending Regulation updates the reporting templates and reporting instructions for the data collection for 2016 as well as the current values of the indicators that are to be determined.
 
The Amending Regulation entered into force on September 9, 2016. 
 
View the Regulation.

View the original RTS.

As it indicated it would do in the Joint Report on Banking Activities and Investments, the OCC issued a proposed rule that would prohibit national banks and federal savings associations from dealing and investing in industrial or commercial metal. If finalized, the prohibition would cover metal, including alloy, in a physical form primarily suited to industrial or commercial use (including, for example: copper cathodes, aluminum T-bars and gold jewelry).  The proposal states that such metals do not constitute “exchange, coin, and bullion” under 12 USC 24(Seventh), nor would buying or selling such metals for the purpose of dealing or investing in that metal be part of or incidental to the business of banking.  By operation of various federal laws, the prohibition would also apply to FDIC-insured state banks and to US branches and agencies of foreign banks.  Comments must be submitted 60 days from the date of the proposed rule’s publication in the Federal Register.

View Text of OCC Proposed Rule

The Basel Committee on Banking Supervision published a report to the G20 leaders, providing an update on implementation of the Basel III regulatory reforms since the Basel Committee’s last progress report in November 2015. The Basel Committee concluded that the Basel III capital and liquidity standards have generally been transposed into domestic regulations within the time frame set by the Committee. Since the last report, key components such as the risk-based capital standards and the Liquidity Coverage Ratio have now been enforced by all member jurisdictions, while the global systematically important banks framework has been enforced by all member jurisdictions that are home jurisdictions to G-SIBs. The Basel Committee highlighted the ongoing efforts of member jurisdictions to adopt other Basel III standards such as the leverage ratio and the Net Stable Funding Ratio. 

Read more.

The US FDIC released the Summer 2016 issue of its publication, Supervisory Insights. The magazine contains two original articles and the regular “Regulatory and Supervisory Roundup” which provides summaries of recently released regulations and supervisory guidance. An article entitled “De Novo Banks: Economic Trends and Supervisory Framework,” lays out trends the FDIC staff has observed in de novo formation, the FDIC application review process and steps the FDIC takes to supervise and support new banking institutions. Another article entitled, “Matters Requiring Board Attention (MRBA)” provides a survey of trends among issues appearing in the MRBA section of examination reports. The article notes several specific trends: first, examinations resulting in MRBAs have declined since 2011, second, there have been relative increases in credit concentration risk management and liquidity management-related MRBAs, and third, corporate governance and IT practices are additional areas of increasing concern.

View Summer 2016 Supervisory Insights.
 

The White House Council of Economic Advisers released a report analyzing the impact of regulations issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act on community banks, defined generally as banks with assets less than $10 billion. The report disputed claims that increased regulations have negatively impacted smaller-size institutions, noting areas where community banks have remained strong since the Dodd-Frank Act. The report also describes certain long-standing structural challenges that precede the Dodd-Frank Act which community banks have continued to face, and noted the “importance of implementing Dodd-Frank in a way that allows community banks to compete on a level playing field.” In response, Republicans on the US House of Representatives Financial Services Committee published a blog post countering the assertions in the White House report, and posted statements from various community bankers and other small financial services operators commenting on the negative ways in which Dodd-Frank Act reforms have impacted their respective institutions.

View text of the White House Report.

View the HFSC blog post.

The European Banking Authority published an amended version of its implementing technical standards on benchmarking of internal approaches under the Capital Requirements Directive IV. The ITS have been amended to assist regulators in their 2017 benchmarking assessment of internal approaches for credit risk and market risk. The 2016 exercise covered credit risk for so-called high-default portfolios (small and medium enterprises and retail) and market risk portfolios. The 2017 exercise will focus on low-default portfolios. The EBA noted that it intends to update the ITS annually to ensure the quality of future benchmarking exercises. The amended ITS have been published as a package of documents with consolidated instructions, templates and annexes. The amended ITS have been submitted to the European Commission but as of yet have not been adopted.

View the amended ITS. 

View the amended draft benchmarking package.

The Prudential Regulation Authority published a statement inviting firms to apply for a temporary modification of the application of the Leverage Ratio, Public Disclosure and Reporting Leverage Ratio parts of the PRA Rulebook to them. The modification is available to firms that are currently subject to the UK leverage ratio framework.  The statement follows a recommendation in July from the Financial Policy Committee of the Bank of England on the composition of the total exposure measure for the purposes of the leverage ratio, which stated that when applying its rules on the leverage ratio, the PRA should consider allowing firms to exclude from the calculation of the total exposure measure those assets constituting claims on central banks where they are matched by deposits accepted by the firm that are denominated in the same currency and of identical or longer maturity. 

Read more.

The Prudential Regulation Authority published a consultation paper on its proposed approach to the implementation of the systemic risk buffer. The consultation paper 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 (where one or more of the accountholders is a small business) and shares (excluding deferred shares). These are jointly referred to as “SRB institutions”. The UK Independent Commission on Banking recommended that UK systematically important SRB institutions be held to a higher capital standard. In addition to these recommendations, the UK legislation implementing the systematic risk buffer requires that the PRA apply the Financial Policy Committee framework as of January 1, 2019. The PRA’s proposals outline the scope of the framework, the capital implications of the SRB and the PRA’s approach to applying the SRB. 

The PRA has proposed that: (i) it will, in the exercise of sound supervisory judgement, only deviate from the SRB rates derived from the FPC framework in exceptional cases; (ii) for building societies in scope of the framework, the applicable basis of the framework will be the group consolidated basis for building societies that are the parents of consolidation groups and the individual basis for all others; (iii) the initial SRB rates will be set and announced by the PRA in early 2019 and will apply three months after being set; and (iv) following the application of the initial SRB rates, rates will be set and announced annually and will apply in the second year following the calendar year in which they were set.

Responses to the proposals are due by October 28, 2016.

View the PRA update. 

View the consultation paper.

View the FPC framework and associated consultation paper.

The European Banking Authority published the results of the EU-wide stress test. The stress test covered 51 EEA banks and assessed the resilience of the EEA banking sector to adverse financial conditions. Unlike the stress tests conducted in 2011 and 2014, the 2016 stress test did not aim to identify possible capital shortfalls, as the EBA considers that after five years of continuous capital raising in the EU banking sector, the crisis type of stress test appears to be less relevant. It is intended instead that supervisors will use the 2016 results to assess banks’ forward looking capital planning. The results of the stress test will be used by national regulators in their Supervisory Review Process to assess each bank's capital planning going forward.  

View the stress test documentation.

The Federal Reserve Board published a proposal to extend for three years, with revision, the Capital Assessments and Stress Testing information collection applicable to bank holding companies with total consolidated assets of $50 billion or more and US intermediate holding companies established by foreign banking organizations. The Federal Reserve Board proposed revising the FR Y-14A, Q and M schedules to expand the chief financial officer attestation reporting requirement applicable to US BHCs subject to the Large Institution Supervision Coordinating Committee (LISCC) framework to US IHC respondents on a phased-in basis beginning with reports as of December 31, 2017. The CFO-attestation requirement was finalized for US BHCs earlier this year and implementation is required on a phased-in basis for reports as of December 31, 2016.

The proposal also provides for revisions to the FR Y-14A that include data on the supplementary leverage ratio as well as to include information on material operational risks included in loss projections, operational risk scenarios and updated documentation requirements to align with SR Letter 15-18. Comments were due by September 26, 2016.

View Federal Reserve Board Proposal.

The European Banking Authority published final draft Regulatory Technical Standards on the criteria for the application of preferential treatment in cross-border intragroup credit or liquidity lines, or within an institutional protection scheme. The Capital Requirements Regulation permits regulators to grant preferential treatment for transactions within a group or an institutional protection scheme by applying higher inflow rates (in the case of the liquidity receiver) or lower outflow rates (in the case of the liquidity provider) for calculating  the liquidity coverage requirement for intra-group liquidity flows. Where transactions within a group or an institutional protection scheme constitute cross-border positions, preferential treatment is conditional upon compliance with additional objective criteria specified in the Liquidity Coverage Ratio Delegated Act. The Capital Requirements Regulation mandates the EBA to develop draft RTS to specify additional objective criteria. 

Read more.

The European Banking Authority published draft Guidelines on bank’s credit risk management practices and accounting for expected losses. IFRS 9 Financial Instruments will replace IAS 39 Financial Instruments: Recognition and Measurement for the accounting periods beginning on or after January 1, 2018. IFRS 9 requires the measurement of impairment loss allowances to be based on an expected credit loss accounting model rather than on an incurred loss accounting model. Many EU banks use the IFRS standards and because the use of an ECL accounting model involves some discretion in it application, the EBA is proposing that bank’s use the Guidelines when implementing and applying IFRS 9. The proposed Guidelines should be read in conjunction with the relevant provisions of the CRR and CRD. The consultation closes on October 26, 2016. The EBA intends to finalize the Guidelines in Q4 2016 or Q1 2017. The finalized Guidelines will need to be implemented by January 1, 2018. 

View the consultation paper.

The European Banking Authority published a consultation paper proposing an updated version of the guidelines on the implementation of the large exposures regime that was issued by the Committee of European Banking Supervisors on December 11, 2009. The large exposures regime has since been amended by the Capital Requirements Regulation and complemented by European Commission and EBA guidelines. In light of the CRR amendments, the EBA has reviewed and updated the 2009 CEBS Guidelines and presented the results of the review in the consultation paper.

The US Federal Reserve Board extended until September 16, 2016, the comment period for the advanced notice of proposed rulemaking detailing conceptual frameworks for capital standards that could apply to systemically important insurance companies and to insurance companies that own a bank or thrift. The Federal Reserve Board proposal presents one approach, known as the “consolidated approach,” that would apply to systemically important insurance companies and a second approach, referred to as the “building block approach,” for the supervised insurance companies that own a bank or thrift. The Federal Reserve Board extended the comment period, originally set for August 17, 2016, to allow interested persons more time to analyze the issues and prepare their comments.

View Proposed Rule.

The European Banking Authority published a report on the recent dynamics, cross-country dispersion and drivers of non-performing exposures in the EU banking sector. The report covers a review of 166 EU banks from September 2014 to March 2016. The EBA notes that there is a high disparity between jurisdictions, suggesting that the average non-performing loan (NPL) ratio is up to three times higher in the EU than in other jurisdictions. The report provides an overview of asset quality across jurisdictions and analyzes the riskiness of counterparties in different countries and the structural characteristics of local markets that can affect credit quality, provisioning policies and recovery of distressed assets. 

A Decision of the European Banking Authority on unsolicited credit assessments was published in the Official Journal of the European Union. The EBA decided that unsolicited credit assessments of certain External Credit Assessment Institutions (ECAIs) did not differ from their solicited credit assessments. An ECAI is a credit rating agency that has been registered or certified under the EU CRA Regulation or a central bank issuing credit ratings which are exempt from the application of the CRA Regulation. 

Read more.

The Managing Director of the International Monetary Fund, Christine Lagarde, gave a speech before the Federal Reserve Bank of New York about the struggles facing the global financial market’s smaller players in the aftermath of the financial crisis. Director Lagarde stated that due to heightened post-financial crisis regulations and anti-money laundering rules, many large global banks were prompted to reevaluate their correspondent banking models with smaller countries, and chose to reduce cross-border banking services offered to those entities considered too risky or unprofitable. In connection with those trends, Director Lagarde expressed concern that the global consequences of large banks withdrawing from vulnerable smaller countries, if left unaddressed, could become systemic and disruptive. She urged regulators to collect data and facilitate discussions with banks on this issue. Finally, Director Lagarde emphasized that “a strong and open international financial system is key to restore momentum in the global economy,” and that global banks must avoid “knee-jerk” reactions to increased regulatory costs.

View Director of Lagarde's speech.
 

Senators Tim Kaine (D-Va) (the Democratic vice-presidential nominee), Mark R. Warner (D-Va.), Gary C. Peters (D-Mich.) and Robert P. Casey (D-Pa.) wrote a letter to the heads of the US Federal Reserve Board, the FDIC and the OCC, requesting an exemption for certain large regional banks from the requirements of the liquidity coverage ratio and the advanced approaches risk-based capital rules. In their letter, the senators argue that it would be unfair for large regional banks to be subjected to the same LCR and capital rules requirements as are applied to riskier, more complex, systemically important banks.

Currently, because LCR reporting requirements are based on an asset threshold test, some large regional banks are subject to heightened LCR requirements, which requires, among other things, certain daily reporting of liquidity levels. Large regional banks may also, by virtue of size or foreign exposure, be subject to the “advanced approaches” capital requirements that dictate capital reserves a bank must hold to cover potential losses. The senators argue that regional banks should be exempted from complying with the burdens of both the LCR requirement and the Advanced Approaches requirements because they do not share the “same risk profile or complexity” as systemically important banks. The Senators also stated generally that the regulatory regime should move away from reliance on an internal models approach on the theory that such reliance obscures a bank’s financial status.

View full text of the letter.

The European Banking Authority launched a data collection exercise to support its response to the European Commission’s Call for Advice on a new prudential framework for investment firms subject to the Markets in Financial Instruments Directive. In December 2014, the Commission sought technical advice from the EBA and the European Securities and Markets Authority on whether the current prudential framework applicable to MiFID investment firms under the Capital Requirements Directive and Capital Requirements Regulation was appropriate in terms of risk sensitivity, proportionality and complexity. In response, the EBA concluded that the regime was not appropriate for the risks that MiFID investment firms are exposed to and made recommendations. 

Read more.

Chairman of the US FDIC Martin J. Gruenberg testified before the Committee on Oversight and Government Reform of the US House of Representatives regarding de novo banks and industrial loan companies. During his testimony, he provided an overview of recent banking industry performance and condition, discussed trends in de novo bank and ILC formation, and steps the FDIC is taking to support the creation of de novo banks. Chairman Gruenberg testified that there have been few de novo banks formed in recent years, noting that since January 2011, the FDIC has received only ten applications for deposit insurance for de novo institutions and no applications for new ILCs. Of these ten applications, three were approved, five were withdrawn and two are still in process. Gruenberg noted that although community bank earnings have recovered in recent years, low interest rates and narrow net interest margins have kept bank profitability ratios (return on assets and return on equity) well below pre-crisis levels, making it relatively unattractive to start new banks. Gruenberg also noted that the FDIC is continuing to monitor developments with respect to the formation of new banking institutions, and recently announced a number of initiatives to support the efforts of viable organizing groups in creating new institutions. For example, the FDIC has begun a “Questions and Answers” series to help applicants better develop their proposals and has presented an overview of the deposit insurance application process to a conference of state bank supervisory agencies. Moreover, on April 6, 2016, the FDIC reduced the period of enhanced supervisory monitoring of newly insured depository institutions from seven years to three years.

View Chairman Gruenberg's Testimony.

The European Central Bank published its Guide on the approach for the recognition of institution protection schemes for prudential purposes.  The Capital Requirements Regulation defines an IPS as a contractual or statutory liability arrangement which protects its member institutions and ensures that they have the liquidity and solvency needed to avoid, where necessary, bankruptcy. Certain waivers or derogations of capital requirements are available for IPS member institutions under CRR.  In particular, CRR provides that the ECB may, subject to certain exceptions, allow credit institutions to apply a 0% risk weight to exposures to other counterparties which are members of the same IPS with the exception of exposures giving rise to Common Equity Tier 1, Additional Tier 1 and Tier 2 items. The ECB directly supervises the largest Eurozone banks for prudential purposes and overseas the prudential supervision by national regulators of the smaller Eurozone banks. The ECB's Guide sets out how it intends to assess compliance of an IPS and its members with the requirements set out in the CRR to grant such a waiver. 

View the Guide.

View the feedback statement. 

The Basel Committee on Banking Supervision published an amended Securitization Framework to include alternative regulatory capital treatment for simple, transparent and comparable (STC) securitisations. The Securitization Framework, which was initially published on December 11, 2014, forms part of Basel III. The amendments to the Securitization Framework provide for lower capital charges to apply to STC Securitizations, and include criteria that should be applied to differentiate STC securitizations from other securitizations. The new capital treatment for STC securitizations should be read in conjunction with the criteria for identifying STC securitizations (published by the Basel Committee and the International Organization of Securities Commissions in July 2015).  The Securitization Framework, as amended, is due to come into effect in January 2018.

View the updated Securitization Framework.

The UK Prudential Regulation Authority published a Policy Statement on the implementation of ring-fencing, covering prudential requirements, intragroup arrangements and the use of financial market infrastructures. The policy statement summarizes feedback received to the consultation paper published in October 2015. The PRA states that it does not consider that the responses received to the consultation paper have necessitated any significant changes to its proposals. 

Read more.

The Bank of England published its latest Financial Stability Report in which the Bank's Financial Policy Committee sets out the key risks to the UK's financial system and weighs them against the resilience of the system. In March 2016, the FPC had identified areas through which there could be increased risk to the UK's financial stability as a result of the vote by the UK public to leave the EU. Such areas include financing of the UK's large current account deficit, the commercial real estate market, the high level of household indebtedness, limited growth in the global economy and vulnerabilities in the functioning of the financial markets. The FPC states that there is evidence that some of these risks have begun to crystallize and that the current outlook for financial stability is challenging. The FPC is monitoring closely the risks of, amongst other things, further deterioration in investor appetite for UK assets, adjustments in commercial real estate markets tightening credit conditions and reduced and fragile liquidity in core financial markets.

To support the supply of credit and in support of market functioning, the FPC has reduced the UK countercyclical capital buffer rate from 0.5% to 0% of banks' UK exposures with immediate effect. This rate is expected to remain in effect until June 2017, and will reduce regulatory capital buffers by £5.7 billion. The FPC continues to monitor the risks closely.

View the report.

You may like to view our client publications and webinar materials on the impact of Brexit, available here.

The European Banking Authority published its second report analyzing the level of asset encumbrance across EU banks. The analysis aims to assist EU supervisors in assessing how banks manage funding stress as well as the impact that switching from unsecured to secured funding might have on banks in conditions of stress. The report is based on data received for December 2014 and December 2015 further to a requirement under the Capital Requirements Regulation for banks to report levels of repurchase agreements, securities lending and all forms of asset encumbrance to national regulators and for the EBA to prepare annual reports based on that data. The analysis shows that there has been no significant increase in the overall weighted average encumbrance ratio over the last year. The report noted that high levels of asset encumbrance in some countries (notably Denmark and Sweden) were driven by large covered bond markets or by high central bank funding in countries affected by the sovereign debt crisis (e.g. Greece) or by high levels of repo financing and collateral requirements for OTC derivatives (e.g. UK and Belgium). 

View the report.

The US Federal Reserve Board announced that it has not objected to the capital plans of 30 of the 33 bank holding companies participating in the Comprehensive Capital Analysis and Review (CCAR). The Federal Reserve Board objected to two firms’ plans and while one other firm’s plan was not objected to, it is being required to address certain weaknesses and resubmit its plan by the end of 2016.

CCAR evaluates the capital planning processes and capital adequacy of the largest US-based bank holding companies (including US BHC subsidiaries of non-US banking organizations), including the firms’ planned capital actions such as dividend payments and share buybacks and issuances. When considering a firm’s capital plan, the Federal Reserve Board analyzes, and may object to a capital plan based on, quantitative factors (e.g., a firm’s projected capital ratios under a hypothetical scenario of severe economic and financial market stress) and qualitative factors (e.g., the strength of the firm’s capital planning process, which incorporate the risk management, internal controls and governance practices that support the process). If the Federal Reserve Board objects to a capital plan, a firm may not make any capital distribution unless expressly authorized by the Federal Reserve Board.

Since the first round of stress tests led by the Federal Reserve Board in 2009, the common equity capital ratio, which compares high-quality capital to risk-weighted assets, of the 33 bank holding companies in the 2016 CCAR has more than doubled from 5.5 percent in the first quarter of 2009 to 12.2 percent in the first quarter of 2016. This reflects an increase of more than $700 billion in common equity capital to a total of $1.2 trillion during the same period.

View CCAR 2016 assessment framework and results.

The European Banking Authority launched a consultation proposing Guidelines on compliance with the regulatory disclosure requirements in the Capital Requirements Regulation. The EBA aims to ensure harmonized and timely implementation of the Basel III Pillar 3 requirements that were released in January 2015. The proposed Guidelines will introduce specific guidance and formats for disclosure, using tables and templates. Responses to the consultation are due by September 29, 2016. The Guidelines are set to apply for year-end disclosures 2017. However, the EBA recommends that Globally Systemically Important Institutions implement a limited subset of disclosures relating to risk-weighted assets and capital requirements for the year-end 2016 disclosures.

View the consultation paper.

An EU Regulation extending the exemption for commodity dealers from large exposures requirements and own fund requirements was published in the Official Journal of the European Union. The exemption has been extended from December 31, 2017 to December 31, 2020 or until a revised framework for the application of the Capital Requirements Regulation to commodity dealers and investment firms comes into force, whichever is the earlier. The European Council announced in March this year that it had agreed to the extension. 

Read more.

The US Federal Reserve Board released the results of supervisory stress tests for 33 participating BHCs, representing more than 80 percent of US domestic banking assets. According to the Federal Reserve Board, the largest US bank holding companies “continue to build their capital levels and improve their credit quality, strengthening their ability to lend to households and businesses during a severe recession.”

Under the most severe hypothetical scenario, the results project that loan losses at the 33 participating firms would total $385 billion during the nine quarters tested. This “severely adverse” scenario features a severe global recession with the domestic unemployment rate rising five percentage points, accompanied by a heightened period of financial stress and negative yields for short-term US Treasury securities. In addition to results under the severely adverse hypothetical scenario, the Federal Reserve Board also released results from the “adverse” scenario, which features a moderate recession and mild deflation in the United States. In this scenario, the average common equity tier 1 capital ratio of the 33 firms fell from an actual 12.3 percent in the fourth quarter of 2015 to a projected minimum level of 10.5 percent in the first quarter of 2018.

The Dodd-Frank Act supervisory stress tests are one component of the Federal Reserve Board’s analysis during the CCAR, which is an annual exercise to evaluate the capital planning processes and capital adequacy of large bank holding companies. This is the sixth round of stress tests led by the Federal Reserve Board since 2009 and the fourth round required by the Dodd-Frank Act.

View Supervisory Stress Test Methodology and Results.

The Banking Supervision arm of the European Central Bank published a Single Supervisory Mechanism supervisory statement on governance and risk appetite. In 2015, a thematic review was undertaken of all significant firms in the euro area to assess their management bodies and their risk appetite frameworks. The supervisory statement reports on the findings from that review, identifies good practices and sets out supervisory expectations for a bank's board and risk appetite framework, aiming to guide banks on their implementation of international best practices. 

View the supervisory statement.

The FDIC issued a notice of proposed rulemaking to remove and modify references to credit ratings with respect to permissible activities for certain foreign banking organizations, consistent with section 939A of the Dodd-Frank Act and the FDIC’s authority under section 5(c) of the Federal Deposit Insurance Act. Specifically, the proposed rule amends subparts A and B of the FDIC’s international banking regulations (12 C.F.R. Part 347). The proposed rule would delete references in Subpart A to nationally recognized statistical rating organization credit ratings in the definition of “investment grade” and replace such references with alternative standards for determining the creditworthiness of securities and other financial instruments. Subpart B would be amended in a similar fashion to eliminate references to credit ratings in respect of the eligibility criteria for assets that foreign banks may pledge in order to satisfy the FDIC’s asset pledge requirement. Comments on the proposed rulemaking were due by August 29, 2016.

View FDIC notice of proposed rulemaking.

The Federal Reserve Board, the US Federal Deposit Insurance Corporation, the US Office of the Comptroller of the Currency and the US National Credit Union Administration released a joint statement providing information about the new Financial Accounting Standards Board statement regarding credit loss estimation. The joint statement provides supervisory views regarding the recently introduced standard which introduces the current expected credit losses methodology for estimating credit losses. This standard applies to all banks, savings associations, credit unions and financial holding companies, regardless of their asset size. Early application is permitted for fiscal years after December 15, 2018, but the rule becomes effective in 2020 for public business entities that are US Securities and Exchange Commission filers, and in 2021 for public business entities that are not SEC-filers and private companies.
 

The European Banking Authority published its annual report which provides a review of the EBA’s work in 2015 and sets out key areas of focus it has forecast for the short term future. The EBA lists its achievements in 2015 in the following categories: (i) completing the Single Rulebook and enhancing consistency in prudential regulation; (ii) concluding the regulatory framework for effective recovery, resolution and deposit guarantee schemes; (iii) strengthening supervisory convergence and ensuring the consistent implementation of supervisory and regulatory practices across the EU; (iv) identifying, analyzing and addressing the key risks in the EU banking sector; (v) protecting consumers monitoring financial innovation and ensuring secure and efficient payment services across the EU; (vi) international engagement; and (vii) working on cross-sectoral issues. 

The European Securities and Markets Authority published its 2015 annual report. The report reviews ESMA’s mission and objectives for 2015 and measures its achievements against its 2015 objectives.  The report also provides information on ESMA's operations, budget and structure. ESMA is charged with enhancing the protection of investors and promoting stable and orderly financial markets, with various roles under legislation such as EMIR and MiFID. The report states that ESMA has made significant steps in realizing its mission by assessing risks to investors, markets and financial stability, completing a single rulebook for EU financial markets, promoting supervisory convergence and supervising credit rating agencies and trade repositories.
 
View the report.