The US Board of Governors of the Federal Reserve System sent a letter to firms participating in the upcoming Dodd-Frank Act Stress Test (DFAST) and Comprehensive Capital Analysis Review (CCAR) notifying them of certain enhancements to aspects of its operational risk and capital models. Among the enhancements to operational risk models are losses from expenses related to put‑back mortgages, as well as potential costs form unfavorable litigation outcomes. For DFAST 2016, the Federal Reserve Board notes that it will use historically-based loss projections (with two new modifications) using an average of two models, while dropping the loss distribution approach. Changes to capital models include incorporating greater precision in the adjustments to the regulatory capital ratio denominators, as well as modifying assumptions regarding the relationship between mortgage servicing assets and associated deferred tax liabilities.

View the letter.    

The US Federal Deposit Insurance Corporation issued a proposal that would require certain insured depository institutions to maintain certain books and records in order to facilitate the payment of insured deposits to customers in the event such institutions were to fail. The proposed rule applies to insured depositary institutions with a large number of deposit accounts (more than 2 million). Based on current data, 36 insured depository institutions would be covered by the rule. The recordkeeping requirements would require the institutions covered by the rule to maintain complete and accurate data on each depositor and would require such institutions to ensure that their information technology systems have the ability to calculate the amount of insured money for each depositor within 24 hours of a failure. Comments on the proposed rule must be received within 90 days after the date of publication in the Federal Register.

View the text of the FDIC proposed rule.

The US Federal Deposit Insurance Corporation and the US Securities and Exchange Commission jointly issued a proposed rule to implement provisions for the orderly liquidation of covered brokers and dealers as required under Title II of the Dodd Frank Wall Street Reform and Consumer Protection Act. Specifically, Title II provides for federal receivership proceedings of qualifying financial companies, including covered broker-dealers, with the FDIC serving as receiver. The proposed rule defines a covered broker or dealer as any covered financial company that is registered with the SEC as a broker or dealer and is a member of the Securities Investor Protection Corporation. A covered financial company is generally one that is in danger of default and whose failure would have serious adverse effects on US financial stability, as determined by the Secretary of the Treasury. In the case of covered broker dealer, the FDIC will serve as receiver, but the SIPC will serve as trustee. 

Comments on the proposed rule must be received within 60 days after the date of publication in the Federal Register.

View the full text of the proposed rule.

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 assessments reviewed the supervisory and regulatory arrangements in each country for: (i) banks; (ii) investment firms; and (iii) exchanges. The following nations are now equivalent across all three categories: Australia, Brazil, China, Mexico, Saudi Arabia, Singapore, South Africa and the United States. This Decision will enter into force on March 8, 2016.

View the list of equivalent third countries and territories.

In a speech at the Brookings Institution in Washington, DC, Federal Reserve Bank of Minneapolis President Neel Kashkari argued that banks are still too big to fail and remain a significant, ongoing risk to the US economy. Kashkari noted that the Dodd-Frank Act did not go far enough and that regulators should consider breaking up large banks into smaller entities, turning them into public utilities by forcing them to hold higher levels of capital (as high as 25% of total assets), and taxing leverage throughout the financial system. According to Kashkari, the Minneapolis Fed will launch an initiative to consider transformational options through policy symposiums and policy briefs and create an actionable plan to end too big to fail that will be released by year-end for consideration by legislators, policymakers, and the public.

Kashkari’s predecessor at the Minneapolis Fed, Narayana Kocherlakota, responded to Kashkari’s proposals, noting that such measures, particularly imposing higher capital standards, would have “adverse macroeconomic consequences.”

View Kashkari’s speech.  

View Kocherlakota’s response.  

The European Banking Authority published final draft Implementing Technical Standards on the mapping of assessments by Credit Rating Agencies for securitization positions under the Capital Requirements Regulation. The CRR establishes that the risk weights under the standardized and internal ratings based approach for securitization positions should be based, if applicable, on the credit quality of the positions. This credit quality is determined by reference to the credit ratings of CRAs. The draft ITS determine the mapping between credit ratings and credit quality steps for the allocation of risk weights to External Credit Assessment Institutions' ratings issued on securitizations. The mapping is backed by the results of an impact analysis as well as quantitative considerations. A securitization-specific systematic mapping methodology is also being considered by the EBA and this would be based on the historical performance of securitization ratings. The ITS aim to enhance regulatory harmonization across the EU allowing credit ratings of all registered credit rating agencies to be used for calculating institutions’ capital requirements.
 
View the final draft ITS.

The Commission Implementing Regulation on the disclosure of leverage ratios by financial institutions under the Capital Requirements Regulation was published in the Official Journal of the European Union. The Regulation provides that firms must disclose relevant information concerning leverage ratios in the form of an approved template. Firms will be under an obligation to disclose a breakdown of the leverage ratio total exposure measure, a reconciliation of the leverage ratio for a firm's published financial statements and qualitative information on the risk of excessive leverage and the factors impacting the leverage ratio. The Regulation applies directly across the EU from February 16, 2016.

View the Regulation.

The US Office of the Comptroller of the Currency issued two revised booklets of the Comptroller’s Handbook: the “Country Risk Management” booklet and the “Installment Lending” booklet. Each revised booklet updates and replaces the previous versions of the respective booklets. The “Installment Lending” booklet provides updated guidance to examiners regarding the administration of installment lending practices and the controls and processes necessary to manage the risks associated with those practices as well as updated guidance for assessing the quantity of risk associated with installment lending activities.

The “Country Risk Management” booklet provides updated guidance to examiners regarding country risk management, based on lessons learned from the financial crisis of 2008 as well as the European banking and debt crises. The booklet also updates descriptions of the risks associated with international activities and contains a more detailed discussion of the effects of country risk, cross-border risk and sovereign risk on the OCC’s 8 risk categories (credit, interest rate, liquidity, price, operational, compliance, strategic, and reputation).

View the “Installment Lending” booklet.

View the “Country Risk Management” booklet. 

 

Janet Yellen, the Chair of the US Board of Governors of the Federal Reserve System submitted before Congress the Federal Reserve Board’s semiannual Monetary Policy Report. In her remarks, Chair Yellen discussed the current economic situation and outlook of the US economy since July 2015, including strong gains in the job market along with continued moderate expansion in economic activity. Chair Yellen further discussed monetary policy and emphasized that the Federal Open Market Committee continues to monitor the federal funds rate, but anticipates that economic conditions will warrant only gradual increases in the federal funds rate.

VIew Chair Yellen’s testimony. 
 

Stanley Fischer, the Vice Chairman of the US Board of Governors of the Federal Reserve System gave a speech at a conference sponsored by the Committee on Capital Markets Regulation discussing the function of the Federal Reserve as a lender of last resort in the United States. In his remarks, Vice Chairman Fischer noted that, despite recent developments that have placed limitations on the Federal Reserve’s actions as a lender of last resort, the Federal Reserve, when necessary and appropriate, has the authority to act as lender of last resort in several ways. Vice Chairman Fischer noted that the Federal Reserve retains the power to extend discount window loans, either to individual institutions or more generally in order to address broader financial stresses, to insured depository institutions, including commercial banks, thrift institutions, credit unions, or US branches and agencies of foreign banks.  Further, the Federal Reserve is also permitted, with the approval of the Secretary of the Treasury, to lend to non-bank institutions through the use of broad-based facilities to provide liquidity to financial markets.

View the text of Vice Chairman Fischer's speech.
 

The Federal Deposit Insurance Corporation released the economic scenarios for use by certain covered financial institutions in the 2016 stress tests required under the Dodd-Frank Act. Generally, those financial institutions with total consolidated assets of more than $10 billion are required to conduct stress tests. The released scenarios include key variables that reflect economic activity, such as unemployment, exchange rates, prices, income, interest rates and other economic and financial factors. The FDIC coordinated with the Federal Reserve Board and the OCC, which released the scenarios in late January, in developing and distributing the scenarios. 

View FDIC stress test scenarios.
 

The European Banking Authority published an Opinion on the implementation of the regulatory review of the Internal Ratings-Based approach to calculating risk-weighted exposure amounts for credit risk. The Opinion sets out the general principles and timelines for implementation and aims to provide clarity for national regulators and relevant firms. The EBA has also published a report on the future of the IRB approach. Both the Opinion and Report aim to address concerns raised over the lack of comparability of capital requirements determined under the IRB approach across firms as well as identify the main drivers of variability in the implementation of IRB models. The IRB framework will be made up of Regulatory Technical Standards and Guidelines which will be introduced in 2016 and 2017 in four phases: (i) the IRB assessment methodology will be introduced in the first quarter of 2016; (ii) a definition of "default" will be introduced by mid-2016; (iii) estimation of risk parameters and treatment of defaulted assets will be introduced by mid-2017; and (iv) credit risk mitigation will be introduced by the end of 2017. The EBA expects that the effective implementation in all areas will be finalized by the end of 2020.
 
View the EBA's Opinion and Report.

The US Board of Governors of the Federal Reserve System extended the comment period to March 21, 2016, for the proposed policy statement describing the Federal Reserve Board’s framework in setting the Countercyclical Capital Buffer. The original deadline for submission of comments was February 19, 2016. The Federal Reserve Board first announced it was soliciting public comment on the proposed policy statement on December 21, 2015. The CCyB is a macro-prudential tool that raises capital requirements on internationally active banking institutions when the risk of above-normal losses in the future is elevated. The proposed policy statement describes various financial-system vulnerabilities as well as issues for Federal Reserve Board consideration in setting the buffer. 

View the proposed policy statement.

View the appendix to the proposed policy statement.

The US Board of Governors of the Federal Reserve System extended the comment period to February 19, 2016, for its proposed rule to strengthen the ability of the largest domestic and foreign banks operating in the United States to be resolved without extraordinary government support or taxpayer assistance. The original deadline for submission of comments was February 1, 2016. The proposed rule requires US Global Systemically Important Banks and the US operations of foreign GSIBs to meet a long-term debt requirement, a “Total Loss-Absorbing Capacity” requirement and a requirement that the parent holding company of a domestic GSIB avoid entering into various financial arrangements that would create obstacles to an orderly resolution. These requirements would strengthen the ability of those banks to withstand financial stress and failure without imposing losses on taxpayers. The proposed rule also includes regulatory capital deductions for firms regulated by the Federal Reserve Board that hold unsecured debt of the parent holding companies of domestic GSIBs.

View the Federal Register notice. 

The Prudential Regulation Authority published final rules amending the Pre-Issuance Notification regime. The PIN regime applies to banks, building societies, insurers and PRA-designated investment firms. Under the amended rules, banks, building societies and PRA-designated investment firms will have to give the PRA one month's notice before issuing a Common Equity Tier 1 instrument and complete the CET1 Compliance Template, which may be used instead of providing a legal opinion on the quality of capital requirement. The advance notification requirement will not apply where certain capital instruments are issued on substantively similar terms to prior issued instruments. Insurers will be required to submit legal opinions for instruments issued, other than ordinary share capital, on the quality of capital requirement and must also provide the PRA with one month's notice prior to amending capital instruments. Insurers will also be subject to certain conditions in the event that they make use of the advance notification exemption for drawdowns from note issuance programs. All relevant firms will be required to submit accounting opinions when issuing Additional Tier 1 Capital instruments or Restricted Tier 1 Capital instruments, as applicable.
 
View the PRA's Policy Statement and final rules.

The Bank of England's Financial Policy Committee published its proposed framework for the UK Systemic Risk Buffer for ring-fenced banks and large building societies (i.e. those that will be subject to the UK ring-fencing rules from 2019 with assets over £25 billion). The SRB, a discretionary buffer under the EU Capital Requirements Directive, aims to mitigate and prevent long-term non-cyclical macro-prudential or systemic risk. 
 
The FPC is proposing that the SRB rate would be calibrated according to a firm's total Risk-Weighted Assets so that firms with RWA: (i) less than £175 billion will have a 0% SRB; (ii) between £175 and £320 billion will have a 1% SRB; (iii) between £320 and £465 billion will have a 1.5% SRB; (iv) between £465 and £610 billion will have a 2% SRB; (v) between £610 and £755 billion will have a 2.5% SRB; and (vi) over £755 billion will have a 3% SRB.
 
Firms subject to the SRB will also be subject to a 3% minimum leverage ratio requirement as well as an additional leverage ratio buffer of 35% of the applicable SRB rate. The Prudential Regulation Authority will apply the SRB to individual firms from 2019, which is when the ring-fencing rules will become applicable. Comments to the consultation are due by April 22, 2016. The FPC intends to finalize the rules by May 31, 2016.
 
View the FPC's consultation paper.

The European Securities and Markets Authority published its Opinion on draft Implementing Technical Standards on Main Indices and Recognized Exchanges under the Capital Requirements Regulation. The Opinion sets out proposed updates to the draft ITS further to requirements under the CRR to define main indices and recognized exchanges. The definitions are required because the terms have been used in the specification of eligible collateral which is used for the calculation of credit risk by banks and investment firms subject to the CRR. ESMA provided the final draft ITS to the Commission in January 2015 for endorsement. The Commission notified ESMA that it intended to endorse the ITS with amendments by adding the Hang Seng Composite Index and the Russell 3000 Index. In ESMA's Opinion, the Hang Seng Composite Index and the Russell 3000 Index should not be added to the list of main equity indices. Instead, ESMA suggests adding the Russell 1000 Index, the Shanghai Shenzhen CSI 300, the S&P BSE 100 Index and the FTSE Nasdaq Dubai UAE 20 Index to that the list. ESMA also undertook a full review of the ITS and suggests replacing the Nikkei 225 with the Nikkei 300 and the NZSE 10 with the S&P NZX 15 Index. ESMA recommends that the European Commission consider amending the current procedure used to update the list of indices and exchanges to a less burdensome and more speedy process, as the long timeframes required to update a legislative instrument such as an ITS are not appropriate for the frequency with which indices or exchanges are created or merged.
 
View the Opinion.

The European Systemic Risk Board published Recommendations and Decisions relating to setting Countercyclical Buffer Rates for exposures to third countries and the assessment of cross-border effects of and voluntary reciprocity for macro-prudential measures. The ESRB is responsible for macro-prudential oversight within the European Union. In respect of CBRs, the ESRB recommends that national designated authorities: (i) inform the ESRB as soon as a third county sets a CBR in excess of 2.5%; (ii) identify material third countries on an annual basis taking into account the ESRB Decision on the assessment of materiality of third countries for recognizing and setting CBRs; and (iii) consider and coordinate on whether a lower CBR should be set for exposures to a third country in the event that the third country authority sets a lower CBR. In respect of the assessment of cross-border effects of macro-prudential measures, the ESRB recommends that national designated authorities: (i) assess the cross-border effects, prior to adoption, of the implementation of their own macro-prudential measures on other Member States and on the Single Market, including the risk of regulatory arbitrage; (ii) reciprocate the macro-prudential measures adopted by other Member States where such reciprocation is recommended by the ESRB; and (iii) notify the ESRB of any macro-prudential measure implemented, including an assessment of the effect of the measure and whether any reciprocation by other Member States may be necessary. The ESRB has also established a website which sets out the CRB rates set by national designated authorities.
 
View the ESRB Recommendations and Decisions.
 
View the CBR rate website.

The US Office of the Comptroller of the Currency released economic and financial market scenarios to be used by certain financial companies, including national banks and federal savings associations with total consolidated assets of more than $10 billion, to conduct upcoming stress tests. The supervisory scenarios include baseline, adverse and severely adverse scenarios, as described in the OCC’s final rules that implement annual stress test requirements under Section 165(i)(2) of the Dodd-Frank Act.

View the OCC press release.

View the 2016 scenario information. 

The US Board of Governors of the Federal Reserve System released supervisory scenarios for the 2016 Comprehensive Capital Analysis and Review and Dodd-Frank Wall Street Reform and Consumer Protection Act stress test exercises. The Federal Reserve Board also issued instructions to firms participating in CCAR. CCAR assesses the capital planning processes and capital adequacy of the largest US-based bank holding companies, including the firms’ planned capital actions. The Dodd-Frank Act stress tests are a forward-looking component to help evaluate whether firms have sufficient capital. Firms are required to use the supervisory scenarios in both the stress tests conducted as part of CCAR and those required by the Dodd-Frank Act. The outcomes are measured under three scenarios: severely adverse, adverse and baseline. This year, CCAR will include 33 bank holding companies with $50 billion or more in total consolidated assets, all of which are required to submit their capital plans and stress testing results to the Federal Reserve Board on or before April 5, 2016. The Federal Reserve Board will announce the results of its supervisory stress tests by June 30, 2016, with the exact date to be announced later.

View the Federal Reserve Board press release.

View the CCAR summary instructions. 

View the Dodd-Frank Act stress exercises.

View the 2016 macro scenario tables. 

 
The European Banking Authority published a letter dated December 18, 2015 addressed to the European Commission in which the EBA requests delays to the dates by which the EBA is required to prepare technical standards and reports under the Capital Requirements Directive, the Capital Requirements Regulation, the EU Bank Recovery and Resolution Directive, the European Market Infrastructure Regulation and the Credit Rating Agencies Regulation. The EBA states that for the most part it has not been able to deliver its mandates according to deadlines due to a persistent shortage in resources and the need to prioritize other workstreams. The EBA invites the Commission to request the EBA to fulfil its mandates  within new time limits.
 
View the EBA's letter.

Regulatory Technical Standards and Implementing Technical Standards on the operational functioning and general conditions for the functioning of colleges of supervisors under the Capital Requirements Directive were published in the Official Journal of the European Union. Colleges bring together different national and European regulatory authorities that supervise a banking group and provide a framework for coordinating and performing supervisory duties within the EU banking sector. The College of Supervisors is established for EEA banks with subsidiaries or significant branches in other EEA countries and includes national regulators from the EU as well as non-EU areas when necessary. The Regulations deal with matters including: (i) the mapping of group institutions; (ii) the designation of members and observers of a college; and (iii) participation in college meetings and activities. The Regulations enter into force on February 17, 2016.
 
View the RTS.
 
View the ITS.

A Regulation was published in the Official Journal of the European Union, setting out Implementing Technical Standards on the joint decision process for the application for certain prudential permissions under the Capital Requirements Regulation. The ITS deal with matters including: (i) the involvement of third country supervisory authorities in the assessment process; (ii) the steps and procedures for joint decision processes; (iii) the preparation of assessment reports and arriving at and communicating joint decisions; and (iv) resolution of disagreements and decisions taken in the absence of a joint decision. The Regulation enters into force on February 17, 2016.
 
View the ITS on the joint decision process for the application for certain prudential permissions.

A Regulation setting out Regulatory Technical Standards for prudent valuations under the Capital Requirements Regulation was published in the Official Journal of the European Union. The RTS relate to firms applying the CRR standards to assets measured on a fair value basis. The RTS deal with matters including: (i) the methodology for calculating Additional Valuation Adjustments; (ii) consideration to be given to available market data; and (iii) the simplified and core approaches for the determination of AVAs. The Regulation enters into force on February 17, 2016.
 
View the RTS for prudent valuation.

The European Banking Authority issued a press release announcing the launch of an impact assessment of the forthcoming implementation of the new financial instruments standard, the International Financial Reporting Standards 9, on a sample of around 50 regulated firms across the EU. The new standards supersede the reporting standards for financial instruments in force in the EU since 2005 and change the way financial instruments are accounted for. The new standards will apply to: (i) banks that are required to prepare consolidated financial statements in accordance with the IFRS; (ii) banks that are required to use the IFRS for the determination of own funds; and (iii) certain investment firms. IFRS also apply to listed issuers as a result of the Transparency Directive. The EBA will assess the impact of the new standards on regulatory own funds, the interaction between the standards and prudential requirements as well as how firms are preparing for the implementation of the new standards.
 
View the press release.

The European Commission published a report on the appropriateness of the definition of "eligible capital" under the Capital Requirements Regulation. The definition of "eligible capital" is used for defining large exposures, setting large exposure limits, determining the prudential treatment of qualifying holdings outside the financial sector and setting the capital requirements for investment firms with limited investment services. 

Read more.

The Board of Directors of the Federal Deposit Insurance Corporation released a revised notice of proposed rulemaking that would amend the manner in which banks with less than $10 billion in assets that have been insured by the FDIC for at least five years are assessed for deposit insurance. The rule reflects comments received on the initial proposed rule on small bank assessments that the FDIC released in June 2015 on topics such as calculation of asset growth and treatment of reciprocal deposits and Federal Home Loan Bank advances. Specifically, the new proposed rule, among other things: (i) uses a brokered deposit ratio as a measure in the financial ratios method for calculating assessment rates for established small banks (instead of the previously proposed core deposit ratio); (ii) removes the existing brokered deposit adjustment for established small banks; and (iii) revises the previously proposed one-year asset growth measure. The new proposed rule, like the June 2015 proposal, seeks to ascertain appropriate assessments that accurately reflect the risks taken by smaller banks. Comments may be submitted for 30 days, following the publication of the proposed amendments in the Federal Register.

View the FDIC press release. 

View the notice of proposed rulemaking. 

US Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg and US Comptroller of the Currency Thomas J. Curry announced interim final rules expanding the examination cycle for institutions with less than $1 billion in assets that meet certain standards, under statutory power granted by the Fixing America’s Surface Transportation Act which was enacted on December 4, 2015. Specifically, the rule will permit institutions with total assets of $200 million or greater and not exceeding $1 billion that receive a composite CAMELS or ROCA rating of “1” or “2,” and that meet other qualifying criteria, to qualify for an 18-month examination cycle. Previously, the longer, 18 month exam cycle was only available to certain insured depository institutions with less than $500 million in assets. Comments on the interim final rule may be submitted for 60 days, following the publication of the proposed amendments in the Federal Register. 

View the FDIC Chairman's statement. 

View the OCC press release.

View the Comptroller's statement. 

View the interim final rule. 

US Federal Deposit Insurance Corporation Vice Chairman Thomas M. Hoenig gave a speech to the Peterson Institute for International Economics, during which he challenged the Federal Reserve Board’s proposal on TLAC. While agreeing that converting debt is often part of a reorganization or recovery strategy, Hoenig discussed the risks of increased debt levels on the stability of the banking system. The proposed TLAC rule requires GSIBs to maintain sufficient long-term debt to facilitate a Single Point of Entry resolution approach, wherein only the top-tier holding company would be put into receivership and through conversion of debt to equity the operating subsidiaries would be recapitalized. Hoenig noted that the proposed rule estimates that to meet a collective $680 billion long-term debt requirement, GSIBs will need to issue approximately $100 billion in new debt. Hoenig also discussed the negative consequences of the proposal, notably the leverage that it would add to an already highly-leveraged industry, as well as the fact that it may encourage firms to adopt an SPOE resolution strategy and otherwise change their business models even where their Title I resolution plans do not currently contemplate an SPOE plan. The Vice Chairman suggested that “(t)he long-term debt requirement would place added earning demands on the banking system and could be counter-productive, especially during a period of financial stress”. Hoenig also suggested that rather than imposing a rule that facilitates only the SPOE strategy, regulators may want to adopt an approach that is tailored to the business model and resolution plan of each individual institution, even where the approach might call for varying debt and equity requirements. 

View the Vice Chairman's speech. 

The European Banking Authority published proposed Guidelines on implicit support for securitization transactions (i.e. support provided by a firm where it is not contractually obliged to do so), as required by the Capital Requirements Regulation. Examples of implicit support include purchases of deteriorating credit risk exposures from an underlying pool or improvement of quality of credit enhancements through the addition of higher quality risk exposures. The CRR requires that any reduction in capital requirements gained through a securitization must be justified by a corresponding transfer of risk to third parties. The CRR restricts the provision of implicit support, because it does not result in significant risk transfer to third parties, by requiring firms to hold a minimum of own funds against all of the securitized exposures as if they had not been securitized. A transaction is not considered to provide support if it is executed under arm's length conditions and is taken into account in the assessment of significant risk transfer. The EBA's proposed Guidelines cover what constitutes arm's length conditions and when a transaction is not structured to provide support. 

Read more.

The US Board of Governors of the Federal Reserve System approved an application by Union di Banche Italiene, S.p.A., a foreign bank headquartered in Italy, to establish a representative office in New York under section 10(a) of the International Banking Act of 1978. UBI is organized as a joint stock corporation under Italian law and has total assets of approximately $108 billion. As part of its evaluation under the IBA and Regulation K, the Federal Reserve Board noted its previous determinations that other banks in Italy were subject to comprehensive, consolidated supervision by the Bank of Italy alone. However, UBI became subject to direct prudential supervision by the European Central Bank pursuant to the Single Supervisory Mechanism as of November 2014. This order appears to represent the first Federal Reserve Board order under the IBA since the SSM took effect, finding that a foreign bank is subject to comprehensive, consolidated supervision by the ECB and a home country supervisor (the Bank of Italy) acting through the SSM. 

View the order. 

A letter addressing possible competition issues between established and challenger banks dated October 7, 2015 sent from the Chairman of the Treasury Committee, Mr. Andrew Tyrie, addressed to the Deputy Governor for Prudential Regulation at the Bank of England, Mr. Andrew Bailey, was published. The letter refers to the potential difficulties challenger banks may face in satisfying the conditions required to use the Internal Ratings-Based approach for calculating credit risk. Mr. Tyrie is concerned that newer banks may be at a competitive disadvantage to more established banks, given that the IRB approach leads to lower capital requirements compared to the Standardized Approach which newer smaller banks would be able to use more easily. The letter asks whether: (i) the new corporation tax regime for banks encourages competition between new and established banks; (ii) adaptations made by the Prudential Regulation Authority's to capital requirements for new banks will be effective in overcoming the competitive disadvantage that new banks may face; (iii) the PRA has plans to make further adjustments to capital or other requirements for new banks; (iv) the PRA is restricted, and if so, to what extent, from making further adjustments to newer banks' capital requirements under the Capital Requirements Directive IV or other EU legislation; and (v) there has been a reduction in requests for pre-application discussions with the PRA and Financial Conduct Authority since the new tax regime was announced in July 2015.
 
View the letter.

The US Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency released an advisory indicating support for the Basel Committee on Banking Supervision’s March 2014 guidance entitled “External audits of banks” for internationally active banks. The advisory notes that while the guidance is largely consistent with existing US standards and practices, there are certain differences between the principles and the expectations of US regulators. The advisory defines “internationally active banks” as insured depository institutions that have consolidated total assets of $250 billion or more, consolidated total on-balance sheet foreign exposure of $10 billion or more and US depository institution holding companies that meet, or have a subsidiary depository institution that meets, the same standards (with the calculation of consolidated total assets excluding assets held by insurance underwriting subsidiaries, in the case of bank holding companies). Key differences highlighted in the advisory include: (i) unlike the guidance, US standards and practices do not require “tendering”, i.e., putting an external audit contract out for bid, but the US banking agencies recommend that institutions consider whether such practice is appropriate; and (ii) while the US banking agencies encourage open communication between external auditors and a financial institution’s supervisor, there is no generally applicable requirement for an external auditor to report directly to the institution’s primary regulators.

View the interagency advisory statement. 

The Basel Committee on Banking Supervision has published revised standards on minimum capital requirements for market risk, which form part of the new market risk framework as endorsed by the Group of Central Bank Governors and Heads of Supervision, known as GHOS, the Basel Committee's governing body. Improvements in the new risk framework include: (i) a revised boundary between the banking and trading books that will reduce scope for arbitrage; (ii) a revised internal models approach with more coherent and comprehensive risk capture; (iii) an enhanced model approval process and more prudent recognition of hedging and portfolio diversification; and (iv) a revised standardized approach that serves as a credible fall-back and floor to the model-based approach and facilitates more consistent and comparable reporting of market risk across banks and jurisdictions. The Basel Committee will also finalize its efforts to address the problem of excessive variability in risk-weighted assets by the end of this year. These efforts will include a proposal to remove the internal model approach for credit risk and limits on the use of internal models for credit risk (in particular, through the use of floors). The GHOS also agreed that the final design and calibration of the leverage ratio should be based on a Tier 1 definition of capital and should comprise a minimum level of 3%. The Basel Committee will finalize the calibration in 2016 to allow time for the leverage ratio to be implemented as a Pillar 1 measure by January 1, 2018.
 
View the revised minimum capital requirements for market risk.

The European Banking Authority published: (i) revised final draft Implementing Technical Standards on the uniform formats and date for disclosure of values used to identify Global Systemically Important Institutions; (ii) revised final draft Regulatory Technical Standards on the specification of the methodology for the identification of G-SIIs; and (iii) draft revised Guidelines on the further specification of the indicators of global systemic importance and their disclosure under the Capital Requirements Directive IV. 

Read more.

The European Central Bank's Banking Supervision division published its priorities for 2016. Under the Single Supervisory Mechanism Regulation, the ECB is responsible for the direct prudential supervision of the largest Eurozone banks and indirectly responsible for prudentially supervising the smaller Eurozone banks. The priorities, which aim to direct the ECB's supervision of the largest Eurozone banks, are business model and profitability risk, credit risk, capital adequacy, risk governance and data quality and liquidity. The ECB will be implementing initiatives around the priorities during 2016, including thematic reviews and holding dialogue with the banks.
 
View the 2016 SSM Priorities.

The European Commission published a report on the effect of the revised International Accounting Standard 19 on the volatility of own funds of banks and investment firms. The Capital Requirements Regulation requires the Commission to assess whether the revised IAS 19 and the requirement on firms to deduct defined-benefit pension fund assets from Common Equity Tier 1 items for the purpose of calculating own funds would impact the volatility of the firm's own funds. The Commission has concluded that the potential additional volatility of own funds introduced by the revision of IAS 19 is limited and that the impact due to initial application has been mitigated by the transitional measures included in the CRR. The Commission therefore does not intend to propose amendments to the CRR in this regard.
 
View the report.

A European Central Bank Recommendation on dividend distribution policies for Eurozone banks was published in the Official Journal of the European Union. The recommendation is aimed at significant supervised entities (i.e. significant banks) and significant supervised groups (each as defined in the Single Supervisory Mechanism Framework Regulation) as well as national regulators. Under the SSM Regulation, the ECB is responsible for the direct prudential supervision of significant Eurozone banks. The Recommendation states that banks must use conservative and prudent assumptions when establishing dividend policies so that any applicable capital requirements, for example minimum capital requirements or countercyclical capital and systemic buffers, are still met after any distribution. The recommendation also makes suggestions for different categories of banks paying dividends for the 2015 financial year in 2016: (i) banks that satisfy the applicable capital requirements and have reached their fully loaded (i.e. calculated without applying the transitional provisions as set out in the Capital Requirements Regulation) capital ratios as at December 31, 2015 should distribute net profits in dividends conservatively; (ii) banks that satisfy the applicable capital requirements, but have not reached their fully loaded ratios as at December 31, 2015 should distribute net profits in dividends conservatively and in principle should only pay out dividends if a linear path to the required loaded capital requirements is secured; and (iii) banks that do not satisfy the applicable capital requirements should not distribute dividends. The Recommendation also states that should a bank not be able to comply with the ECB's Recommendation due to a legal obligation to pay out dividends, it should contact its supervisory team immediately.

View the Recommendation.

The European Banking Authority launched a consultation on proposed Guidelines on stress testing and supervisory stress testing. The proposed Guidelines cover: (i) internal stress testing by firms, providing detailed guidance for firms when designing and conducting a stress testing program; (ii) the assessment of firms' stress testing by national regulators with the aim of ensuring convergence in the context of the supervisory review and evaluation process; and (iii) supervisory stress testing. The proposed Guidelines provide common organizational requirements, methodologies and processes for firms performing internal stress tests as part of their risk management processes and common methodologies for national regulators when conducting supervisory stress tests but do not set methodologies for the EBA's stress testing in cooperation with national regulators. Once finalized, the Guidelines will replace the current guidelines issued by the Committee of European Banking Supervisors. The consultation is open until March 18, 2016. The EBA aims to publish the final Guidelines in Q2 2016 and expects that they will apply from Q4 2016.

View the proposed Guidelines.

The European Banking Authority published an Opinion, dated December 16, 2015, addressed to national regulators and the European Commission on the interaction of Pillar 1, Pillar 2 and combined buffer requirements and restrictions on distributions. The EBA considers that national regulators should ensure that the Common Equity Tier 1 capital that is used for calculation of the maximum distributable amount is limited to the amount not used to meet a firm's Pillar 1 and 2 own funds requirements. Also, national regulators should require firms to disclose MDA-relevant capital requirements. The EBA is also of the view that the Commission should review the MDA provisions of the Capital Requirements Directive, aiming to eliminate inconsistencies in the application of the provisions across the EU and should review the prohibition on distribution, in particular, as it relates to Additional Tier 1 instruments when no profits are made in a given year.

View the Opinion.

The European Banking Authority published a report on its analysis and market practice assessment of synthetic securitization in Europe. The report makes recommendations for the European Commission's proposed legislative amendments to the Capital Requirements Regulation and proposed securitization regulation, which provide for the preferential regulatory treatment of simple, transparent and standardized securitizations. The EBA's analysis supports the approach taken by the Commission in its proposed securitization framework, which provides for a different regulatory treatment of on-balance sheet synthetic securitization positions retained by originator banks. The EBA concurs that the proposed framework should not be extended to all synthetic securitizations applicable to all investors across asset types. The EBA recommends that certain criteria be met for eligibility of balance sheet synthetic transactions, including requirements that originator banks should meet to transfer the risk of eligible transactions to public or private investors. In particular, the EBA advises the Commission to consider amending its proposal to include transactions in which private investors provide credit protection in the form of cash. The report follows the EBA's report in July 2015 on a qualifying framework for traditional securitization.

View the report.

View the Commission's proposed securitization framework.

The European Banking Authority published a report, dated December 15, 2015, on the necessity for adding stable funding requirements to the EU regulatory capital requirements framework. The Capital Requirements Regulation requires the EBA to report to the Commission on whether and how it would be appropriate to ensure that banks and investment firms use stable sources of funding and to provide an assessment of the impact of a stable funding requirement on the businesses and risk profiles of firms in the EU, the financial markets, the economy and trade financing, as well as potential methodologies for determining the amount of stable funding available to and required by firms. The mandate was included in the CRR in response to the Basel Committee on Banking Supervision's publication in 2010 of a net stable funding ratio (known as the NSFR) to be put in place by 2018. The NSFR requires firms to maintain a stable funding profile in relation to their assets and off-balance-sheet activities over a period of one year.

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The Basel Committee on Banking Supervision published its third progress report on the adoption by banks of its Principles for effective risk data aggregation and risk reporting. The Principles must be implemented by global systemically important banks by January 1, 2016, and aim to strengthen risk data aggregation and risk reporting at banks so that risk management and decision-making practices are improved. The report details the progress that G-SIBs have made in order to comply with the Principles. The Basel Committee recommends that: (i) banks and national regulators should continue to promote understanding of the Principles; (ii) national regulators should conduct more in-depth/specialised examinations on data aggregation requirements to evaluate weaknesses; (iii) banks should clearly articulate risk data aggregation and risk reporting expectations, in line with their risk appetite in both normal and stress periods; (iv) banks should have appropriate governance arrangements in place to oversee manual processes; (v) banks should consider reducing the complexity of their systems to meet the data aggregation requirements; (vi) auditors should undertake an independent assessment of each bank's compliance with the Principles in early 2016, reporting any necessary remedial action to the bank's board; and (vii) banks that are unable to comply by the deadline should agree plans to do so with their national regulator. The Basel Committee also recommends that national regulators apply the Principles to domestic systemically important banks (known as D-SIBs) from three years after they have been identified as such.

View the report.

The European Commission published a proposed Regulation which would amend the Capital Requirements Regulation with regards to exemptions for commodity dealers. The CRR currently exempts commodity dealers from large exposures requirements and own fund requirements until December 31, 2017. That date was set on the basis that the Commission would have conducted a review of the prudential regime applicable to commodity dealers and to investment firms by the end of 2015 and, if appropriate, proposed a legislative regime adapted for the risks profile of commodity dealers and investment firms. The Commissions' review is still in progress. The Commission is therefore proposing that the CRR exemptions are extended until December 31, 2020 to allow time for work in this area to be completed and to avoid the need for relevant firms to temporarily comply with the full CRR requirements in 2018 before being subsequently moved to a tailored regime within two to three years.

View the proposed Regulation.

The Regulation setting out Implementing Technical Standards for currencies with constraints on the availability of liquid assets under the Capital Requirements Regulation was published in the Official Journal of the European Union. The CRR sets out a Liquidity Coverage Requirement which requires firms to hold liquid assets to maintain adequate levels of liquidity buffers to face any possible imbalances between liquidity inflows and outflows. The CRR allows firms to apply derogations where justified needs for liquid assets exist owing to the Liquidity Coverage Requirement, which exceed the availability of those liquid assets in certain currencies. The Regulation identifies the Norwegian Krone as a currency with constraints on the availability of liquid assets. The Regulation enters into force on January 5, 2016.

View the Regulation.

The European Banking Authority published final Guidelines on requirements for banks and certain investment firms to have sufficient information about, and to set limits on, their individual and aggregate exposure to shadow banking entities which carry out certain banking-like activities, such as lending, outside a regulated framework. The EBA is mandated to produce the Guidelines under the Capital Requirements Regulation which limits the exposure a firm can have to a single client or group of connected clients (more generally known as limits to large exposures). In order to prepare the Guidelines, the EBA collected data from 148 EU firms on their exposures to shadow banking entities, the results of which are published in a separate report. Both the Report and the Guidelines will help inform the European Commission's report on the appropriateness and impact of imposing such limits, which may be accompanied by a legislative proposal. The EBA Guidelines will apply from January 1, 2017.

View the Guidelines.

View the EBA's report.

The European Banking Authority launched a consultation on proposed draft Regulatory Technical Standards under the Capital Requirements Regulation on the assessment methodology national regulators should use when a firm applies for approval to calculate their own funds requirements using their internal models for one or more risk categories. In particular, the proposed draft RTS cover: (i) the methodology for national regulators to assess whether a firm complies with the requirements to use an Internal Model Approach for market risk; and (ii) the conditions under which national regulators assess the significance of the positions that will be included in the scope of an IMA. The proposed draft RTS are consistent with the RTS on the conditions for assessing materiality of extensions and changes to use market internal models, adopted by the European Commission in June 2015. Comments are due by March 13, 2016.

View the consultation paper.

The Federal Reserve Board published a final rule to revise certain elements of its “Banking Organization Systemic Risk Report” (Form FR Y‑15) that will become effective as of December 31, 2015. However, the new requirement to file the form on a quarterly basis has been extended until June 30, 2016, and the effective date of the new requirements for reporting short‑term wholesale funding (Schedule G) has been extended to December 31, 2016. While the preamble to the final rule notes that reporting requirements for Intermediate Holding Companies that foreign banking organizations are required to designate or establish under Dodd‑Frank Act Section 165 have not yet been proposed, under current requirements IHCs with a US bank subsidiary and $50 billion or more in total consolidated assets would be required to file the FR Y‑15 beginning with the next filing date following its establishment. Commenters requested an extension for IHCs, but the Federal Reserve Board indicated it would invite comment on this issue when reporting requirements for IHCs are proposed.

On December 2, 2015, the Federal Reserve Board proposed certain new line items to its “Annual Report of Foreign Banking Organizations” (Form FR Y‑7) to collect information from foreign banking organizations required to comply with the enhanced prudential standards for foreign banking organizations prescribed by Section 165 of the Dodd‑Frank Act. 

View the The final rule for Form FR Y‑15.

View the proposed revisions to Form FR Y‑7. 

The Implementing Regulation on the extension of the transitional periods for own funds requirements for exposures to CPPs as set out in the Capital Requirements Regulation was published in the Official Journal of the European Union. The Implementing Regulation extends the transitional period for regulatory capital requirements for EU banks’ exposures to CCPs from December 15, 2015 to June 15, 2016. The extension is intended to allow further time for CCPs, both from the EU and from non-EU jurisdictions, to become authorized or recognized under the European Market Infrastructure Regulation. This is linked to the current consultation on margin holding period for exchange-traded derivatives, published by ESMA on December 14, 2015, which should result in technical standards paving the way for recognition in the new year.  The provision aims to minimize disruption to financial markets and to prevent institutions from being penalized through higher own funds requirements during the processes of authorization and recognition of existing CCPs. The Implementing Regulation comes into effect on December 12, 2015.
 
View the Regulation.
 
View ESMA's consultation on margin holding period. 

The European Banking Authority published a consultation paper on draft Guidelines for the collection of information for the Internal Capital Adequacy Assessment Process and the Internal Liquidity Adequacy Assessment Process under the Capital Requirements Directive. The consultation forms part of the Supervisory Review and Evaluation Process and follows on from the criteria and methodologies specified in the EBA Guidelines on common procedures and methodologies for SREP. The Guidelines aim to facilitate the assessment of ICAAP and ILAAP as well as to create a consistent approach to the ICAAP and ILAAP frameworks and to the assessment of reliability of the own capital and liquidity estimates of financial institutions. The draft Guidelines set out, amongst other things, the general criteria for national regulators for the collection of ICAAP and ILAAP information from institutions and will be finalized following the completion of the consultation. The Guidelines are expected to apply from June 30, 2016. Comments are due by March 11, 2016.
 
View the consultation paper.