The Federal Reserve Board issued a public statement regarding AIG and the recently issued United States Court of Federal Claims decision in Starr International Company, Inc. v. The United States. In its statement, the Federal Reserve Board stated that its actions during the bailout of AIG during the financial crisis were “legal, proper and effective.” In the decision, the United States Court of Federal Claims found in favor of Starr International Company, Inc. on a portion of its claim against the United States under the Fifth Amendment, but ultimately did not award any damages. The opinion strongly criticized many of the US government’s actions with respect to the assistance it provided AIG in 2008 and the years following. Ultimately, the Court held that no damages were available to the shareholders, because they were in fact in a better position than they would have been had the US government not intervened and AIG had filed for bankruptcy.

View Federal Reserve Board press release.

The European Banking Authority published two final draft Implementing Technical Standards under the Capital Requirements Regulation on the leverage ratio for EU firms with regards to disclosure and supervisory reporting. These include amendments and updates to templates used for supervisory reporting and instructions to update the leverage ratio disclosure and reporting framework. The final draft ITS on reporting aim to encourage the harmonization of reporting and disclosure of the leverage ratio across the European Union, as consistent reporting requirements in all member states facilitate the comparability of data as well as cross-border supervision. The final draft ITS will enter into force following their publication in the Official Journal of the European Union.

View final draft ITS.

View final draft ITS 2.

The US federal agencies responsible for implementing the Volcker Rule (the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission) issued two new Volcker Rule Frequently Asked Questions. The FAQs provide guidance regarding the application of covered funds exclusions to foreign public funds and joint ventures.

FAQ 14 generally provides that foreign public funds sponsored by banking entities will not themselves be treated as banking entities even if controlled by a foreign banking entity though means other than share ownership. FAQ 15 generally emphasizes that joint ventures must be engaged in business activities, as opposed to investing in securities or other financial instruments, in order to be exempt as a joint venture.

View FAQ 14.

View FAQ 15.

Several US federal financial regulatory agencies (including the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency and the Securities and Exchange Commission) issued a final interagency policy statement creating joint standards to assess the diversity policies and practices of entities they regulate, as required by Section 342 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. 

Similar to the proposed standards, the final standards provide regulated entities with a framework for strengthening their
diversity policies and practices. This framework includes an organizational commitment to diversity, workforce and employment practices, procurement and business practices and practices to promote transparency of organizational diversity and inclusion within the entities’ US operations. 

The final interagency policy statement is effective on publication in the Federal Register.

View the press release.

View the interagency policy statement.

The Basel Committee on Banking Supervision published a consultation paper on the risk management, capital treatment and supervision of interest rate risk in the banking book. The proposals expand upon, and are intended to ultimately replace, the Basel Committee’s 2004 Principles for the Management and Supervision of Interest Rate Risk. The objectives of the proposals are to help ensure that banks have appropriate capital to cover potential losses from exposures to changes in interest rates and to limit capital arbitrage between the trading book and the banking book, as well as between banking book portfolios that are subject to different accounting treatments. The published proposal
presents two options for the capital treatment of interest rate risk in the banking book: (i) a Pillar 1 (Minimum Capital Requirements) approach; and (ii) an enhanced Pillar 2 approach. Comments to the proposal are due by September 11, 2015.

View the consultation document.

View the 2004 Principles for the Management and Supervision of Interest Rate Risk.

US Financial Stability Oversight Council staff released guidance providing additional information regarding the calculation of Stage 1 thresholds, used by the FSOC to help identify nonbank financial companies for potential supervision by the Board of Governors of the Federal Reserve System and to determine application of enhanced prudential standards to such companies. To assist its determination, the FSOC created a three-stage process, where it applies in Stage 1 six quantitative thresholds to a broad group of nonbank financial companies to assess whether any may be subject to further evaluation in Stage 2. The recent FSOC guidance describes the components of each of the thresholds, applicable accounting standards that are applied, data sources that are utilized, entities included in the calculations, the frequency of calculations and periodic review of the Stage 1 thresholds.

View the FSOC staff guidance.

The Prudential Regulation Authority published a Policy Statement setting out the final rules on its approach to regulating liquidity under the Capital Requirements Regulation. The Policy Statement provides feedback on the responses received by the PRA to the consultation on liquidity published in November 2014, and refers to a new Supervisory Statement on supervisory liquidity and funding risks which was published on the same day. The Policy Statement is aimed at UK banks, EEA banks with a branch in the UK, PRA-designated investment firms, as well as third country banks or PRA-designated investment firms. The Policy Statement includes new rules and feedback on issues related to: (i) the phasing-in of the Liquidity Coverage Requirement and additional liquidity requirements on top of the LCR; (ii) liquidity reporting and disclosure, including changes made to address concerns about the increased and burdensome volume of liquidity data that is to be reported; and (iii) interim LCR reporting. The Supervisory Statement deals with issues including (i) the Internal Liquidity Adequacy Assessment Process; (ii) the liquidity supervisory review and evaluation process; (iii) the drawing down of liquid asset buffers; (iv) collateral placed at the Bank of England; and (v) reporting of liquidity positions. The rules and Supervisory Statement come into effect on October 1, 2015, with the exception of Annex E, which will delete the requirement to submit certain liquidity returns and which will enter into force following a further review.

View the policy statement.

View the supervisory statement.

The European Banking Authority published a final report, dated June 3, 2015, including final draft Regulatory Technical Standards on the criteria that national regulators must take into account before allowing firms to use the Advanced Measurement Approaches for calculating capital requirements for operational risk under the Capital Requirements Regulation. The draft RTS aim to encourage regulatory harmonization across the European Union and also detail the assessment methodology that is to be used by national regulators. The draft RTS cover: (i) the qualitative and quantitative criteria that firms must meet before they are granted permission to use AMA models; (ii) the criteria for the supervisory assessment of key methodological components of the operational risk measurement system; and (iii) the common standards for the supervisory assessment of a bank’s operational risk governance.

View the final draft RTS.

Following the announcement by the European Commission, that the transitional period for regulatory capital requirements for EU banks’ exposures to CCPs under the EU Capital Requirements Regulation would be extended from June 15, 2015 to December 15, 2015, the Implementing Regulation was published in the Official Journal of the European Union on June 9, 2015. The Implementing Regulation comes into effect on June 12, 2015. 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. One of the requirements for recognition of a third country CCP is that the third country’s regime for supervision of CCPs is deemed to be equivalent to that of the regime under EMIR. Equivalence decisions for CCP regimes have only been given for Hong Kong, Singapore, Australia and Japan. Decisions for major jurisdictions, such as the US, are still outstanding. Authorization or recognition under EMIR will give the CCP the status of being a Qualifying CCP, which is relevant for clearing member firms to calculate their capital requirements for exposures to CCPs under the CRR. Lower capital requirements will be imposed for exposures to a QCCP than for exposures to a non-QCCP CCP.

View the Implementing Regulation.

View our client note on third country equivalence under EMIR.

The US Board of Governors of the Federal Reserve System, the US Federal Deposit Insurance Corporation and the US Office of the Comptroller of the Currency (collectively, the Federal banking agencies), released a statement reiterating the disclosure requirements for the annual company-run stress tests conducted by financial institutions with total consolidated assets between $10 billion and $50 billion. In the statement, the Federal banking agencies emphasized the requirement for such medium-sized firms to disclose certain information regarding the annual stress tests, including: (i) a description of the types of risks included in the stress test; (ii) a summary description of the methodologies used to conduct the stress test; (iii) estimates of losses, revenue, and net income; (iv) post-stress capital ratios; and (v) an explanation of the most significant causes for the changes in regulatory capital ratios. In addition, as the Federal banking agencies have previously stated, the company-run stress tests are intended to produce hypothetical results and are not intended to be forecasts or expected outcomes.

Stress test results must be disclosed between June 15, 2015 and June 30, 2015. Any questions regarding the disclosures made in connection with the stress tests should be directed to the firms.

View statement released by the Federal banking agencies.

The Amending Regulation setting out Regulatory Technical Standards on own funds requirements for institutions under the EU Capital Requirements Directive and Capital Requirements Regulation, together known as CRD IV, was published in the Official Journal of the European Union. The Amending Regulation applies to banks and investment firms and specifies the conditions in which a drag on own funds is disproportionate in terms of distributions on: (i) an individual Common Equity Tier 1 instrument; and (ii) the total own funds of the firm. The Amending Regulation also deals with preferential distributions regarding preferential rights to payments of distributions as well as preferential distributions regarding the order of distribution payments. The Amending Regulation enters into effect on June 22, 2015.

View the Regulation.

The European Banking Authority published a questionnaire on the assessment of third country equivalence with the regulatory and supervisory framework under the Capital Requirements Directive IV package. The questionnaire aims to assess whether third countries apply regulatory and supervisory provisions equivalent to those in the EU framework. The questionnaire will be sent to certain third countries so that the regimes of those countries can be assessed. For third countries that are deemed to be equivalent, more favorable treatment in terms of capital requirements could be available for EU credit institutions with relevant exposures to entities located in these countries, though only after the European Commission adopts an Implementing Decision determining the equivalence of the third country’s prudential supervisory and regulatory requirements.

View the questionnaire.

The US Office of the Comptroller of the Currency, the US Federal Deposit Insurance Corporation, and the Federal Reserve Board (collectively, the "federal bank regulatory agencies") approved a notice requesting comment on a third set of regulatory categories as part of their review to identify outdated or unnecessary regulations applied to insured depository institutions. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 requires federal bank regulatory agencies to review their regulations at least once every 10 years and to categorize and publish the regulations for comment. Consistent with the EGRPRA, the federal bank regulatory agencies have grouped regulations applicable to insured depository institutions into 12 regulatory categories: (i) Applications and Reporting; (ii) Banking Operations; (iii) Capital; (iv) Community Reinvestment Act; (v) Consumer Protection; (vi) Directors, Officers and Employees; (vii) International Operations; (viii) Money Laundering; (ix) Powers and Activities; (x) Rules of Procedure; (xi) Safety and Soundness; and (xii) Securities. The latest notice seeks comment on regulations in the following three categories: (i) Consumer Protection; (ii) Directors, Officers and Employees; and (iii) Money Laundering. Comments will be accepted within 90 days after publication in the Federal Register. Although the current notice seeks comment on the three specifically enumerated categories above, comments are accepted on any of the established categories of regulation as well as on all rules that have been finalized before the publication of the last EGRPRA notice which is expected by year-end. The European Commission also recently launched its Better Regulation Agenda, which among other things, aims to improve the review of existing EU laws.

View the Federal Register Notice.
View the EGRPRA website.

The European Banking Authority published a final report on the monitoring of Additional Tier 1 capital instruments issued by EU firms. Under the EU Capital Requirements Regulation, the EBA must monitor the quality of own funds instruments issued by EU institutions. The report presents the EBA’s recent monitoring results and updates the EBA’s earlier report on the topic, published on May 4, 2015. The EBA has examined 15 AT1 issuances made between August 2013 and November 2014, five of which were made under a conversion mechanism and 10 under a temporary write-down mechanism, for a total amount of €21.4 billion. The report states that certain provisions or wording of existing AT1 instruments should be avoided or revised to minimize uncertainty. Wording used should be consistent with that in the CRR, for example, "non-objection" cannot be used as a substitute for "supervisory permission," a term used in the CRR. Also, certain issuances include partial regulatory calls. This means that only a portion of the instruments may be called by an institution if the corresponding part of the issuance is, due to a regulatory change, no longer recognized in Tier 1 capital. The report states that only regulatory calls for the full amount of instruments are acceptable, irrespective of whether a regulatory changes triggers full or partial derecognition from AT1 capital. The EBA intends to continue monitoring certain AT1 issuances, expects that future issuances will use some level of standardization and advises that terms and conditions should not be unjustifiably complex. The EBA will also develop standardized terms and conditions for AT1 issuances which would not be compulsory for firms but would help to ensure compliance with regulatory provisions.

View the report.

The US Financial Stability Oversight Council unanimously approved and published its 2015 annual report. The report discusses a variety of issues, including significant financial market and regulatory developments, potential emerging threats to the financial stability of the US, and recommendations on methods to mitigate such threats. The findings in the FSOC report emphasize, among other things, the need for the continuing enhancement of cyber security for all market participants, the ongoing investigation into whether existing rules and standards are sufficiently robust to mitigate the potential risk that central counterparties could transmit credit and liquidity problems among financial institutions and markets during periods of market stress, and the efforts made to reduce gaps that remain in the scope and quality of data sharing among regulators.

View the 2015 FSOC annual report.

View press release.

The European Banking Authority published a final report on guidelines on the management of interest rate risk arising from non-trading activities also known as interest rate risk in the banking book or IRRBB. The report includes the final guidelines which apply from January 1, 2016, and are addressed to national regulators, relevant credit institutions and investment firms. The final guidelines update and repeal the guidelines published on October 3, 2006 by the Committee of European Banking Supervisors. The guidelines set out the expectations for the identification and mitigation of IRRBB risks by firms. The level of application of the guidelines should be consistent with the level of application of the supervisory review and evaluation process.

View the report.

The US Board of Governors of the Federal Reserve System issued a proposal adding certain general obligation state and municipal bonds to the range of assets a banking organization may use to satisfy the Liquidity Coverage Ratio requirement. Under the LCR requirement adopted by the federal banking agencies in September 2014, large banking organizations are required to hold High-Quality Liquid Assets that can be easily and quickly converted into cash within 30 days during a period of financial stress. The proposed rule would allow investment grade, general obligation US state and municipal bonds to be counted as HQLA up to certain levels if they meet the same liquidity criteria that currently apply to corporate debt securities. The limits on the amount of a state or municipality’s bonds that could qualify are based on the specific liquidity characteristics of the bonds. The proposed rule would apply only to entities subject to the LCR and supervised by the Federal Reserve Board. The deadline for comments on the proposed rule is July 24, 2015.

View the proposed rule.

The European Banking Authority published a consultation paper comprising draft Regulatory Technical Standards on the assignation of risk weights to specialized lending exposures under the Capital Requirements Regulation. Specialized lending exposures are exposures to entities created explicitly to finance or operate physical assets. The CRR allows for special treatment of these exposures within the internal model based approach using a set of supervisory risk weights made up of five categories. The proposed RTS aim to determine how banks take into account certain factors, such as financial strength, political and legal environment and transaction characteristics, when assigning risk weight to specialized lending exposures. The draft RTS also specify how banks should combine those factors to determine the final assignment to a certain category. Responses to the consultation are due by August 11, 2015.

View the consultation paper.

The EBA published the new taxonomy for national regulators to provide data to the EBA under the supervisory reporting requirements set out in the Capital Requirements Directive. The revised taxonomy is for reporting on funding plans and supervisory benchmarking from December 31, 2014 onwards. The revised taxonomy incorporates corrections to funding plans and benchmarking reporting structures.

View the EBA announcement.

The European Banking Authority published a consultation paper comprising draft Implementing Technical Standards on the mapping of credit assessments of External Credit Assessment Institutions for securitization positions under the Capital Requirements Regulation. The draft ITS aim to determine the mapping between credit ratings and credit quality steps for the allocation of risk weights to ECAIs’ ratings issued on securitizations. Under the CRR, risk weights under the standardized and internal ratings based approach for securitization positions should be based on the credit quality of those positions established according to the credit ratings of ECAIs. 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. Responses to the consultation are due by August 7, 2015.

View the consultation paper.

The European Banking Authority published a report on the monitoring of Additional Tier 1 capital instruments issued by EU institutions. Under the EU Capital Requirements Regulation, the EBA must monitor the quality of own funds instruments issued by EU institutions. The report presents the EBA’s recent monitoring results and updates the EBA’s earlier report on the topic, published in October 2014. The EBA has examined fifteen AT1 issuances made between August 2013 and November 2014, five of which were made under a conversion mechanism and ten under a temporary write-down mechanism. The report states that certain provisions or wording of existing AT1 instruments should be avoided or revised so that uncertainty and complexity is minimized. Wording used should be consistent with that in the CRR, for example, "non-objection" cannot be used as a substitute for "supervisory permission," a term used in the CRR. The EBA intends to continue monitoring certain AT1 issuances, expects that future issuances will use some level of standardization, and advises that terms and conditions should not be unjustifiably complex. The EBA will also develop standardized terms and conditions for AT1 issuances. These would be non-compulsory for institutions, but would help to ensure compliance with regulatory provisions. The EBA report is not fully comprehensive and a final report will be published at the end of May 2015.

View the report.

The UK Prudential Regulation Authority published a policy statement introducing the final rule that implements the Branch Return, a new return that will collect data biannually from EEA and non-EEA firms with UK branches. The final rule is also directed at firms looking to operate in the UK in the future. The new return gathers quantitative information on economic functions performed by branches in the UK and aims to enhance the PRA’s understanding of the impact that branches have on UK financial stability.

View the Policy Statement and Branch Return Form.

The US Federal Financial Institutions Examination Council’s Task Force on Consumer Compliance issued interagency examination procedures for Regulation Z (Truth in Lending) and Regulation X (Real Estate Settlement Procedures Act). The procedures reflect recent amendments by the CFPB to Regulation Z and Regulation X that, among other things, revised and integrated the disclosures received in connection with certain closed-end mortgage loans. The guidance will become effective on August 1, 2015.

View the Federal Reserve Board’s press release.

View a summary of the updates to the examination procedures.

The US Board of Governors of the Federal Reserve System released its Semiannual Report on Banking Applications Activity. The report delivers aggregate information on applications submitted by bank holding companies, state member banks, savings and loan holding companies, foreign banking organizations, and other entities and individuals for approval to undertake various transactions, including mergers and acquisitions, and engaging in new activities. The latest report covers the period from July 1, 2014 to December 31, 2014. During that period, 681 proposals were reviewed, of which 629 were approved and 52 were withdrawn. Among other things, the report noted that merger and acquisition proposals are generally more complex than other proposals. The average and median number of days to approve such an application is 60 and 41 days, respectively, but the average number of days to approve an application that receives adverse public comments is 206 days.

View the latest Semiannual Report on Banking Applications Activity.

The European Banking Authority published a consultation paper to update its data template for the identification methodology for Global Systemically Important Institutions under the Capital Requirements Directive and Capital Requirements Regulation, together known as CRD IV. This review follows on from the introduction by the Basel Committee on Banking Supervision of new identification methodology in January 2015. The consultation paper includes a draft regulation amending the regulatory technical standards on the identification methodology for G-SIIs and the implementing technical standards on uniform format and date of disclosure by G-SIIs. The new data template comprises minor technical revisions such as: (i) average exchange rates being provided by the relevant supervisory authority rather than the respondent bank; and (ii) long-term monitoring items being re-labeled as "Ancillary Data". The scope of the disclosure requirements under CRD IV remains unchanged. Draft revised guidelines on further specification of the indicators of global systemic importance are also included in the consultation paper. Going forward, the data template will be incorporated into the guidelines and instructions specifying how the template should be completed will be published on the EBA website. Responses to the consultation are due by May 30, 2015.

View the consultation paper.

The Basel Committee on Banking Supervision agreed to eliminate certain national discretions from the Basel II capital framework. The use of national discretions can hinder comparability across jurisdictions and increase variability in risk-weighted assets. The Basel Committee has agreed to remove national discretions from the Basel II capital framework regarding: (i) the treatment of past due loans; (ii) the definition of retail exposures; (iii) transitional arrangements for corporate, sovereign, bank and retail exposures; (iv) the rating structure standards for wholesale exposures; (v) internal and external audit; and (vi) re-ageing. The national discretion for the internal ratings-based approach treatment of equity exposures will expire in 2016. The Basel Committee intends to monitor national discretions that are still available and consider whether more of them should be removed. The Basel Committee also responded to a frequently asked question on funding valuation adjustment. The FAQ notes that a bank’s adoption of FVA should not have the effect of offsetting or reducing its “own credit” adjustment. A bank should continue to derecognize its debit valuation adjustment in full, whether or not it has adopted a funding valuation-type adjustment.

View the press release.

The US Federal Deposit Insurance Corporation issued an advanced notice of proposed rulemaking (“ANPR”), seeking input on potential new recordkeeping standards for certain FDIC-insured institutions with more than two million deposit accounts. The FDIC is required to provide depositors with access to their insured accounts as soon as possible after an institution fails. For a bank with a large number of deposit accounts, payments might be delayed if the bank’s records are unclear or incomplete, making it difficult to determine what is insured and what is not. Generally, the FDIC seeks input on whether banks with a large number of deposit accounts should be required to have a greater responsibility in the deposit insurance determination process. Specifically, the FDIC seeks comment on whether banks should be required to meet certain records standards, including the ability to calculate insured and uninsured amounts for each depositor at the end of each business day. The FDIC also seeks input on what types of new data requirements would aid a quick and effective insurance determination process as well as the appropriate threshold for institutions to have to comply with the potential new requirements. The proposals will be open for comment for 90 days after the ANPR has been published in the Federal Register.
 

View a statement issued by FDIC Director, Jeremiah O. Norton.

View the press release.

The US Board of Governors of the Federal Reserve System, Division of Banking, Supervision and Regulation issued information regarding the operating structure of the Large Institution Supervision Coordinating Committee supervisory program. SR Letter 15-7 provides information on the program’s organizational structure, including the roles and responsibilities of the committees, subgroups and dedicated supervisory teams that collectively comprise the LISCC’s governance structure. Established in 2010, the LISCC program aims to oversee and supervise the largest, most systemically important financial institutions using a centralized process and is comprised of senior Federal Reserve Board and Federal Reserve Bank officers and financial professionals.

View the letter.

The European Banking Authority published its annual assessment on the EU Colleges of Supervisors. Colleges bring together 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 EBA’s assessment specifies an action plan for 2015, and states that the College’s 2014 action plan was fulfilled to a reasonable extent with improvements in the efficiency of EU supervisory cooperation and the development of a better understanding of the risk profiles of cross-border banking groups. The 2015 action plan covers issues such as: (i) credit, conduct and IT risk; (ii) key tasks for supervisory colleges, including joint decisions on capital and liquidity; and (iii) how best to align the functioning of the College with the new Regulatory Technical Standards and Implementing Technical Standards on the operational functioning of supervisory colleges.

View the assessment.

The European Banking Authority published a report on the eXtensible Business Reporting Language taxonomy filing rules. National regulators use this taxonomy to provide data to the EBA under the supervisory reporting requirements set out in the new European capital requirements legislation. The document corrects the scheme identifier for pre-LEIs. Supervisory reporting covers own funds, financial information, large exposures, leverage and liquidity ratios, asset encumbrance and funding plans

View the report.

The US Board of Governors of the Federal Reserve System, Division of Banking, Supervision and Regulation issued information regarding the operating structure of the Large Institution Supervision Coordinating Committee supervisory program. SR Letter 15-7 provides information on the program’s organizational structure, including the roles and responsibilities of the committees, subgroups and dedicated supervisory teams that collectively comprise the LISCC’s governance structure. Established in 2010, the LISCC program aims to oversee and supervise the largest, most systemically important financial institutions using a centralized process and is comprised of senior Federal Reserve Board and Federal Reserve Bank officers and financial professionals.

View the letter.

Regulations on the calculation of margin periods of risk of netting sets, which calculation firms must use to calculate their own funds requirements when acting as a clearing member, were published in the Official Journal of the European Union. The Regulations, which supplement the Capital Requirements Regulation, provide for the calculation of exposures to clients according to whether a transaction is cleared by a qualifying CCP or not. A qualifying CCP is one which has been authorized or recognized under the European Market Infrastructure Regulation.

View the Regulations.

The Federal Reserve Board requested public comment on proposed amendments to Regulation D (Reserve Requirements of Depository Institutions). The amendments include making technical changes to the calculation of interest payments on certain balances maintained by depository institutions at Federal Reserve Banks. Comments on the proposal are requested within 30 days of publication in the Federal Register.

View the press release.

View the proposal.
 

The European Banking Authority published its first report on progress towards convergence of supervisory practice across EU Member States. Under the Capital Requirements Directive, the EBA must report annually to the EU Parliament and the Council on the degree of convergence of supervisory practices between Member States. The EBA is responsible for developing a Single Rulebook and recommendations as well as a European supervisory handbook to promote consistency across the EU. The EBA’s report focuses on the supervisory review and evaluation process and assessment of risks (known as SREP), stress testing, review of permissions to use internal approach, and supervisory measures and powers. The EBA notes that there has been significant progress since 2011 in strengthening supervisory colleges and that supervisory convergence is under way. However, further work is required, such as the development of technical standards and guidelines on key aspects of the Internal Ratings Based Approach, the interaction between capital buffers, and additional capital requirements and implementation by national regulators of the EBA’s guidelines and other policy items relating to supervision.

View the EBA’s report.

The US Board of Governors of the Federal Reserve System issued a final rule expanding the applicability of its Small Bank Holding Company Policy Statement (“Policy Statement”) to include certain savings and loan holding companies and raising the asset threshold of the Policy Statement from $500 million to $1 billion in total consolidated assets. This rulemaking will allow a greater number of community banks to qualify for the advantages of being deemed a small bank holding company.

Small bank holding companies are exempt from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level. This rule allows small bank holding companies to use non-equity funding, such as holding company loans, to finance growth and/or to use leverage to fund share repurchases and otherwise provide liquidity to shareholders.

The final rule implements a law passed in December 2014 by Congress. It will become effective 30 days after publication in the Federal Register.

View the Federal Reserve Board press release.

View the draft final rule.
 

The US Office of the Comptroller of the Currency, the US Board of Governors of the Federal Reserve and the US Federal Deposit Insurance Corporation issued answers to certain frequently asked questions on the regulatory capital rule. The topics addressed in the FAQs include the following: (i) the definition of capital; (ii) separate account and equity exposures to investment funds; (iii) high volatility commercial real estate exposures; (iv) other real estate and off-balance-sheet exposures; (v) qualifying central counterparty questions; (vi) credit valuation adjustment questions; and (vii) other miscellaneous questions.
 

The full text of the FAQs.

 

The Prudential Regulation Authority published further Rules and Supervisory Statements and Policy Statements that will form part of the PRA Rulebook. The new Rulebook parts include verification of standing data rules and internal governance rules. The new Supervisory Statements cover internal governance, exercising certain functions under the Building Societies Act 1986 and supervising building societies’ treasury and lending activities. Also published is a new Policy Statement on the PRA’s approach to insurance business transfers. The PRA is creating a stand-alone PRA Rulebook and intends to launch the new Rulebook website online in summer 2015. The current PRA Handbook sits alongside the Financial Conduct Authority’s Handbook, inherited from the Financial Services Authority.

View the PRA Rulebook.
 

View the additional parts to the PRA Rulebook.

The European Banking Authority published its recommendations on the equivalence of the confidentiality regimes of third country supervisory authorities. Under the EU Capital Requirements Directive, third country supervisory authorities may participate in a college of supervisors set up for an international cross-border bank if: (i) it is considered appropriate for that authority to participate and (ii) the authority is subject to confidentiality requirements that are equivalent to those set out in the EU Capital Requirements Directive. The EBA’s recommendations only relate to the equivalence of the confidentiality regimes. The appropriateness issue is to be determined by each college of supervisors. The EBA recommends that the confidentiality regimes of the supervisory authorities in the following countries should be considered as equivalent to the CRD IV requirements: Bosnia-Herzegovina, Brazil, Canada, China, FYR Macedonia, Mexico, Montenegro, Serbia, Singapore, Switzerland, Turkey and the United States.
 

View the EBA Recommendation.

The Regulation of the European Central Bank on reporting of supervisory financial information was published in the Official Journal of the European Union. The Regulation sets out the requirements for significant and less significant banks to report supervisory financial information to their relevant national regulator. The Regulation applies to all banks that fall under the Single Supervisory Mechanism as well as any branches of banks established outside of the SSM where the branch operates in a Eurozone Member State or another Member State that has opted into the SSM. The aim of the Regulation is to ensure that both significant and less significant firms report a common minimum set of information to national regulators, which will then be passed to the ECB. The Regulation came into effect on April 1, 2015.
 

View the Regulation.

The US Board of Governors of the Federal Reserve and the US Office of the Comptroller announced that Wells Fargo – one of the largest global systemically important financial institutions – will be permitted to use the “advanced approaches” capital framework to calculate and publicly disclose its risk-based capital requirements as of the second quarter of 2015. The US advanced approaches framework is available for the largest US banks following a trial or “parallel run” in which the bank proves its ability to meet disclosure requirements for the capital framework under the advanced approach method for four consecutive calendar years. Currently, seven other US banks use the advanced approaches framework. Previously, Wells Fargo used the standardized approach to calculate risk-based capital.

View the Federal Reserve Board press release.

The Bank of England published details of the 2015 stress test for the largest UK banks and building societies. The stress test, which aims to assess the resilience of banks and the banking system to severe shock, was agreed between the Financial Policy Committee and the Prudential Regulation Authority Board. It is not a variant to the EU stress test calibrated by the European Banking Authority, as was the case for the 2014 stress test. The European Banking Authority is not intending to undertake an EU-wide stress test this year. The results of the stress test will be announced in December 2015. If a firm’s capital or leverage ratios fall below the threshold in the test, it is likely that the PRA will require the firm to strengthen its capital position. The PRA may also require a firm whose ratios meet the threshold to strengthen its capital position after examining capital adequacy, recovery and resolution plans and the extent to which potentially significant risks are not quantified adequately as part of the stress. Any weakness detected in the banking system will be addressed by the FPC which has a variety of powers at its disposal, including recommendations to the PRA and the Financial Conduct Authority.
 

View the stress test details.

UK legislation was enacted which gives the Bank of England's Financial Policy Committee power to issue directions to the Prudential Regulation Authority and the Financial Conduct Authority for certain macro-prudential measures. The FPC will be able to give a direction to (i) specify a minimum leverage ratio for UK banks and PRA-designated UK investment firms; (ii) require UK banks and PRA-designated UK investment firms for which the PRA sets a strategic risk buffer to also maintain an additional leverage ratio specified by the FPC; (iii) require globally systemically important institutions to hold sufficient Tier 1 capital to satisfy an additional leverage ratio specified by the FPC; and (iv) require UK banks and PRA-designated UK investment firms to hold sufficient capital to maintain a countercyclical leverage buffer. The legislation comes into force on April 6, 2015, except for the power of direction for firms required to hold a strategic risk buffer which comes into force on January 1, 2019.

View the legislation.

A Commission Delegated Regulation was published in the Official Journal of the European Journal, which amends the Delegated Regulation on own funds requirements for investment firms based on fixed overheads. Under the Capital Requirements Regulation certain investment firms are able to use an alternative method based on a quarter of their fixed costs to calculate their total capital requirement. The amending Regulations insert into the Delegated Regulation the methodology for investment firms to calculate fixed overheads. The amending Regulations come into force on April 14, 2015.
 

View the amending Regulations.

The Code of Conduct for the Members of the Supervisory Board of the European Central Bank was published in the Official Journal of the European Union. The code includes the basic principles that members of the board are to abide by, as well as rules on conflicts of interest, private financial transactions and wealth declarations. This follows on from the ECB’s new prudential supervisory role for banks in the Eurozone under the Single Supervisory Mechanism. The ECB assumed this new role in November 2014, and the SSM creates a new system of financial supervision, under which the ECB directly supervises 120 significant banking groups, and sets and monitors supervisory standards for other Eurozone banks by working more closely with national regulators. The code entered into force on March 21, 2015.

View the code of conduct

The European Banking Authority launched a consultation and published draft guidelines on setting limits on exposures to shadow banking entities which carry out activities outside of the regulated framework under the Capital Requirements Regulation. The guidelines set out the approaches that institutions should take to develop internal policies for monitoring and setting limits on individual and aggregate levels. The Principal Approach and the Fallback Approach for setting limits on exposures are set out in the guidelines. The Principal Approach proposes that institutions set an aggregate limit to exposures to the shadow banking sector in relation to the institution’s eligible capital. If an institution is not able to apply the Principal Approach, due to, for example, holding insufficient information about the activities of shadow banking entities, the Fallback Approach should be used which would mean that a limit of 25% of the institution’s eligible capital would be applied to its aggregate exposures to shadow banking entities. In addition, institutions would set tighter limits to individual exposures and should take into account matters such as the financial situation and regulatory status of the shadow banking entity, and whether the entity is vulnerable to asset price or credit quality volatility. The draft guidelines also set out the proposed definitions that are to be used for terms that have not been defined or sufficiently defined in the CRR, such as “shadow banking entities”, “exposures to shadow banking entities”, “excluded undertakings” and “credit intermediation activities.” Comments on the consultation may be submitted until June 19, 2015.

View the consultation paper and guidelines

The Comptroller of the Currency discussed the Office of the Comptroller of the Currency’s approach to adapting regulatory and supervisory expectations to the size and complexity of supervised institutions. His remarks were part of testimony before the US Senate Committee on Banking, Housing and Urban Affairs. His testimony provides a brief overview of the key provisions of Section 165 of Dodd-Frank Act as they apply to bank holding companies and how the OCC’s supervisory and regulatory tools complement and support the objectives of these provisions. He also describes that the OCC has tailored its supervisory programs into three distinct portfolios—community banks, midsize banks, and large banks.

View the oral statement

View the written testimony

The European Banking Authority published its final draft Implementing Technical Standards on supervisory reporting to amend the current ITS on supervisory reporting for institutions under the Capital Requirements Regulations. The draft ITS include minor amendments to several templates that are to be used by financial institutions in the supervisory reporting process as well as corrections to clerical errors and legal references. The ITS set out the standards that financial institutions must meet for the purposes of supervisory reporting.

View the final draft ITS and annexes

The European Banking Authority updated its periodic risk dashboard setting out the principal risks and vulnerabilities in the EU banking sector. The dashboard analyses the evolution of risk indicators among a sample of 55 banks across the EU. The dashboard shows that the capital position trends of EU banks are positive and that CET 1 ratios are at their highest levels since 2009. It also shows that levels of profitability tend to be unstable but that balance sheet structures are shifting towards lower loan-to-deposit ratios, and therefore less debt.

View the risk dashboard

The US Board of Governors of the Federal Reserve System announced a proposal requiring banking organizations to include their existing Legal Entity Identifiers on certain regulatory reporting forms as of June 30, 2015. The LEI is a unique reference code that enables easier identification of a firm’s legal entities. Comments on the proposal are requested within 60 days of publication in the Federal Register.

View the Proposal

The Board of Governors of the Federal Reserve System recently released results for the Dodd-Frank Annual Stress Tests for the 31 largest bank-holding companies. This is the third round of stress tests required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. According to the press release, all of the largest US-based bank holding companies have passed the test and have been building capital levels at a sufficient level to withstand severe recession and financial market volatility. The quantitative results from these tests are one part of the Federal Reserve Board’s annual exercise to evaluate the capital planning and adequacy of large financial institutions. Comprehensive Capital Analysis and Review results will be released on March 11, 2015.

View the Federal Reserve Board press release

View the 2015 Supervisory Stress Test Methodology and Results