The US Board of Governors of the Federal Reserve System announced that it has not objected to the capital plans of 28 bank holding companies participating in the Comprehensive Capital Analysis and Review. However, Bank of America Corporation is required to submit a new capital plan to address weaknesses in its capital planning processes. The Federal Reserve Board did object to the capital plans of Deutsche Bank Trust Corporation and Santander Holdings USA due to qualitative concerns. There were no objections based on quantitative grounds. Goldman Sachs Group, Inc., JPMorgan Chase & Co., and Morgan Stanley needed to submit adjusted capital actions to meet the minimum post-stress minimum capital requirements.

View the Federal Reserve Board press release

View the CCAR results 

The European Banking Authority published a revised list of validation rules for submitting supervisory reporting data. The rules detail the standards and formats that are to be used for submissions of data by national regulators under the Capital Requirements Directive IV. The revised list displays the rules that have been deactivated due to technical issues or incorrectness.

View the EBA press release and updated validation rules

The European Banking Authority published an opinion on the Capital Requirements Regulation provision that deals with eligibility conditions for covered bonds in relation to risk weight preferential treatment, including the assets by which eligible covered bonds can be collateralized. Under the CRR, eligible covered bonds can be collateralized by exposures to institutions that qualify for the credit quality step 1, which must not exceed 15% of the nominal amount of outstanding covered bonds of the issuing institution. Exposures to institutions in the EU with a maturity not exceeding 100 days have no CQS 1 requirement, but must at least qualify for CQS 2. After consulting the EBA, national regulators may partially waive these specifications and allow CQS 2 for up to 10% of the total exposure of the nominal amount of outstanding covered bonds of the issuing institution. This would only apply if significant potential concentration problems in the specific member state are due to the application of the CQS 1 requirement. In December 2014, the Swedish Financial Supervisory Authority submitted a proposal to the EBA for such a waiver. The EBA has assessed the proposal, taking into account factors such as the nature and magnitude of exposures to institutions that covered bonds assume in that jurisdiction. The EBA is of the opinion that sufficient evidence was submitted by the Swedish Regulator to document that the significant potential concentration problem derives from the application of the CQS 1 requirement specified in the CRR. The EBA has stated therefore that the establishment of a partial waiver is justified.

View the EBA opinion.

The European Banking Authority launched a discussion paper on the future of the internal ratings-based approach under the Capital Requirements Regulation. This is the approach under which certain banks and investment firms with sophisticated risk management systems are allowed to calculate capital requirements based on internally produced parameters. The paper discusses the compromised comparability of capital requirements under the IRB approach due to the framework’s high level of flexibility. The EBA believes that a review of the regulatory framework for the IRB approach is required to ensure a higher level of comparability going forward. Comments on the discussion paper may be submitted until 5 May 2015.

View the discussion paper

The European Banking Authority launched a public consultation on its guidelines on sound remuneration policies. The guidelines specify the criteria for allocation of remuneration components into either fixed or variable remuneration, clarify the way in which the remuneration rules in Capital Requirements Directive should be interpreted by regulators and generally aim to ensure compliance with the bonus cap requirements introduced by CRD. The consultation period ends on June 4, 2015.

View the consultation paper.

The European Banking Authority issued a press release stating that it will not carry out an EU-wide stress test in 2015, but will instead be preparing for the next exercise in 2016. The EBA will however carry out a transparency exercise in 2015 which will provide data on the balance sheets and portfolios of EU banks.

View the EBA Press Release

The European Banking Authority published final draft regulatory technical standards on benchmarking portfolio assessment standards and assessment sharing procedures under the Capital Requirements Directive, together with final draft implementing technical standards on benchmarking portfolios, templates, definitions and IT solutions. These final drafts specify the framework for EU institutions and national regulators on annual supervisory benchmarking. The EBA simultaneously published its technical advice, for the purposes of the report. All documents have now been submitted to the European Commission for adoption.

View the report.

View the technical advice.

The Federal Reserve Board extended until April 3, 2015 the comment period for its proposed rule to implement capital surcharges for global systemically important banks. Comments were originally due by March 2, 2015. The Federal Reserve Board extended the comment period to allow relevant parties more time to analyze the proposed rule and prepare comments. The proposal would establish a methodology to identify if a firm is a G-SIB as well as establish the size of a firm’s risk-based capital surcharge. The rule is expected to strengthen the capital positions of these financial institutions and if finalized as proposed, would be higher than international standards.

View the The Federal Reserve Board press release

View the The Shearman & Sterling Publication on the G-SIB Surcharge proposed rule

The European Banking Authority published an Opinion addressed to the European Commission on Credit Valuation Adjustment. The Opinion deals with several aspects of the calculation of own funds requirements for CVA risk. Sixteen recommendations are listed in the Opinion, including: (i) clarifying by means of an amendment to the Capital Requirements Regulations that exchange-traded derivatives are included in the scope of CVA risk charge; (ii) harmonising the treatment of securities financing transactions in the EU; and (iii) clarifying the standardised method for CVA. The Opinion was published by the EBA simultaneously alongside a Report and Review on CVA and the application of CVA charges to non-financial counterparties established in a third country under the CRR. The documents have now been submitted for consideration by the European Commission.

View the Opinion

View the Report and Review

Amendments to the Implementing Technical Standards for the supervisory reporting of financial institutions under the Capital Requirements Regulation was published in the Official Journal of the European Union. The ITS set out the standards that financial institutions must meet for the purposes of supervisory reporting. The amendments include the replacement of several templates that are to be used by financial institutions in the supervisory reporting process. The purpose of the amendments is to increase clarity and provide further instructions and definitions to financial institutions for the purposes of supervisory reporting. The amended ITS entered into force on February 21, 2015.
 

View he ITS.

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency announced that they are seeking comment on banking operations regulations, capital regulations and the Community Reinvestment Act to identify “outdated or unnecessary regulations” that apply to insured depository institutions. Comments are due by May 14, 2015. Over the coming year, the regulators will publish requests for comments for nine additional categories of regulation.

View the Federal Reigster notice.

The Prudential Regulation Authority issued a statement on extending the duration of whole-firm liquidity modifications, intragroup liquidity modifications and permissions under the Capital Requirements Regulation. Following the European Commission's adoption of a Delegated Act on the Liquidity Coverage Requirement which will become the binding liquidity standard in the EU from October 1, 2015 (according to its provisions), a number of liquidity modifications granted by the PRA under its Prudential Sourcebook for Banks, Building Societies and Investment Firms and the CRR expire between now and October 1, 2015. Given that the time period between these expirations and the LCR becoming binding is relatively short, the PRA will allow firms to extend modification periods. The PRA statement sets out the process that is to be followed to apply for an extension.
 

View the PRA.

The European Banking Authority published its opinion on the appropriateness of the definition of “eligible capital” under the Capital Requirements Regulation. The term “eligible capital” has been used since January 2014, replacing the earlier “own funds” term for defining large exposures and setting large exposure limits. Under the “eligible funds” definition, the amount of Tier 2 capital recognized as eligible capital must not exceed one third of Tier 1 capital. Under the “own funds” definition, there was no limit for Tier 2 capital. The EBA opinion
states that it has not found any evidence to show that the new stricter regime would impact firms detrimentally and recommends that a review of the EU large exposures regime is carried out so that it can be further aligned with the final standard of the Basel Committee on Banking Supervision that was published in April 2014.

View the opinion.

Implementing technical standards for currencies in which there is an extremely narrow definition of central bank eligibility were published in the Official Journal of the European Union. The Capital Requirements Regulation requires firms to report assets as liquid assets where they meet certain conditions, one of which is that the assets are eligible collateral for standard liquidity operations of a central bank in a Member State or a third country. The condition is waived for liquid assets held to meet liquidity outflows in a currency in which there is an extremely narrow definition of central bank eligibility. The ITS establish that the Bulgarian Lev is the only such currency to date.

View the legislation.

A European Central Bank Recommendation on dividend distribution policies was published in the Official Journal of the European Union. The ECB Recommendation is addressed to significant supervised entities and significant supervised groups, which are subject to supervision by the ECB under the Single Supervisory Mechanism.

View the recommendation.

The Board of Governors of the Federal Reserve System, the FDIC and the Office of the Comptroller of the Currency announced that they have developed an automated tool to aid financial institutions subject to the agencies’ regulatory capital rules in calculating risk-based capital requirements for individual securitization exposures. This tool is not a part of the regulatory capital rules or a component of regulatory reporting, and financial institutions may use the tool solely at their own discretion. Specifically, institutions that use the rules’ Simplified Supervisory Formula Approach to calculate risk-based capital requirements for securitization exposures may use the tool to calculate capital requirements for such exposures. The SSFA is a formula-based approach intended to apply relatively higher capital requirements to the more risky junior tranches of securitizations that are the first to absorb losses, and relatively lower requirements to the most senior tranches.

The European Banking Authority published an overview of the potential implications of regulatory measures for banks’ business models. The report focuses on the impact of regulation for business models after the recent financial crisis, including the implementation of regulatory capital requirements, the leverage ratio, the liquidity coverage ratio, net stable funding ratio, reforms on banking structures, recovery and resolution regimes and the obligations under European Market Infrastructure Regulation for the derivatives markets.

View the EBA report.

The US Financial Stability Oversight Council (“FSOC”) adopted certain changes relating to the process of reviewing nonbank financial companies for systemically important financial institution (“SIFI”) designation to make the process more transparent and collaborative. Section 113 of the Dodd-Frank Wall Street and Consumer Protection Act (“Dodd-Frank Act”) enables the FSOC to identify a nonbank financial company for supervision by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) and be subject to enhanced prudential standards. The changes belong in three categories: (i) improved communication and engagement with companies under consideration by the Council; (ii) better transparency with the public in regards to the designations process, while still protecting sensitive, nonpublic company information; and (iii) improved engagement during the FSOC’s annual reevaluations process.

View the FSOC supplemental procedures.

View the updated Frequently Asked Questions.

HM Treasury published the outcome to its consultation on the leverage ratio framework. The Financial Policy Committee previously recommended that HM Treasury enable the FPC to give directions to the Prudential Regulation Authority to set leverage ratio requirements and buffers for PRA-regulated institutions. HM Treasury’s consultation paper sought views on how to implement the FPC’s recommendations and grant the FPC such powers of direction, and also included draft legislation. The FPC stated that the directions should include a power for the FPC to set a minimum leverage ratio requirement, a supplementary leverage ratio buffer to apply to global systemically important banks and major UK institutions, as well as a countercyclical ratio buffer. The outcome sets out the Government's position in light of the consultation responses, stating that the Government believes the FPC is well-placed to consider the level of leverage in the UK financial system which is prudent, whilst the systm continues to conribute to economic growth. The Government also intends to grant the FPC a power to set supplementary ratio buffers. As for the countercyclical ratio buffer, the Government states that the FPC is required to act proportionally when exercising this power, and that this requirement to act proportionally justifies the granting of this power to the FPC.

View the Outcome.

The UK Government announced that it would be proceeding with the recommendations of the UK Bank of England’s Financial Policy Committee to give the FPC powers of direction over the housing market and the leverage ratio for UK banks. The new powers will enable the FPC to direct the Prudential Regulation Authority and Financial Conduct Authority to require regulated lenders to place limits on residential mortgage lending (owner-occupied only) and direct the PRA to set: (i) a minimum leverage ratio requirement; (ii) a supplementary leverage ratio buffer that will apply to globally systemically important banks and other major domestic UK banks and building societies, including ring-fenced banks; and (iii) a countercyclical leverage ratio buffer. Draft legislation providing for the new FPC powers has been put before the UK Parliament. On February 4, 2015, the FPC published draft policy statements detailing the specific tools, the firms subject to the requirements, timelines for implementation, how the tools might affect financial stability and economic growth, how the FPC intends to take decisions over setting the countercyclical leverage ratio buffer and the proposed calibration of the tools.

View the announcement here.

View the FPC papers.

The Board of Governors of the Federal Reserve System (“Federal Reserve Board”) issued a proposed rule expanding the applicability of the Small Bank Holding Company Policy Statement (“Policy Statement”) and reducing reporting requirements for certain bank holding companies and savings and loan holding companies. The Federal Reserve Board further adopted an interim final rule excluding savings and loan companies with less than $500 million in consolidated assets that meet certain qualitative requirements in the Policy Statement from regulatory capital requirements.

View the Interim Final Rule.

View the Policy Statement.

The Basel Committee on Banking Supervision issued its final standard for revised Pillar 3 disclosure requirements. The revised requirements aim to enhance the transparency of the approaches taken by banks in calculating their minimum regulatory capital requirements and allow market participants to access key information and compare banks’ disclosures of risk-weighted assets. In aiming to improve the comparability and consistency of disclosures, new templates are introduced, and five guiding principles for disclosures have been agreed. The disclosures should be: (i) clear; (ii) comprehensive; (iii) meaningful to users; (iv) consistent over time; and (v) comparable across banks. The new requirements will supersede the existing Pillar 3 requirements from the end of 2016.

View the final standards.

A letter from the Chair of the Supervisory Board of the Single Supervisory Mechanism at the European Central Bank, addressed to the management of significant banks, discussing the practices that apply in the new supervisory setting of the SSM was published by the ECB. The ECB assumed its new prudential supervisory role for banks in the Eurozone under the SSM in November 2014. 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 letter states that written clarification has been requested by banks on the processes and practices that apply within the new supervisory framework. The Board recognizes that a broad variety of practices relating to the supervision of significant banks exist across member states, and confirms that the existing process under the SSM Regulation will apply until further notice. In the meantime, the ECB will proactively assess the merits of
various other approaches.

View the ECB letter.

The European Banking Authority published draft amended final Regulatory Technical Standards on prudent valuation of fair-valued positions under the Capital Requirements Regulation. The draft RTS, initially published in March 2014, specified the conditions under which prudent valuation requirements should be applied and introduced a methodology to calculate additional valuation adjustments in the form of two approaches: the simplified approach and the core approach. The revised draft RTS contain small amendments replacing all occurrences in Articles 9 and 10 of the word "volatility" to the word "variance." This affects institutions using the core approach only, and relaxes the calibration of the volatility test, giving more flexibility in the implementation of the prudent valuation framework. The EBA suggests that the calibration of the volatility test should be revised within the first two years of implementation.

View the revised RTS.

The UK’s Prudential Regulation Authority published an updated version of its supervisory statement on the approach it will take under the Capital Requirements Regulation on credit risk treatments of exposures to third country counterparties, and for recognized exchanges. Initially, the supervisory statement set out the approach that was to be taken by the PRA on certain credit risk treatments under the CRR, where relevant third country equivalence determinations had not yet been made by the European Commission. It also set out the individual markets and exchanges that qualified as recognized exchanges under the CRR in the absence of a determination by the European Commission. Further to the binding decision of the European Commission that came into effect on January 1, 2015 (which published the names of third countries that apply supervisory and regulatory arrangements at least equivalent to those applied in the EU), the section in the supervisory statement dealing with this topic no longer applies and has therefore been deleted.

View the updated supervisory statement.

View the European Commission’s Decision.

The Basel Committee on Banking Supervision published its second progress report on the adoption by banks of its Principles for effective risk data aggregation and risk reporting. The Principles are to be implemented by global systemically important banks by 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 and the measures that they have taken to comply with the Principles. Fourteen out of the thirty-one G-SIBs have stated that they will not be able to comply with the principles by the 2016 deadline. The report also states that national regulators are recommended to 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 US Office of the Comptroller of the Currency released a list of Community Reinvestment Act ("CRA") performance evaluations that became public during the period of December 1, 2014 through December 31, 2014. The CRA requires each federal bank regulatory agency to assess each federally insured institution's record of helping to meet the credit needs of its entire community, consistent with safe and sound lending. The list only includes national banks, federal savings associations and insured federal branches of foreign banks. The possible rating categories are as follows: outstanding, satisfactory, needs to improve and substantial noncompliance. Of the thirty evaluations made public, two were rated outstanding and twenty-eight were rated satisfactory.

View list of evaluations.

The FDIC issued a proposed rule amending regulations related to “Fair Credit Reporting.” The three proposed amendments are as follows: (i) rescinding and removing the provisions of FDIC’s Part 334; (ii) rescinding and removing 12 CFR Part 391 Subpart C and amending 12 CFR Part 334 of the FDIC’s existing Rules and Regulations; and (iii) amending the definition of “creditor” in the Red Flag Identity Theft rule to implement the Red Flag Program Clarification Act of 2010. Overall, the revisions would streamline FDIC rules and eliminate unnecessary regulations.

View the Federal Register notice.

The US Federal Deposit Insurance Corporation (“FDIC”) issued a proposed rule revising certain provisions of the Securitization Safe Harbor rule regarding the treatment of financial assets transferred in the process of a securitization or participation in a FDIC receivership. The rule, if finalized as proposed, would clarify the retention of economic interest in the credit risk of securitized financial assets. The amendment would be effective on the same timeline as the credit risk retention rule adopted under Section 15G of the Securities Exchange Act.

View the Federal Register notice.

The EU Implementing Regulation which amends the Regulation laying down Implementing Technical Standards on supervisory reporting of institutions regarding asset encumbrance, single data point model and validation rules under the Capital Requirements Directive and Capital Requirements Regulation, together known as CRD IV, was published in the Official Journal of the European Union. The amendments include changes on: (i) the format and frequency of reporting on asset encumbrance on an individual and consolidated basis; (ii) first reporting reference dates; and (iii) validation rules. The Implementing Regulation enters into force on February 10, 2015.

View the Implementing Regulation.

The Basel Committee on Banking Supervision published its work program for 2015 and 2016. The program is based around four themes: (i) policy development; (ii) the balance between simplicity, comparability and risk sensitivity across the regulatory framework; (iii) monitoring and assessing implementation of the Basel framework; and (iv) improving the effectiveness of supervision. The Basel Committee’s work program states its objectives, which include restoring confidence in capital ratios, continuing to revise existing methods of measuring risk-weighted assets, assessing the role of stress testing, reviewing the regulatory treatment of sovereign risk as well as assessing the interaction of reform policies overall.

View the report.

The Prudential Regulation Authority published a consultation paper on assessing Pillar 2 capital adequacy under the Capital Requirements Regulation and the Capital Requirements Directive, together known as CRD IV. Pillar 2 aims to ensure that firms have sufficient capital to cover potential risks not sufficiently addressed in the prescriptive Pillar 1 requirements. The consultation paper sets out proposed changes to the current framework, rules and supervisory statements, focusing on: (i) new proposed methodologies for determining Pillar 2A capital (which aims to strengthen the relationship between an institution’s risk profile, risk management and risk mitigation systems); (ii) the buffer and the form it would take; (iii) governance and risk management; and (iv) disclosure. The consultation period closes on April 17, 2015. The PRA plans to publish its policy statement and final rules together with a supervisory statement in July 2015. It is expected that the new rules would apply from January 1, 2016.

View the consultation paper.

The following Delegated Regulations supplementing the Capital Requirements Regulation and the Capital Requirements Directive, together known as CRD IV, were published in the Official Journal of the European Union:

1. Delegated Regulation on the liquidity coverage requirement for credit institutions covering matters such as stress scenarios, the composition of the liquidity buffer and the general requirements for liquid assets. This Delegated Regulation will enter into force on February 6, 2015.

2. Delegated Regulation on the leverage ratio covering matters such as the calculation of the leverage ratio and the exposure value of derivatives. This Delegated Regulation entered into force on January 18, 2015.

View Delegated Regulation 1

View Delegated Regulation 2

The European Banking Authority published its second impact assessment report for the liquidity coverage ratio requirements under the Capital Requirements Directive and Capital Requirements Regulation, together known as CRD IV. The report is based on data provided by 322 European banks and concludes that the LCR is not expected to have a material detrimental impact on the business and risk profile of EU-established institutions. This is mainly because EU institutions have significantly improved their compliance with LCR requirements and the potential for making adjustments to balance sheets to meet LCR requirements.

View the report.

HM Treasury published the Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) Regulations 2015 ("the Amending Regulations") together with an explanatory memorandum. The Regulations amend the Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014, which implemented all of the capital buffers under the Capital Requirements Directive except for the Systemic Risk Buffer and the Other Sysemically Important Institutions buffer. The Amending Regulations introduce the SRB for banks and investment firms. Capital buffers require firms to hold additional amounts of capital on top of their minimum capital requirements. Under CRD, member states are able to decide which firms should meet the SRB and must notify the European Commission, European Systemic Risk Board, European Banking Authority and national regulators of the reasons for use of the SRB. The SRB would apply to banks and building societies with deposits of more than £25 billion (i.e. it will apply to ring-fenced banks under the bank structural reform requirements), The Financial Policy Committee of the Bank of England will be responsible for setting the SRB and the Prudential Regulation Authority will apply the SRB on an entity-by-entity basis. The SRB is applicable from January 1, 2019.

View the Regulations.

View the explanatory memorandum.

The US Department of the Treasury (“US Treasury”), acting for the US Financial Stability Oversight Council (“FSOC”), issued a proposed rulemaking aimed to implement the Qualified Financial Contract (“QFC”) recordkeeping requirements of the Dodd-Frank Act. The proposed rules would apply to financial companies with $50 billion or more in consolidated assets, financial companies designated by the FSOC, as well as financial affiliates of these companies and would require recordkeeping of positions, counterparties, legal documentation and collateral. This information is needed to help the Federal Deposit Insurance Corporation (“FDIC”) as receiver to, among other things, decide whether to transfer QFCs, evaluate the consequences of decisions to transfer, disaffirm or permit the termination of QFCs with one or more counterparties, and conclude whether any financial systematic risks are posed by the transfer, disaffirmation or termination of such QFCs in the case of a distressed situation. The deadline for comments is April 7, 2015.

View the US Treasure press release.

View the Federal Register notice of proposed rulemaking.