In this week’s newsletter, we provide a snapshot of the principal US, European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructure providers, asset managers and corporates.

Bank Prudential Regulation & Regulatory Capital

US Board of Governors of the Federal Reserve System Releases Guidance that Consolidates Capital Planning Expectations for Large Financial Institutions

On December 21, 2015, the US Board of Governors of the Federal Reserve System issued guidance for the benefit of its examiners, as well as banking institutions, intended to consolidate its capital planning expectations for all large financial institutions and identify differences in its expectations, depending on the size and complexity of such institutions. For institutions that are bank holding companies and intermediate holding companies of foreign banks subject to the Federal Reserve Board's Large Institution Supervision Coordinating Committee framework, and firms with $250 billion or more in total consolidated assets or $10 billion or more in foreign exposures, the guidance explains expectations previously communicated to such institutions through prior Comprehensive Capital Analysis and Review exercises and related supervisory reviews. The guidance also clarifies capital planning processes for firms with more than $50 billion, but less than $250 billion in total consolidated assets, as well as less than $10 billion in foreign exposures, taking into account such firms' lower systemic risk profiles and less complex operations. Additionally, the guidance notes that bank holding companies with more than $50 billion in total consolidated assets are subject to the Federal Reserve Board's CCAR, which evaluates the firms' planned capital actions, such as dividend payments and share buybacks and issuances. The guidance is effective for the 2016 CCAR cycle.

The Federal Reserve Supervisory Assessment of Capital Planning and Positions for LISCC Firms and Large and Complex Firms is available at: http://www.federalreserve.gov/bankinforeg/srletters/sr1518.htm.

The Federal Reserve Supervisory Assessment of Capital Planning and Positions for Large and Noncomplex Firms is available at: http://www.federalreserve.gov/bankinforeg/srletters/sr1519.htm.

US Federal Reserve Board Seeks Public Comment on Proposed Policy Statement Regarding the Countercyclical Capital Buffer

On December 21, 2015, the Federal Reserve Board announced it is soliciting public comment on a proposed policy statement describing its framework for setting the Countercyclical Capital Buffer, a macroprudential tool that raises capital requirements on internationally active banking institutions when the risk of above-normal losses in the future is elevated. The CCyB, which applies to banking organizations that are subject to the advanced approaches capital rules (generally those with more than $250 billion in assets or $10 billion in on-balance-sheet foreign exposures) and to their depository institution subsidiaries, would aid such institutions in absorbing shocks in connection with declining credit conditions and help moderate fluctuations in the supply of credit. The proposed policy statement describes various financial-system vulnerabilities as well as issues for Federal Reserve Board consideration in setting the buffer, including leverage in the nonfinancial sector, leverage in the financial sector, maturity and liquidity transformation in the financial sector and asset valuation pressures. Calculations of the CCyB are based on private-sector credit exposures located in the US and, once fully phased in, the CCyB could range from 0 percent of risk-weighted assets to a maximum of 2.5 percent. Banks subject to the CCyB would face restrictions on capital distributions and the payment of discretionary bonuses if they fail to meet the buffer. The Federal Reserve Board, in consultation with the US Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, has voted to affirm the CCyB amount at the current level of 0 percent. The deadline for comment on the proposed policy statement is February 19, 2016.

The proposed policy statement is available at:

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20151221b1.pdf and the appendix to the statement is  available at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20151221b2.pdf.

US Federal Banking Agencies Issue Statement on Prudent Risk Management for Commercial Real Estate Lending

On December 18, 2015, the US Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency jointly issued a statement calling for sensible risk-management practices regarding commercial real estate lending in light of the substantial growth in many commercial real estate asset and lending markets. The federal banking agencies urged financial institutions to maintain underwriting discipline and practice prudent risk-management in order to identify, measure, monitor, and manage the risks arising from commercial real estate lending. The agencies also noted that some of the risks associated with commercial real estate lending that they have observed include increased competitive pressures, rising commercial real estate concentrations in banks, and an easing of commercial real estate underwriting standards. The statement reinforces existing guidance for commercial real estate risk management in particular, the guidance on concentrations issued in December 2006.

The statement is available at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20151218a1.pdf and the  2006 Concentration Guidance is available at: https://www.gpo.gov/fdsys/pkg/FR-2006-12-12/pdf/06-9630.pdf.

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