In this 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 Issues Proposed Rules Applying Enhanced Capital and Prudential Standards to Certain Insurance Companies
On June 3, 2016, the US Board of Governors of the Federal Reserve System issued proposed rules to apply enhanced prudential standards and capital standards to certain insurance companies within the Federal Reserve Board's jurisdiction. Specifically, the Federal Reserve Board issued an advance notice of proposed rulemaking that would apply capital standards to (i) systemically important insurance companies and (ii) insurance companies that own a bank or thrift. The ANPR would apply different capital standards to the two groups, but both approaches would be tailored to the differences between insurance companies and banks and would use insurance-focused risk weights and formulas that reflect the particular risks and liabilities faced by insurance companies.
The Federal Reserve Board concurrently approved a proposed rule to apply enhanced prudential standards to insurance companies designated as "systemically important" by the US Financial Stability Oversight Council. Under the proposed rule, a systemically important insurance company would be subject to the requirements applicable to systemically important financial institutions set forth under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requirements would apply heightened liquidity, corporate governance and risk-management standards to the firms.
Federal Reserve Board Chair Janet Yellen and Federal Reserve Board Governor Daniel Tarullo issued separate statements discussing the proposals, stating that the ANPR and the proposed rules for insurance companies would serve the purpose of applying more stringent regulation to firms that pose greater risks to the financial system, while at the same time creating tailored regulation that reflects the individual characteristics of financial institutions.
Comments on the ANPR and the proposed rule are due by August 2, 2016.
The full text of the ANPR is available at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160603a1.pdf.
The full text of the proposed rule is available at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160603a2.pdf.
The text of Chair Yellen's statement is available at: http://www.federalreserve.gov/newsevents/press/bcreg/yellen- opening-statement-20160603.htm.
The text of Governor Tarullo's statement is available at: http://www.federalreserve.gov/newsevents/press/bcreg/tarullo-opening-statement-20160603.htm.
US Board of Governors of the Federal Reserve System Announces Date of Release for Results of Supervisory Stress Tests and the Comprehensive Capital Analysis and Review
On June 2, 2016, the Federal Reserve Board announced that it would release results from the latest supervisory stress tests on Thursday, June 23, 2016. Results from the Comprehensive Capital Analysis and Review will be released on Wednesday, June 29, 2016. The stress tests, conducted pursuant to requirements in the Dodd-Frank Act, and the CCAR exercises aim to help large bank holding companies assess the sufficiency of their capital and capital planning processes, taking into account the unique risks of the institutions and the companies' risk measurement and risk management procedures.
The Federal Reserve Board's press release regarding the stress testing and CCAR results is available at: http://www.federalreserve.gov/newsevents/press/bcreg/20160602a.htm.
Final EU Legislation on Exclusion on the Application of Write-down or Conversion Powers Under the Bank Recovery and Resolution Directive
On June 1, 2016, a Commission Delegated Regulation further specifying the circumstances in which exclusion from the application of write-down or conversion powers is necessary under the Bank Recovery and Resolution Directive was published in the Official Journal of the European Union. Under the BRRD, the bail-in tool may be applied to all liabilities unless they fall within the list of liabilities explicitly excluded. The new Regulation provides that regulators may only exclude a liability if the obstacles invoked for such exercise do not allow for it to take place within a reasonable time. The BRRD only allows regulators to exclude a liability from bail-in, if it considers that it is not possible to bail-in the liability within a "reasonable time," which is determined by assessing when the write-down amount ultimately has to be determined; and then assessing, the time by which all tasks needed to bail-in those liabilities would need to be performed in order to meet the resolution objectives. The new Regulation specifies that regulators may exclude liabilities on the basis of it being necessary and proportionate to preserve critical functions and core business lines under the BRRD. The Regulation will apply from June 21, 2016.
The delegated regulation is available at: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2016.144.01.0011.01.ENG&toc=OJ:L:2016:144:TOC.
European Commission Consults on EU Implementation of the Net Stable Funding Ratio
On May 26, 2016, the European Commission published a consultation paper on the implementation of the Net Stable Funding Ratio at European Union level. The NSFR measures the assumed degree of stability of liabilities and the liquidity of assets over a one-year horizon. The Capital Requirements Regulation introduced reporting requirements for the NSFR without setting any more detailed requirements. The EBA published a report in December 2015 on whether, and how, it would be appropriate to ensure that institutions use stable sources of funding, supporting the Basel Committee NSFR at a European level but with some specificities regarding its calibration. To supplement the Commission's analysis of the EBA's report and Call for Evidence published in September 2015, the Commission is calling for a more nuanced treatment of specific business models and some transactions. The consultation seeks views on the treatment of specific aspects of the NSFR, derivative and short-term transactions (less than six months) with financial institutions and the application of the proportionality principle, in particular, the appropriate level of NSFR application and the criteria for defining institutions with a "low liquidity risk profile."
Responses to the consultation are due by June 24, 2016.
The consultation paper is available at: http://ec.europa.eu/finance/bank/docs/regcapital/crr-crd-review/20160526-nsfr-consultation_en.pdf.
The EBA report on NSFR is available at: https://www.eba.europa.eu/documents/10180/983359/EBA-Op-2015-22+NSFR+Report.pdf.
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