United States: Financial Regulatory Developments Focus December 16, 2014 Issue 46/2014

Bank Prudential Regulation & Regulatory Capital

Federal Reserve Board Proposes Additional Capital Surcharge for Global Systemically Important Banks

On December 9, 2014, the US Board of Governors of the Federal Reserve System ("Federal Reserve Board") issued proposed amendments to its risk-based capital rule. The proposed amendments would impose a risk-based capital surcharge on eight US global systemically important banks ("G-SIBs"). The proposal is based on the international standard adopted by the Basel Committee on Banking Supervision (the "Basel Committee") in November 2011 and would amend the Federal Reserve Board's risk-based capital rules. However, the US G-SIB surcharge would exceed the amount established by the Basel Committee and would be based in part on a firm's reliance on short-term wholesale funding. The stated goal of the G-SIB surcharge is to internalize the negative externalities posed by G-SIBs, including those arising from the perception that they are too-big-to-fail, protect the financial system from spillover risks due to the G-SIB's failure and correct for competitive distortions created by a G-SIB banks' systemic nature. The G-SIB surcharge, if adopted as proposed, would become effective on the same timeline as the capital conservation buffer and thus would be phased in beginning in 2016 and become fully effective on January 1, 2019.

The proposal is available at:


Federal Reserve Board Issues Proposal to Provide Additional Capital Information for Non-Stock Entities

On December 12, 2014, the Federal Reserve Board proposed amendments to its risk-based capital framework in relation to depository institution holding companies with non-traditional capital structures. The proposed rule sets out examples of instruments issued by non-stock entities, characteristics that prevent these instruments from counting towards tier 1 common equity capital, and provides suggestions on alterations that would allow them to count towards the requirements. The proposal would also add provisions relating to savings and loan holding companies and extend the deadline to January 1, 2016 from January 1, 2015 to allow for compliance with the new rules by the relevant entities.

The proposal is available at:


Adoption of Direct Recapitalization Instrument for Eurozone Banks

On December 8, 2014, the Board of Governors of the European Stability Mechanism ("ESM") announced that it adopted the Direct Recapitalization Instrument ("DRI") applicable to Eurozone banks, following the formation of the Banking Union (which consists of the Single Supervisory Mechanism ("SSM"), the Single Resolution Mechanism as well as funding arrangements which include the DRI). Previously, the ESM was only able to recapitalize financial institutions indirectly. The DRI now allows the ESM to recapitalize systemic and viable financial institutions directly, as a last resort measure and under certain specific circumstances, by providing a loan to the government of the relevant member state, who will then in turn recapitalize the bank.

For further details on the SSM, you may want to read our client note at:

http://www.shearman.com/~/media/Files/NewsInsights/Publications/2014/11/Ban king-Supervision-Within-the-Eurozone-The-Single-Supervisory-Mechanism-FIA FR-111714.pdf.

The press release and FAQs are available at:

http://www.esm.europa.eu/press/releases/esm-direct-bank-recapitalisation-instrum ent-adopted.htm and


European Banking Authority Overview on Implementation and Transposition of CRD IV

On December 10, 2014, the European Banking Authority ("EBA") published all of the information disclosed by EU competent authorities under the EBA's implementing technical standards on supervisory disclosure. The information published is in an aggregated format and organized in four sections, covering: (i) the rules and guidance adopted by each member state to implement and transpose the Capital Requirements Directive IV ("CRD IV") across the EU; (ii) the options and national discretions used by member states; (iii) the supervisory review and evaluation process; and (iv) the aggregate statistical data on the EU banking sector as at the end of 2013. The information disclosed covers all EU member states other than Cyprus, Lithuania, Poland and Portugal, for which updates are expected shortly.

The overview is available at:


Commission Lists Jurisdictions with Equivalent Supervisory and Regulatory Arrangements for Exposures to Credit Institutions, Investment Firms and Exchanges

On December 12, 2014, the European Commission published the Implementing Decision it has adopted on the equivalence of the supervisory and regulatory requirements of certain third countries for the treatment of exposures according to CRD IV, together with related FAQs. The Implementing Decision deems six jurisdictions have equivalent supervisory and regulatory arrangements for treatment of exposures to credit institutions, investment firms and exchanges: Brazil; Canada; China; Singapore; South Africa; and the US. The Implementing Decision will enter into force on 1 January 2015.

The Implementing Decision and FAQs are available at:

http://ec.europa.eu/finance/bank/docs/regcapital/acts/implementing/141212- implementing-decision_en.pdf and


Basel Committee Consultation on Net Stable Funding Ratio Disclosure Standards

On December 9, 2014, the Basel Committee issued a consultative paper on the net stable funding ratio ("NSFR") disclosure standards, following the publication of the NSFR standard in October 2014. The NSFR is a ratio structure requiring banks to address any liquidity mismatches and seeking to align the funding of longer-term illiquid assets with more stable financing, so as to reduce the risk of a bank's failure, which could potentially lead to broader systemic stress. The disclosure requirements aim to improve liquidity risk management, enhance the transparency of regulatory funding requirements and strengthen market discipline. In order for market participants to be able to consistently assess the funding risks of banks, it is important that a common disclosure framework be adopted. The disclosure standards are expected to come into effect from January 1, 2018 and would apply to all internationally active banks on a consolidated basis, though may be used for other banks and on any subset of entities of internationally active banks. Disclosure would be required as often as financial statements are published, and common templates will be used. The consultation closes on March 6, 2015.

The consultation document is available at:


Consultation to Identify Simple, Transparent and Comparable Securitizations

On December 11, 2014, the Basel Committee and International Organization of Securities Commissions jointly published a consultative document on criteria to identify simple, transparent and comparable securitizations. Fourteen criteria have been identified for the development of such securitizations, aiming to assist involved parties in evaluating the risks of certain securitizations when carrying out due diligence. The proposed criteria relate to key types of risk in the securitization process: (i) asset risk; (ii) structural risk; and (iii) fiduciary and servicer risk. The consultation closes on February 13, 2015.

The consultation document is available at:


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