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 Federal Deposit Insurance Corporation Adopts Proposed Rule to Increase Deposit Insurance Fund to Statutorily Required Level
On October 22, 2015, the Federal Deposit Insurance Corporation issued for public comment a proposal to increase the reserve ratio of the Deposit Insurance Fund to the statutorily required minimum level of 1.35 percent. The Dodd-Frank Wall Street Reform and Consumer Protection Act increased the minimum for the reserve ratio from 1.15 percent to 1.35 percent and required the ratio to reach the new minimum by September 30, 2020. Moreover, the Dodd-Frank Act made this increase the responsibility of large banks with $10 billion or more in total assets. In effect, the proposed rule, if finalized, would impose upon banks a quarterly surcharge of 4.5 cents per $100 of their assessment base, with certain adjustments. It is expected that the surcharges will commence in 2016 and the reserve ratio would reach 1.35 percent following approximately eight quarters of payments of such surcharges (i.e. in advance of the required 2020 date). Comments on the proposed rule will be due 60 days after the rule is published in the Federal Register. The proposed rule and the FDIC Chairman's statement are available at:
The proposed rule and the FDIC Chairman's statement are available at: https://www.fdic.gov/news/board/2015/2015- 10-22_notice_dis_c_fr.pdf and https://www.fdic.gov/news/news/speeches/spoct2215b.html.
US Comptroller of the Currency Discusses Credit Risk
On October 21, 2015, Comptroller of the Currency, Thomas J. Curry, in a speech before the Exchequer Club, discussed the increasing credit risk in the federal banking system. Comptroller Curry believes the financial system is currently at a point in the market cycle where loan underwriting standards are weakening and credit risk is becoming an increasing point of focus. He stated, "...we should be asking whether banks have the appropriate risk management processes and structures in place to measure, monitor and control the increased credit risk they are taking on." In his remarks, the Comptroller mentioned leveraged lending and auto lending as two specific products of concern.
The Office of the Comptroller of the Currency press release and Comptroller's remarks are available at: http://www.occ.gov/news-issuances/news-releases/2015/nr-occ-2015-141.html and http://www.occ.gov/news- issuances/speeches/2015/pub-speech-2015-141.pdf.
European Commission Reports on EU Capital Requirements for Covered Bonds
On October 20, 2015, the European Commission published its report to the European Parliament and Council on the capital requirements for covered bonds as incorporated in the Capital Requirements Regulation. Under CRR, for banks investing in covered bonds that meet certain criteria, preferential risk weight is applied. The Commission is required to report on the appropriateness of: (i) the preferential risk weights taking into account types of cover assets, level of transparency on the cover pool and the impact of the covered bond issuance on the issuer's unsecured creditors; (ii) extending the preferential risk weights to covered bonds secured by certain aircraft loans; (iii) including covered bonds guaranteed by residential loans as eligible assets; (iv) the derogation for covered bonds backed by securitization instruments; and (v) the derogation for covered bonds backed by other covered bonds. The Commission considers the European Banking Authority's recommendations on the EU covered bond framework published in 2014 and sets out where it agrees with those recommendations and its proposed steps to implement them, including consulting with stakeholders on proposed changes to the legislative requirements. The Commission's recent consultation on the EU's covered bond framework under the Capital Markets Union initiative is also relevant and will impact on how the capital treatment for covered bonds is revised.
The Commission's Report is available at: http://eur-lex.europa.eu/legal- content/EN/TXT/PDF/?uri=COM:2015:509:FIN&from=EN and the EBA's Report is available at: https://www.eba.europa.eu/documents/10180/534414/EBA+Report+on+EU+Covered+Bond+Frameworks+and+Capital +Treatment.pdf.
European Commission Consultation on Remuneration Requirements under CRD IV
On October 22, 2015, the European Commission published a consultation on the possible impact of the maximum remuneration ratio rule for variable and fixed remuneration required by the Capital Requirements Directive. The consultation also addresses the overall efficiency of the remuneration rules as set out in the CRD and CRR, together known as CRD IV. The consultation aims to obtain views on the remuneration provisions of CRD IV, including on: (i) the efficiency, implementation and enforcement of the principle of proportionality, as well as the identification of any gaps arising from the application of the principle; (ii) compliance with the maximum ratio rule for variable and fixed remuneration as prescribed by the CRD; and (iii) the impact of the maximum ratio rule on competitiveness, financial stability and staff in non-EEA countries. The Commission must report back to the European Parliament and Council by June 30, 2016. Responses are due by January 14, 2016.
The European Commission's consultation page and consultation paper are available at: http://ec.europa.eu/justice/newsroom/civil/opinion/151015_en.htm and https://ec.europa.eu/eusurvey/runner/CRDRem2016.
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