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 Banking Agencies Issue Interim Final Rules Allowing More Banks and Savings Associations to Qualify for 18-Month Examination Cycle
On February 19, 2016, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly issued interim final rules that will allow certain well-capitalized and well- managed insured depository institutions with less than $1 billion in total assets to qualify for an 18-month examination cycle, rather than a 12-month cycle. Institutions are considered to be well-capitalized and well-managed if they have a composite examination rating of 1 or 2—the top ratings in the five-point scale indicating the safety and soundness of a bank or savings association.
The rules are estimated to increase the number of institutions that may qualify for an 18-month examination cycle by approximately 617, to nearly 5,000 insured depository institutions. In addition, the rules increase the number of US branches and agencies of foreign banks that may qualify for an 18-month examination cycle by 26 branches and agencies, to a total of 89. The changes are intended to reduce regulatory compliance costs for smaller institutions, while still maintaining safety and soundness protections. Comments to the rules will be accepted for 60 days from publication in the Federal Register.
The interim final rules and request for comments is available at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160219a1.pdf.
US Federal Reserve Board Notifies Firms of Enhancements to Federal Reserve Models Used to Estimate Operational Risk and Capital
On February 17, 2016, the Federal Reserve Board sent a letter to firms participating in the upcoming Dodd-Frank Act Stress Test (DFAST) and Comprehensive Capital Analysis Review (CCAR) notifying them of certain enhancements to aspects of its operational risk and capital models. Among the enhancements to operational risk models are losses from expenses related to put- back mortgages, as well as potential costs form unfavorable litigation outcomes. For DFAST 2016, the Federal Reserve Board notes that it will use historically-based loss projections (with two new modifications) using an average of two models, while dropping the loss distribution approach. Changes to capital models include incorporating greater precision in the adjustments to the regulatory capital ratio denominators, as well as modifying assumptions regarding the relationship between mortgage servicing assets and associated deferred tax liabilities.
The letter is available at: http://www.federalreserve.gov/bankinforeg/model-changes-20160217.pdf.
Federal Reserve Bank of Minneapolis President Delivers Speech Arguing that Banks are Still Too Big to Fail
On February 16, 2016, in a speech at the Brookings Institution in Washington, DC, Federal Reserve Bank of Minneapolis President Neel Kashkari argued that banks are still too big to fail and remain a significant, ongoing risk to the US economy. Kashkari noted that the Dodd-Frank Act did not go far enough and that regulators should consider breaking up large banks into smaller entities, turning them into public utilities by forcing them to hold higher levels of capital (as high as 25% of total assets), and taxing leverage throughout the financial system. According to Kashkari, the Minneapolis Fed will launch an initiative to consider transformational options through policy symposiums and policy briefs and create an actionable plan to end too big to fail that will be released by year-end for consideration by legislators, policymakers, and the public. Kashkari's predecessor at the Minneapolis Fed, Narayana Kocherlakota, responded to Kashkari's proposals, noting that such measures, particularly imposing higher capital standards, would have "adverse macroeconomic consequences."
Kashkari's speech is available at https://www.minneapolisfed.org/news-and-events/presidents-speeches/lessons-from-the-crisis-ending-too-big-to-fail.
Kocherlakota's response is available at: https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/2-16-16.
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