Worldwide: Financial Regulatory Developments Focus — Issue 34, August 31, 2018

BANK PRUDENTIAL REGULATION & REGULATORY CAPITAL

US Federal Reserve Board, OCC and FDIC Expand 18-Month Examination Cycle for Small Banks and Branches and Agencies of Foreign Banks

On August 23, 2018, the U.S. Board of Governors of the Federal Reserve System, U.S. Office of the Comptroller of the Currency and U.S. Federal Deposit Insurance Corporation jointly issued an interim final rule and request for comment to expand the number of insured depository institutions and U.S. branches and agencies of foreign banks eligible for an 18-month on-site examination cycle. The interim final rule implements Section 210 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amends Section 10(d) of the Federal Deposit Insurance Act. Under the interim final rule, the Federal Reserve Board, OCC and FDIC are permitted to examine qualifying insured depository institutions with less than $3 billion in total assets on an 18-month cycle. Consistent with Section 7(c)(1)(C) of the International Banking Act, which provides that a federal or state branch or agency of a foreign bank be subject to the same on-site examination frequency as a national or state bank, the interim final rule also makes parallel changes with respect to the regulations governing the on-site examination cycle for U.S. branches and agencies of foreign banks. In order to qualify for the extended examination cycle, the institution must (i) have less than $3 billion in total assets; (ii) be well capitalized; (iii) have been found at its most recent examination to be well managed, with a composite condition of "outstanding" or "good;" (iv) not be subject to a formal enforcement proceeding or order by the FDIC or the institution's respective federal banking regulatory agency; and (v) have not undergone a change in control during the previous 12-month period in which a full-scope, on-site examination otherwise would have been required. The interim final rule will take effect upon its publication in the Federal Register, with comments due within 60 days of publication.

The full text of the interim final rule is available at: https://www.occ.treas.gov/news-issuances/news-releases/2018/nr-ia-2018-82a.pdf.

US Federal Reserve Board, OCC and FDIC Issue Interim Final Rule With Respect to the Treatment of Certain Municipal Obligations as High-Quality Liquid Assets

On August 22, 2018, the U.S. Board of Governors of the Federal Reserve System, U.S. Office of the Comptroller of the Currency and U.S. Federal Deposit Insurance Corporation jointly issued an interim final rule and request for comment to treat "liquid and readily-marketable," investment grade municipal obligations as level 2B high-quality liquid assets (HQLAs) for purposes of the liquidity coverage ratio rule. The interim final rule implements Section 403 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amends Section 18 of the Federal Deposit Insurance Act and requires the Federal Reserve Board, OCC and FDIC to treat qualifying municipal obligations as high-quality liquid assets (i.e., level 2B liquid assets) for purposes of the LCR rule and any other regulation that incorporates the definition of "high-quality liquid asset" or similar term. For purposes of the LCR rule, the term "municipal obligation" is defined to mean "an obligation of a state or any political subdivision thereof or any agency or instrumentality of a state or any political subdivision thereof." In order for a municipal obligation to qualify as a HQLA, it must be liquid and readily-marketable and investment grade at the time of calculation. With respect to the definition of liquid and readily-marketable, the interim final rule harmonizes the definition across the three agencies and adopts the Federal Reserve Board's definition, which defines the term as a security that is traded in an active secondary market with: (i) more than two committed market makers; (ii) a large number of non-market maker participants on both the buying and selling sides of transactions; (iii) timely and observable market prices; and (iv) a high trading volume. Section 403 also provides that the term "investment grade" has the meaning given in 12 C.F.R. Part 1, which requires that the issuer of a security has adequate capacity to meet financial commitments (meaning that the risk of default is low and full and timely repayment is likely) under the security for the projected life of the asset or exposure. In addition, consistent with the EGRRCPA, the Federal Reserve Board is rescinding its 2016 amendments to the LCR rule, which treated a narrower range of municipal obligations as HQLAs. With respect to FDIC- and OCC-regulated financial institutions, municipal obligations were not previously permitted to be treated as HQLAs. The interim final rule will take effect upon its publication in the Federal Register, with comments due within 30 days of publication.

The full text of the interim final rule is available at: https://www.occ.treas.gov/news-issuances/news-releases/2018/nr-ia-2018-81a.pdf.

European Central Bank Issues Opinion on Proposed Prudential Framework for Investment Firms

On August 22, 2018, the European Central Bank published an Opinion on the legislative proposals adopted by the European Commission in December 2017 for a new framework for the prudential regulation of investment firms. The framework proposed by the European Commission comprises a proposal for a regulation on the prudential requirements of investment firms (including amendments to the Capital Requirements Regulation, the Markets in Financial Instruments Regulation and the European Banking Authority Regulation) along with a proposal for a directive on the prudential supervision of investment firms, which includes amendments to the CRD IV Directive and the revised Markets in Financial Instruments Directive. The ECB was asked by the European Parliament and the Council of the European Union to provide its opinion on the proposed framework in January 2018.

In the Opinion, the ECB states that it generally supports the objectives of the proposed framework, which are to create a prudential framework better suited to the risks and business models of different types of investment firms and to subject systemically important investment firms to the same prudential rules as credit institutions.

The ECB's Opinion sets out detailed comments on and proposed amendments to the text of the Commission's proposals on the following issues:

  • classification of investment firms as credit institutions;
  • authorization of certain investment firms as credit institutions;
  • statistical implications of changing definitions;
  • macro-prudential perspective on investment firms;
  • provision of services by third-country firms; and
  • alignment of the proposals with the CRD IV Directive, the CRR and MiFID II.

The ECB Opinion is available at: http://www.ecb.europa.eu/ecb/legal/pdf/en_con_2018_36_f_sign.pdf and details of the proposed prudential framework are available at: https://finreg.shearman.com/eu-proposals-for-an-amended-prudential-regime-for.

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