In this week's newsletter, we provide a snapshot of the principal U.S., 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 Office of the Comptroller of the Currency Announces Technical Amendments to Stress Testing Regulation
On February 23, 2018, the U.S. Office of the Comptroller of the Currency issued a final rule that makes certain technical amendments to its annual stress testing regulation. The stress testing regulation provides that the OCC may require an institution to include trading and counterparty components in its adverse and severely adverse scenarios if the institution has significant trading activities. Under the final rule, the date range of this position data has been expanded from between January 1 and March 1 of the current calendar
year to between October 1 of the preceding calendar year and March 1 of the current calendar year. The final rule notes that this will provide the OCC with greater flexibility in establishing an appropriate as-of date and that the U.S. Board of Governors of the Federal Reserve System has made a similar change to its corresponding regulations. The final rule also amends and clarifies the transition period for institutions that meet the $50 billion asset threshold, which subjects the institution to different stress testing requirements.
Under the final rule, if an institution crosses the $50 billion threshold in the fourth quarter of a calendar year, it will not be subject to the supervisory stress testing requirement until the third calendar year after it crossed the threshold. Otherwise, institutions become subject to the over $50 billion stress testing requirements two calendar years after crossing the threshold. The final rule also makes definitional and other technical changes. The final rule will become effective 30 days from its publication in the Federal Register.
The full text of the final rule is available at: https://www.occ.treas.gov/news-issuances/news-releases/2018/nr-occ-2018-20a.pdf.
US Federal Deposit Insurance Corporation Issues Final Rule Amending International Banking Regulations
On February 14, 2018, the Federal Deposit Insurance Corporation adopted amendments to its international banking regulations that primarily impact the asset pledge requirements applicable to FDIC-insured branch offices of non-U.S. banks (of which there are only 10) as well as certain securities-related powers of foreign branch offices of state non-member banks, which depend in part on whether the branch is transacting in investment grade securities. The amendments implement Section 939A of the Dodd-Frank Act, which generally requires the removal of reliance on credit ratings in banking (and other) regulations for determining the creditworthiness of a security or money market instrument. Under the amended regulation, an investment grade security is one "whose issuer has adequate capacity to meet all financial commitments under the security for the projected life of the exposure." This means that the risk of default by the obligor is low and that full and timely repayment of principal and interest is expected. FDIC-insured branch offices of foreign banks are required to pledge investment grade assets to the FDIC, and such assets must meet the new standard. In addition, in light of lessons learned from the financial crisis, the FDIC has added a liquidity standard and a fair value haircut requirement for pledged assets. The FDIC noted that the haircut requirement could require foreign banks that pledge a predominance of bank notes and CDs to pledge additional collateral, but that the overall impact on FDIC-insured branches is expected to be minimal.
Interestingly, the FDIC will also now permit cash to be pledged, but only if the depository institution holding the cash holds it separate from the general funds of the bank and does not commingle it with any cash or other property of the depository institution. No interest may be paid on the cash because the depository may not lend, invest or otherwise use the cash in its operations. The FDIC noted that it is reviewing pledge agreements to determine what modifications may be needed (if any) in light of the amendments.
The final rule takes effect on April 1, 2018.
The full text of the final rule is available at: https://www.fdic.gov/news/news/financial/2018/fil18009a.pdf.
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