The Federal Reserve’s Proposed Enhanced Prudential Standards for Foreign Banks Explored
In December 2012, the Federal Reserve issued the proposed enhanced prudential standards for foreign banking organizations (FBOs) having total global consolidated assets of US$50 billion or more. The proposal, which will go into effect on July 1, 2015, is expected to bring unprecedented and significant changes to the regulation of FBOs with new requirements to address risk management, stress testing, early remediation, liquidity and debt-to-equity limits among others. With the proposed standards to implement a “rebalanced approach” in regulating non-US banks with U.S. operations, large FBOs will be mandated to establish an intermediate holding company (ICH) that will hold all US bank and nonbank subsidiaries and shall be subject to U.S. capital, liquidity and other enhanced prudential standards on a consolidated basis.
The Knowledge Group is producing “The Federal Reserve’s Proposed Enhanced Prudential Standards Explored LIVE Webcast,” to help FBOs, multinational banks and other affected financial institutions learn the significant issues surrounding the proposal and its potential impact on their businesses. Our assembled panel of thought leaders will help finance executives understand all the significant issues with respect to this important topic including:
Requirement to Establish a Top-Tier U.S. IHC
IHC Subject to U.S. BHC Capital Requirements
Liquidity Requirements for U.S. Operations of a Large FBO
Single Counterparty Credit Limits
Risk Management and Risk Committee Requirements
Stress Testing Requirements
Early Remediation Framework
Application to Foreign Nonbank SIFIs
Impact Assessment and Development of an Effective Implementation and Compliance Plan
And so much more!
This live webcast is a must attend for all finance executives, senior management, corporate lawyers, banking and finance attorneys and other related professionals who need to be in the know with respect to the proposed enhanced prudential standard.
Richard Coffman, General Counsel,
Institute of International Bankers
Barbara R. Mendelson, Partner,
Morrison & Foerster
Hugh C. Kelly, Principal and National Lead, Bank Regulatory Advisory Group,
Fed Concerns Regarding FBOs Arising from the Financial Crisis
- Shift from “lending branch” to “funding branch” model
- Over reliance on short-term USD wholesale funding with corresponding maturity mismatches
- Need for US liquidity support
- Fed, as host country regulator, has limited visibility into FBOs’ total risk profiles, risk management capabilities and strategy
- Increased concentration, interconnectedness and complexity
- Expansion into capital markets – 5 of top 10 broker-dealers are FBO-owned
- Resolution aspects – the location of capital and liquidity is critical as resolution regimes remain nationally based and pre-crisis home/host supervisory arrangements (ie, MOUs) were found to be lacking
The Existing US Regulatory Framework Applicable to FBOs
- Flexibility to operate through multiple structures
- Branches, agencies, insured depository institution subsidiaries and bank holding companies, broker-dealers and other nonbank financial companies with or without intermediate US holding companies
- Fed with umbrella oversight of all FBO US operations regardless of degree of consolidation
- Fed’s application of SR 08-09 to FBO’s led to inconsistent implementation of the “virtual bank holding company” concept
- Roles and authorities of multiple functional regulators
- Reliance on home country consolidated oversight in accordance with international standards
Statutory Requirements of Section 165 – Enhanced Prudential Standards
- Statutory Purpose (Section 165(a)(1))
- “prevent or mitigate risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities of large, interconnected financial institutions”
- The Statutory Solution (Section 165(a)(1))
- Application by the Fed of prescribed enhanced prudential standards to “bank holding companies with total consolidated assets equal to or greater than $50,000,000” (where “bank holding company” is defined to include FBOs that own US banks as well as FBOs that do not own a US bank but operate US branches/agencies)
- Mandatory requirements (Section 165(b)(1)(A))
- risk-based capital and leverage limits
- liquidity requirements
- overall risk management requirements
- resolution plan and credit exposure report requirements
- concentration limits
- Also: stress testing (Section 165(i)) – supervisory and company-run
- debt-to-equity limits (Section 165(j))
- Discretionary requirements (Section 165(b)(1)(B))
- contingent capital
- enhanced public disclosures
- short-term debt limits
- “such other prudential standards as the [Fed], on its own, or pursuant to a recommendation by [FSOC], determines are appropriate”
The Statutory Approach
- Section 165(a)(1)(B) – degree of stringency of standards to increase based on a variety of factors
- Section 165(a)(2)(A) – “differentiate among [covered] companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities (including the financial activities of their subsidiaries), size and any other risk-related factor that the [Fed] deems appropriate”
- Specific directives regarding standards for foreign financial companies
- Section 165(b)(2)(A) – “give due regard to the principle of national treatment and equality of competitive opportunity”
- Section 165(b)(2)(B) – “take into account the extent to which the foreign financial company is subject on a consolidated basis to home country standards that are comparable to those applied to financial companies in the United States”
Consequences of Failure To Abide by Standards – Early Remediation Requirements of Section 166
- Statutory Purpose (Section 166(b))
- “establish a series of specific remedial actions to be taken by [a covered company] that is experiencing increasing financial distress, in order to minimize the probability that the company will become insolvent and the potential harm of such insolvency to the financial stability of the United States”
- Remediation Requirements (Section 166(c))
- Fed to define measures of a company’s financial condition, “including regulatory capital, liquidity measures, and other forward-looking indicators”
- Remedial actions to increase in stringency as the financial condition of the covered company deteriorates
- Initial stages – limits on capital distributions, acquisitions and asset growth
- Later stages – capital restoration plan and capital raising requirements, limits on transactions with affiliates, management changes, asset sales
Proposed Implementation of Sections 165 and 166 for Large FBOs
- In the interest of time, concentrate on the most significant aspects of the proposal
- The Intermediate Holding Company (IHC) Requirement
- Risk-Based Capital and Leverage Limits
- FBOs Themselves
- Liquidity Measures
- FBOs Themselves
- Risk management requirements for FBOs with larger US footprint (Section 165(h) of the Dodd-Frank Act)
- Required oversight of enterprise-wide risk management for the combined U.S. operations of the FBO by a Chief Risk Officer and a risk committee
- Risk committee can be a committee of the global board of directors (stand alone or part of the FBOs enterprise wide risk management) or a committee of the IHC board of directors
- U.S. Chief Risk Officer must be employed by a U.S. subsidiary or office of the FBO
- FBOs will have to implement and coordinate the U.S. risk management with its global risk governance, management and control infrastructure
- Single Counterparty Credit Limits
- FBOs Themselves
- Early Remediation
- National treatment/equality of competitive opportunity and home country standards (Section 165(b)(2)(A) and (B) of the Dodd-Frank Act) :
- Mandate of Dodd-Frank Act to give due regard to national treatment and equality of competitive opportunity and take into account the extent to which the foreign financial institution is subject on a consolidated basis to home country standards that are comparable to U.S. standards
- Tailoring – one size does not fit all (Section 165(a)(2)(A) of the Dodd-Frank Act)
- Proposed rules do not differentiate sufficiently among companies on an individual basis or by category when prescribing more stringent prudential standards under Section 165
- Tailored approach should consider an FBO’s capital structure, risk to the U.S. financial system, complexity, financial activities, size and other risk-related factors
- Proposed rules would apply to over 100 FBOs, most of them with only a limited footprint in the United States (and without being a risk to the U.S. financial system)
- Tailored measures should address the specific risks of an FBO to the U.S. financial system and not an FBO’s general risks
- Early remediation triggers (Section 166 of the Dodd-Frank Act)
- General impact of U.S. regulatory action on home country remediation/resolution – necessity for coordination and cooperation between U.S. regulators and home country regulators
- Ring-fencing contrary to global development
- Application of the early remediation triggers as of January 1, 2015, whereas Basel III will not take fully effect until January 1, 2019
Overview of Comments
- Foreign Government and Regulatory Authorities
- Trade Associations
- Individual Banks
Who Should Attend:
– Banks Executives
– Financial/Accounting Managers
– Risk Managers
– Treasury Managers
– Executive Officers
– Risk Analysts & Controllers
– Financial Analysts
– Heads and Operating Staff of Liquidity Management, Liquidity Controlling and Treasury Departments
– Banking & Finance Lawyers
– Business Consultants
– Chief Risk Officers
– And Other Interested Professionals
Richard Coffman is General Counsel of the Institute of International Bankers (IIB). Mr. Coffman has been deeply involved in foreign bank regulatory matters for over 25 years and has served as IIB General Counsel since 2006. The IIB is the only national association devoted exclusively to representing and advancing the interests of the international banking community in the United States. Its advocacy efforts on legislative and regulatory matters are directed at achieving results that are consistent with the U.S. policy of national treatment and appropriately limit the extraterritorial application of U.S. laws to the global operations of its member institutions. Mr. Coffman holds J.D. and Ph.D. degrees from Columbia University and a Bachelor of Arts degree from Southern Methodist University.
Richard Coffman is General Counsel of the Institute of International Bankers (IIB). Mr. Coffman has been deeply involved in foreign …
Barbara Mendelson is a partner in the Financial Services Group in the New York office. Her practice involves advising foreign and U.S. banks in a variety of complex regulatory matters, including sales and acquisitions of U.S. banking and nonbanking firms, applications to federal and state bank regulators for expansion of activities and new products, Bank Secrecy Act and OFAC matters and over-the-counter and exchange-based trading of various instruments and derivatives. She has represented foreign banks in their U.S. operations for more than 25 years. Ms. Mendelson has also been instrumental in forming a number of commercial bank subsidiaries of foreign bank holding companies. In addition to her bank regulatory practice, Ms. Mendelson works with sovereign entities and multilateral organizations with respect to the investment of their foreign currency assets.
Ms. Mendelson is a contributing author of Regulation of Foreign Banks & Affiliates in the United States (West 2012) and a co-author of Considerations for Foreign Banks Financing in the US, published by International Financial Law Review (2012). Ms. Mendelson was awarded a “Lawyer of the Year” designation by Best Lawyers in America (2013) in the category of Financial Services Regulation Law (New York City). She has been recommended as a leading lawyer by International Financial Law Review for 2012, Chambers USA for 2012, Legal 500 US for 2012 and by Super Lawyers 2012, and has been recognized in Best Lawyers in America (2013) and International Who’s Who of Banking Lawyers 2011. Ms. Mendelson was shortlisted for Euromoney Legal Media Group Americas Women in Business Law Awards in both 2012 and 2013 in the category of Financial Regulation.
She serves on the Banking Law Committee of the New York City Bar Association and is also a member of the New York County Lawyers Association Banking Law Committee and the American Bar Association. Additionally, Ms. Mendelson is a member of the Committee of the Cyrus R. Vance Center for International Justice of the New York City Bar Association.
Barbara Mendelson is a partner in the Financial Services Group in the New York office. Her practice involves advising foreign …
• Over 30 years financial services regulatory and advisory experience, including 26 years with the U.S. Office of the Comptroller of the Currency (OCC) as the Senior Advisor for Global Banking, Global Banking Division Head, and examiner-in-charge of large banking institutions.
• Since 2004, Hugh is KPMG U.S.’s Lead National Partner for Bank Regulatory Advisory Services.
Professional and Industry Experience
• Led numerous projects to assist large financial institutions address bank regulatory safety/soundness and compliance examination requirements.
• Areas of focus include Board governance and enterprise risk management, internal audit, Basel II implementation, operational risk AMA, credit risk, market risk, treasury risk, regulatory reporting, third party risk management (including off-shoring), information security, and cross-border regulatory challenges.
• Assisted a number of U.S. and global institutions with new bank and BHC charters and licenses as well as to meet the regulatory reform requirements from the Dodd-Frank Act (DFA) and regulatory reform.
• Conducted “mock examinations” to prepare clients for bank regulatory examinations and DFA.
• New bank charter and US branch
• Led KPMG’s assistance to BITS and The Financial Services Roundtable on their study on “Reconciliation of Regulatory Overlap for Management and Supervision of Operational Risk” in U.S. Financial Institutions, which identified overlapping regulatory compliance requirements in SOX 404, FDICIA, GLBA 501b and the Basel II AMA Guidance for Operational Risk Management.
• While at OCC, led US regulatory development of Basel II, including Operational Risk AMA rules and guidance for large banks. Co-led Interagency Basel II bank benchmarking reviews of operational risk AMA frameworks.
• Served on several Basel Committee on Banking Supervision working groups and numerous international supervisors committees.
Bank regulatory and examination processes concerning risk management, capital (Basel II), regulatory reporting, operational risk, IT risk management and regulatory compliance, including cross-border “home-host” issues.
Publications and Speaking Engagements
• Frequent speaker and instructor on regulatory compliance, Basel II, ERM, internal audit, operational risk, and technology risk management issues at industry and regulatory conferences.
• Contributor to various Basel Committee on Banking Supervision working group papers.
Background • Over 30 years financial services regulatory and advisory experience, including 26 years with the U.S. Office of …
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Institute of International Bankers
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