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The Federal Reserve Board’s Final
Dodd-Frank Systemic Prudential
Regulations for Domestic Banks
March 11, 2014 Presented By
Henry M. Fields
Oliver I. Ireland
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Today’s Discussion Topics
• Background
• Changes from the Proposals
• Coverage
• Capital
• Liquidity
• Risk Management
• Stress Testing
• Debt-to-Equity Limits
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Other Topics
• Deferred Rulemaking • Single-Counterparty Credit Limits
• Early Remediation Standards
• Enhanced Prudential Standards for Non-Bank Financial
Companies • Stress testing rules previously adopted apply
• Other enhanced prudential standards to be addressed on a case-by-case
basis
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Some Helpful Definitions
• Board – Federal Reserve Board
• BHCA – the U.S. Bank Holding Company Act
• BHC – Bank holding company as defined under the BHCA and Regulation Y
• SLHC – Savings and loan holding company as defined under Regulation LL
• DFA – Dodd-Frank Wall Street Reform and Consumer Protection Act
• $10BB BHC – a U.S. BHC with total consolidated assets of between $10BB
and $50BB
• $50BB BHC – a U.S. BHC with $50BB+ of total consolidated assets
• NBFC – a nonbank financial company that the Financial Stability Oversight
Council has determined under DFA Section 113 to be supervised by the
Board and for which such determination is still in effect
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Background
• Proposed in December 2011 under DFA Sections 165 and 166
• Section 165: Enhanced supervision and prudential standards for
systemically important banks and nonbank financial companies
• Section 166: Early remediation requirements for systemically important
banks and nonbank financial companies
• Designed to prevent or mitigate risks to U.S. financial stability that
could arise from the material financial distress or failure, or ongoing
activities of, large, interconnected financial institutions
• Enhanced prudential standards must increase in stringency based on
the systemic footprint and risk characteristics of the financial
institution
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Background
• Final Rule incorporates previously-issued capital plan and
stress test requirements
• Capital plan rule adopted in 2011 imposes enhanced risk-based
and leverage capital requirements on $50BB BHCs, and requires
submission of an annual capital plan to the Board that
demonstrates ability to maintain capital above minimum ratios
under baseline and stressed conditions
• DFA Section 165(i)(1) rules adopted in 2012 require $50BB BHCs
and NBFCs to conduct annual supervisory and semi-annual
company-run stress tests
• DFA Section 165(i)(2) rules adopted in 2012 require $10BB BHCs
and SLHCs and banks with more than $10BB in total
consolidated assets to conduct annual company-run stress tests
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Changes from Proposals
• Final Rule defers action on single-counterparty credit
limits and early remediation standards
• NBFCs
• Stress testing rules previously adopted apply
• Board intends separately to issue orders or rules imposing other
enhanced prudential standards on NBFCs on a case-by-case
basis
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Coverage
• Enhanced prudential standards generally apply to $50BB
BHCs
• $10BB BHCs that are publicly traded are subject to risk
committee requirements
• $10BB BHCs and SLHCs and banks with more than
$10BB in total consolidated assets are subject to annual
company-run stress test requirements
• NBFCs are subject to supervisory and company-run
stress test requirements
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Summary
Size Requirements Subpart of Final Rule
$10BB BHCs and SLHCs and banks with more than $10BB in total consolidated assets
Company-run stress tests Subpart B
$10BB BHCs that are publicly traded Risk committee Subpart C
$50BB BHCs Risk-based and leverage capital Risk management Risk committee Liquidity risk-management, stress-testing and buffers Supervisory stress tests Company-run stress tests Debt-to-equity limits (upon grave threat determination
Subpart D Subpart E Subpart F Subpart U
NBFCs Supervisory stress tests Company-run stress tests
Subpart E Subpart F
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Capital: $50BB BHCs • “Must comply with, and hold capital commensurate with the requirements of,
any regulations adopted by the Board relating to capital planning and stress
tests”
• Capital Plan Rule (issued Dec. 2011)
• Must submit annual capital plan to the Board that demonstrates ability to maintain
capital above the minimum risk-based capital ratios under expected conditions
and stressed scenarios over a minimum nine-quarter, forward-looking planning
horizon
• Companies with unsatisfactory capital plans face limits on ability to make capital
distributions
• Stress Test Rule (discussed later)
• Defines tier 1 common ratio by cross-reference to the capital plan rule
• Capital plans must reflect the results of company-run stress tests using the
scenarios provided under the DFA stress test rules
• Supervisory and company-run stress test results alone will not sufficiently address
all relevant outcomes that should be covered in a satisfactory capital plan
(although such results will be considered in the Board’s evaluation of the capital
plan)
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Capital: $50BB BHCs • Board issued Basel III-based revised regulatory capital framework in
July 2013
• New minimum common equity tier 1 capital ratio of 4.5%
• Raises minimum tier 1 ratio from 4% to 6%
• Minimum leverage ratio of 4%
• Implements strict eligibility criteria for regulatory capital instruments
• Introduces a standardized methodology for calculating risk-weighted assets
• Requires BHCs with total consolidated assets of $250BB+ or foreign exposures of
$10BB+ to meet a supplementary leverage ratio of 3%
• BHCs subject to advanced approaches generally subject as of January 1, 2014
• Other $50BB BHCs must comply by January 1, 2015
• Board issued final rule in February 2014 incorporating the revised
capital framework into the capital plan and stress test rules
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Capital: $50BB BHCs
• February 2014 final rule (cont.)
• $50BB BHCs must project regulatory capital ratios and meet the
minimum capital requirements for each quarter of the planning
horizon in accordance with the minimum capital requirements that
are in effect for that company during that quarter
• BHCs using the advanced approaches framework must
incorporate those changes into the capital planning and stress
testing cycles that begin October 1, 2015
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Risk Management
• $10BB BHCs that are publicly traded
• Must maintain a risk committee that:
• Approves and periodically reviews the risk-management policies
(formerly “practices”) of its global operations
• Oversees the operation of its global risk-management framework that
is commensurate with the structure, risk profile, complexity, and size
of the BHC
• Meets at least quarterly and fully documents and maintains records,
including risk-management decisions
• The risk committee must have:
• At least one member with risk management experience (formerly
“expertise”), and at least one “independent” member
• A formal, written charter that is approved by the BHC’s board of
directors
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Risk Management
• $50BB BHCs
• The same risk committee requirements that apply to $10BB BHCs
(regardless of whether stock is publicly traded)
• The BHC must appoint a chief risk officer, who must:
• Have risk management experience (formerly “expertise”)
• Be independently compensated
• Report directly to both the risk committee and CEO
• Oversee the establishment of, and monitor compliance with, risk
limits on an enterprise-wide basis
• Oversee the implementation of, and compliance with, risk
management policies and procedures
• Oversee the management, monitoring and testing of risks and risk
controls
• Report and resolve risk management deficiencies in a timely manner
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Risk Management
• $50BB BHCs (cont.)
• Risk committee’s responsibilities include the liquidity risk-
management responsibilities (discussed below)
• Must report directly to the BHC’s board of directors
• Must receive and review reports on not less than a quarterly basis
from the BHC’s chief risk officer
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Liquidity: $50BB BHCs
• Final Rule builds on the Board’s supervisory framework for liquidity
adequacy and liquidity risk management
• Based substantially on the Basel Committee’s “Principles for Sound Liquidity Risk
Management and Supervision”
• Requires $50BB BHCs to:
• Establish and maintain a liquidity risk management review function
independent of the management responsible for funding
• Regular (no less than annual) review of adequacy and effectiveness of
liquidity risk management processes and compliance with law
• Report material liquidity risk management issues to board of directors or risk
committee
• Produce comprehensive cash flow projections
• Monitor sources of liquidity risk and establish liquidity risk limits
consistent with liquidity risk tolerance
• Establish and maintain procedures for collateral, legal entity, and intraday
liquidity risk monitoring
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Liquidity: $50BB BHCs
• Establish and maintain a contingency funding plan
• Conduct monthly (or more frequently as the Board may require)
liquidity stress tests
• Must include, at a minimum, scenarios reflecting:
• Adverse market conditions
• Idiosyncratic stress event
• Combined market and idiosyncratic stresses
• Must be tailored to, and provide sufficient detail to reflect, a BHC’s capital
structure, risk profile, complexity, activities and size
• Policies, procedures and controls (including management information
systems) for liquidity stress testing are required
• Must maintain liquidity buffer of unencumbered “highly liquid assets”
• Must be sufficient to meet projected net stressed cash-flow need over 30-
day planning horizon
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Liquidity: $50BB BHCs
• Senior management must:
• Establish and implement strategies, policies and procedures
designed to effectively manage liquidity risk
• Establish liquidity risk limits
• Oversee the development and implementation of liquidity risk
measurement and reporting systems
• Approve new products and business lines based on liquidity risk
• Periodically review the independent review function
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Liquidity: $50BB BHCs
• Senior management must, at least quarterly: • Determine compliance with strategies, policies and procedures governing
liquidity risk management and liquidity stress testing
• Determine compliance with liquidity risk limits
• Report the liquidity risk profile and liquidity risk tolerance to the board of
directors or risk committee
• Review cash-flow projections and liquidity stress testing results
• Approve liquidity buffer
• And upon material revision, approve liquidity stress testing practices,
methodologies and assumptions
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Liquidity: $50BB BHCs
• Board of directors must: • Annually approve the BHC’s liquidity risk tolerance, taking into account
the capital structure, risk profile, complexity, activities and size of the
BHC
• Review information provided by senior management at least semi-
annually to determine compliance with liquidity risk tolerance
• Approve and periodically review the liquidity risk-management strategies,
policies and procedures established by senior management
• Risk committee (or a designated subcommittee thereof
composed of members of the board of directors) must: • Approve the contingency funding plan at least annually or upon revision
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Stress Testing
• A process to assess the potential impact of scenarios on the consolidated
earnings, losses, and capital of a company over a nine-quarter planning
horizon, taking into account the current condition of the company and its
risks, exposures, strategies, and activities
• Scenarios are those sets of conditions that affect the U.S. economy or the
financial condition of a company, including but not limited to baseline,
adverse, and severely adverse scenarios
• For company-run stress tests, the Board may require a company to:
• Include a trading and counterparty component in its adverse and severely adverse
scenarios (if engaged in significant trading activity)
• Include additional scenarios, or additional components in its adverse and severely
adverse scenarios (based on the company’s financial condition, size, complexity,
risk profile, scope of operations, or activities, or risks to the U.S. economy)
• Final Rule incorporates stress test requirements issued in October 2012
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Stress Testing
• $10BB BHCs and SLHCs and banks with more than
$10BB in total consolidated assets • Must conduct annual company-run stress tests using scenarios provided
by the regulator
• SLHCs with total consolidated assets of $50BB+ and banks that are
subsidiaries of $50BB BHCs:
• Must conduct stress test by January 5 of each calendar year based on data
as of September 30 of the preceding calendar year, unless extended by the
Board
• Must publicly disclose summary results between March 15 and March 31
• Other SLHCs and banks and $10BB BHCs:
• Must conduct stress test by March 31 of each calendar year based on data as
of September 30 of the preceding calendar year, unless extended by the
Board
• Must publicly disclose summary results between June 15 and June 30
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Stress Tests Guidance for $10BB Banks and
BHCs
• Interagency Supervisory Guidance* • Supervisory expectations regarding each requirement of the Dodd-Frank
stress test rules and illustrative examples of satisfactory practices
• Stress test time-lines
• Stress test scenarios
• Stress test methodologies and practices
• Estimating the potential impact on regulatory capital levels and capital ratios
• Controls, oversight, and documentation
• Reports to supervisors
• Public disclosure of stress tests
* OCC Bulletin 2014-5 (OCC, FRB, FDIC)
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Stress Testing: $50BB BHCs
• Must conduct annual and semi-annual company-run
stress tests
• Annual company-run stress tests must:
• Be conducted by January 5 of each calendar year based on data as of
September 30 of the preceding calendar year, unless extended by the Board
• Use scenarios provided by the Board
• Publicly disclose summary results between March 15 and March 31
• Semi-annual company-run stress tests must:
• Be conducted by July 5 of each calendar year based on data as of March 31
of that calendar year, unless extended by the Board
• Use at least three company-developed scenarios
• Publicly disclose summary results between Sept 15 and Sept 30
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Stress Testing: $50BB BHCs
• Also subject to annual supervisory stress test conducted
by the Board
• The Board’s stress test framework would rely on consolidated
data and other information supplied by each BHC
•BHCs must submit regulatory reports and any other required
information by mid-November
• Design focuses on the capital adequacy and does not focus on all
aspects of financial condition
• Standardized tests are not adjusted for each BHC
• Scenarios for upcoming annual cycle published by Board no later
than mid-November
• Board completes supervisory stress tests and compiles results by
mid-February, and discloses results by March 31
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Stress Testing: NBFCs
• NBFCs are subject to the same supervisory and
company-run stress test requirements for $50BB BHCs
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Debt-to-Equity Limits
• All U.S. BHCs:
• A conditional debt-to-equity limit of not more than 15-to-1, upon a
determination by the U.S. Financial Stability Oversight Council
that a BHC poses a “grave threat” to U.S. financial stability, and
that the debt-to-equity limit is necessary to mitigate that risk
• A company generally would be expected to make a good faith
effort to increase equity capital through limits on distributions,
share offerings, or other capital raising efforts prior to liquidating
margined assets in order to achieve the required ratio
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Deferred Rulemaking
• Single-counterparty Credit Limits • The Board is continuing to develop single-counterparty credit limits
required under DFA Section 165 based on the results of a quantitative
impact study conducted last summer and the Basel Committee’s initiative
to develop a regulatory framework governing large credit exposures that
would apply to all global banks
• Early Remediation Requirements (DFA Section 166) • The Board is continuing to review comments on early remediation
requirements and is integrating the remediation levels with the Basel III
capital rules adopted in July 2013
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