Financial Law Blog

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Tag: Large Banks

FRB proposes changes to CCAR and stress testing rule; Governor Tarullo outlines next steps

The Federal Reserve Board this Monday proposed changes to CCAR and stress testing rules for the 2017 cycle. Governor Tarullo on the same day delivered a speech outlining significant changes to the programs to be proposed in early 2017.

Key changes to be made to the CCAR program in 2017 (proposed rule)

  • The proposal exempts “large and noncomplex firms” from the qualitative component of CCAR. Large and noncomplex firms are those with assets above $50 billion but under $250 billion, on-balance sheet foreign exposure under $10 billion, and nonbank assets under $75 billion.
  • The proposal narrows the de minimis exception to the limitation on distributions in the capital plan rule.

Key changes to stress testing and CCAR programs after 2017 (to be proposed in early 2017)

    1. Stress Capital Buffer
  • Introduces a firm-specific “stress capital buffer,” (SCB) which would be set to the maximum decline in a firm’s CET1 capital ratio under the severely adverse scenario of the supervisory stress test before including planned capital distributions. It would have a floor of 2.5%.
  • The SCB for each firm would be recalculated after each year’s stress test. A capital plan under which the firm would fall into the buffer under the stress test’s baseline projections would not be approved.
  • Any GSIB capital surcharge, as well as any countercyclical capital buffer, would be added to the SCB (along with the 4.5% Basel III minimum CET1 ratio) to arrive at the total CET1 capital ratio required to be maintained after any distributions.
  • 2. Potential Modeling Changes
  • May assume that planned dividends will continue to be paid out under stress — but only for one year — while planned share repurchases will be “reduced”
  • May assume that balance sheets and risk-weighted assets remain constant over the severely adverse scenario horizon
  • May make changes in the unemployment rate less severe during downturns
  • May tie hypothesized path of house prices to disposable personal income
  • May incorporate funding shocks, liquidity shocks, and spillovers from the default of common counterparties into models
  • 3. Public Disclosures
  • Public disclosures will include more details on components of projected net revenues of program participants

FRB orders Goldman Sachs to pay $36.3 million relating to violations of confidential supervisory information rules

The FRB today ordered Goldman Sachs to pay a $36.3 million civil money penalty arising from violations of rules regarding confidential supervisory information. The release states that the “Board expects all firms, including Goldman Sachs, to comply with all U.S. laws, rules, and regulations.” (emphasis supplied)

The majority of supervisory information received by banks from their regulators is considered confidential. That is, confidential supervisory information is not only internal materials that regulators don’t share with banks. Each of the FRB, OCC, and FDIC has its own rules on what specifically constitutes “confidential” supervisory information, and under what circumstances banks can share it — even with their attorneys, financial advisers, and potential transaction partners. Under the rules, not only the sender but also the recipient of supervisory information could be in violation if the information is “confidential.”

The FRB’s release may be a reminder to practitioners to take their obligations under the rules regarding confidential supervisory information seriously, lest the regulators do that for them.

Large banks predominantly engaged in retail commercial banking receiving M&A approval from FRB

The Federal Reserve Board yesterday approved Huntington Bancshares’ acquisition of FirstMerit. Both are large institutions — Huntington Bancshares has assets of $71.1 billion and FirstMerit $25.5 billion. On closing Huntington would become the 34th largest depository in the United States.

This merger was approved by the FRB within 6 months of announcement and the approval mirrors the recent Federal Reserve Board approval of KeyCorp’s acquisition of First Niagara Financial Group Inc. In the financial stability analysis, the FRB highlighted that both companies are “predominantly engaged in retail commercial banking activities” and the resulting institution would not be overly complex.

OCC releases guidance on corporate governance and the risk governance framework for supervised banks

The OCC released guidance today on corporate governance and enterprise risk management for OCC-supervised financial institutions. The document is a booklet which will be incorporated into the OCC’s Comptroller’s Handbook.

The guidance contains a discussion of expectations regarding board structure, committees, and the risk governance framework, integrating guidance which practitioners had been cobbling together from a variety of sources in the past.

The guidance also contains the OCC’s views on risk management systems (which are part of the “risk governance framework”) including the “three lines of defense” — front line units, independent risk management, and internal audit.

Risk management guidance for banks with direct or indirect exposure to oil & gas borrowers released by FDIC

The FDIC released supervisory guidance this week to FDIC-supervised financial institutions with direct or indirect oil & gas exposure.

“When O&G related borrowers experience financial difficulties, the FDIC encourages financial institutions to work constructively with borrowers to strengthen the credits and to mitigate losses where possible.” The release of this guidance suggests that this is an area of supervisory concern, particularly for institutions with concentrated exposures. The FIL warns that if a bank’s exposure to O&G remains concentrated notwithstanding efforts at diversification, that “may indicate the need for capital levels higher than the regulatory minimums.”

The FIL, which applies to large institutions as well as those with assets under $1 billion, makes a number of recommendations regarding institutional risk management policies. For example:

  • When working with troubled borrowers, a “well-conceived workout plan and effective internal controls” are required.
  • Management should closely monitor all credit concentrations and report the results of concentration monitoring programs regularly to the board of directors.

Additional reporting lines for Chief Compliance Officers of FCMs, SDs and MSPs are possible according to CFTC Staff guidance

CFTC Staff issued guidance yesterday confirming that additional reporting lines for Chief Compliance Officers are possible.

Regulation 3.3 applies to FCMs and swaps registrant entities. It requires the Chief Compliance Officer of a registrant to report directly to its CEO or Board. The intention of this requirement is to assure the CCO’s independence from the business unit.

Larger institutions, which may have layers of management at the parent level above the registrant, sought assurance that their CCOs could have additional reporting lines outside of the registrant. The Staff noted possibilities such as the registrant’s CCO reporting to a global CCO of the parent company or to another senior officer responsible for multiple of the parent’s lines of business. Each of these arrangements is not foreclosed, noted the Staff, but whether they comply with the rule will depend on “all relevant facts and circumstances.”

Large bank M&A a possibility for some institutions, regulators say

The Federal Reserve Board recently approved KeyCorp’s acquisition of First Niagara Financial Group Inc. Both are large institutions — KeyCorp has assets of $98.6 billion and First Niagara $40.1 billion. On closing KeyCorp would become the 26th largest depository in the United States.

The FRB noted that both companies are “considered to be well managed” and that the acquirer’s “risk-management program appears consistent with approval.” In approving the large deal, the FRB highlighted that both companies are “predominantly engaged in retail commercial banking activities” and the resulting institution would not be overly complex.

Large banks looking to expand may see this as a welcome development, especially considering the widely held belief that regulators have been lukewarm about any proposed combinations among the large institutions.  F.N.B. Corp. and Yadkin Financial also announced merger plans on Thursday.

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