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Financial Services Law Insights and Observations


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  • Fed vice chair calls for higher capital for large banks

    On July 10, Federal Reserve Board Vice Chair for Supervision Michael S. Barr delivered remarks at the Bipartisan Policy Center outlining proposed updates to capital standards. As part of his holistic review of capital standards for large banks, Barr concluded that the existing approach to capital requirements—including risk-based requirements, stress testing, risk-based capital buffers, and leverage requirements and buffers—was sound. He stated that the changes he proposes are intended to build on the existing foundation. Barr’s proposed updates include: (i) updating risk-based requirement standards to better reflect credit, trading, and operational risk, consistent with international standards adopted by the Basel Committee; (ii) evolving the stress test to capture a wider range of risks; and (iii) improving the measurement of systemic indicators under the global systemically important bank surcharge. Barr stated that at this time he was not recommending changes to the enhanced supplementary leverage ratio.

    Barr also proposed implementing changes to the risk-based capital requirements, referred to as the “Basel III endgame,” which are intended to ensure that the U.S. minimum capital requirements require banks to hold adequate capital against their risk-taking. These proposed changes include: (i) with respect to a firm’s lending activities, the proposed rules would terminate the practice of relying on banks’ own individual estimates of their own risk and would instead adopt a more transparent and consistent approach; (ii) regarding a firm’s trading activities, the proposed rules would adjust the way that the firm measures market risk, better aligning market risk capital requirements with market risk exposure and providing supervisors with improved tools; and (iii) for operational losses, such as trading losses or litigation expenses, the proposed rules would replace an internal modeled operational risk requirement with a standardized measure.

    Barr recommended that these enhanced capital rules apply only to banks and bank holding companies with $100 billion or more in assets. He emphasized that the proposed changes would not be fully effective for some years due to the notice and comment rulemaking process, and that any final rule would provide for an appropriate transition.

    Bank Regulatory Federal Issues Federal Reserve Capital Basel Risk Management

  • Agencies adopt Covid-19 rules on regulatory capital and appraisals

    Federal Issues

    Recently, the OCC, Federal Reserve Board, and FDIC (collectively, “the agencies”) adopted four interim final rules issued as a result of the Covid-19 pandemic as two final rules. Highlights of the rules include:

    • Regulatory Capital. The agencies issued a final rule covering revisions to the regulatory capital rule and the liquidity coverage ratio (LCR) rule made under three interim final rules. The final rule, which adopts three of the interim final rules as final with no changes, (i) allows financial institutions to participate in the Money Market Mutual Fund Liquidity Facility (MMLF) and Paycheck Protection Program Lending Facility (PPPLF) by neutralizing the regulatory capital effects of participating in each of the programs (covered by InfoBytes here and here); and (ii) modifies the agencies’ LCR rule to support participation in the MMLF and the PPPLF (covered by InfoBytes here).
    • Appraisals and Evaluations. The agencies adopted as final, with one revision, an interim final rule (covered by InfoBytes here) allowing regulated financial institutions to defer completion of appraisals and evaluations for certain residential and commercial real estate transactions, excluding those involving the acquisition, development, and construction of real estate. Financial institutions are allowed up to 120 days from the closing date to obtain the required appraisal or evaluation in order to expedite the liquidity needs of borrowers. The final rule is effective through December 31.

    Federal Issues Covid-19 MMLF Appraisal PPPLF LCR Capital Agency Rule-Making & Guidance

  • Agencies finalize three pandemic-related rules

    Federal Issues

    On August 26, the Federal Reserve Board, FDIC, and OCC finalized three rules that were temporarily issued in March and April to assist financial institutions during the Covid-19 pandemic. Highlights of the three rules include:

    • Community Bank Leverage Ratio (CBLR). The agencies adopted, without change, two interim final rules issued in April (covered by InfoBytes here) that temporarily lower the CBLR threshold and provide a gradual transition back to the prior level in order to enable qualifying community banking organizations to support lending during the Covid-19 pandemic. Effective October 1, the final rule, among other things, lowers the leverage ratio to eight percent through 2020 and increases the ratio to 8.5 percent in 2021 and nine percent in 2022.
    • Current Expected Credit Losses (CECL). The agencies adopted, without substantial change, an interim final rule issued in March (covered by InfoBytes here), which provides an additional two years to the three-year transition period that is already available to “mitigate the estimated cumulative regulatory capital effects” of CECL. The final rule expands the pool of eligible institutions to include any institution adopting CECL in 2020 and is effective upon publication in the Federal Register.
    • Capital distributions. The agencies adopted, without change, an interim final rule issued in March revising the definition of “eligible retained income” to allow for a more gradual application of any automatic limitations on capital distributions if an institution’s capital levels decline below certain levels. Additionally, the final rule includes the adoption of a Federal Reserve-only interim final rule (covered by InfoBytes here), similarly revising the definition of “eligible retained income” for purposes of the total loss-absorbing capacity rule. The final rule is effective January 1, 2021.

    Federal Issues Agency Rule-Making & Guidance FDIC OCC CECL Federal Reserve Capital Covid-19

  • Fed changes supplementary leverage ratio rule to increase credit flow

    Federal Issues

    On April 1, the Federal Reserve (Fed) released an interim final rule, which provides a short-term change to the calculation of the supplementary leverage ratio for holding companies (banks). This change temporarily allows banks to exclude their Treasury securities and Federal Reserve Bank deposits from the computation of the banks’ total assets, thus reducing the amount of capital the banks must maintain. The Fed suggested that the move will reduce the banks’ tier 1 capital requirements by around two percent, allowing them to take on more debt, resulting in an increase in available credit to households and businesses. The Fed stressed that it made this change to allow the banks to increase the flow of credit, and not to increase the banks’ capital distributions. The temporary change is effective immediately and will automatically revert on March 31, 2021. Comments on the rule must be submitted within 45 days of the announcement.

    Federal Issues Covid-19 Federal Reserve Capital Requirements Bank Holding Companies Federal Reserve System Capital Securities Deposits

  • SEC to host to virtual discussion on raising capital for small businesses

    Federal Issues

    On March 31, the SEC announced that the Office of the Advocate for Small Business Capital Formation will begin hosting a series of virtual discussions, each on “a particular area of the market, incorporating feedback from entrepreneurs, investors, and other market participants.” The first “Online Investment Capital Raising Virtual Coffee Break” will focus on the impact Covid-19 is having on raising capital, and will be held on April 3 at 11 am EDT. Additional information about the event can be found here, and participants can join the event by clicking here.

    Federal Issues SEC Capital Small Business Covid-19

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