Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The Federal Reserve Board has proposed steps to strengthen regulation and supervision of large bank holding companies and systemically important nonbank financial firms. The proposal, which includes a wide range of measures addressing issues such as capital, liquidity, credit exposure, stress testing, risk management, and early remediation requirements, is mandated by the Dodd-Frank Act.

The proposal generally applies to all U.S. bank holding companies with consolidated assets of $50 billion or more and any nonbank financial firms that may be designated by the Financial Stability Oversight Council as systemically important companies. The Board will issue a proposal regarding foreign banking organizations shortly. In general, savings and loan holding companies (SLHCs) would not be subject to the requirements in this proposal, except certain stress test requirements. The Board plans to issue a separate proposal later to address the applicability of the enhanced standards to SLHCs.

The Board is proposing a number of measures, including:

  • Risk-based capital and leverage requirements. These requirements would be implemented in two phases. In the first phase, the institutions would be subject to the Board’s capital plan rule, which was issued in November 2011. That rule requires firms to develop annual capital plans, conduct stress tests, and maintain adequate capital, including a tier one common risk-based capital ratio greater than 5 percent, under both expected and stressed conditions. In the second phase, the Board would issue a proposal to implement a risk-based capital surcharge based on the framework and methodology developed by the Basel Committee on Banking Supervision.
  • Liquidity requirements. These measures would also be implemented in multiple phases. First, institutions would be subject to qualitative liquidity risk-management standards generally based on the interagency liquidity risk-management guidance issued in March 2010. These standards would require companies to conduct internal liquidity stress tests and set internal quantitative limits to manage liquidity risk. In the second phase, the Board would issue one or more proposals to implement quantitative liquidity requirements based on the Basel III liquidity rules.
  • Special Corporate Governance Provisions.  The proposed rule would require that each covered company and each over $10 billion bank holding company establish a risk committee of the board of directors to document and oversee, on an enterprise-wide basis, the risk management practices of the company’s worldwide operations.  The Board proposes that a covered company and over $10 billion bank holding company’s risk committee must be chaired by an independent director.  In addition to the independent director requirements, the proposed rule would require at least one member of a company’s risk committee to have risk management expertise that is commensurate with the company’s capital structure, risk profile, complexity, activities, size, and other appropriate risk-related factors.  The proposed rule would require a company’s risk committee to have a formal, written charter that is approved by the company’s board of directors. In addition, the proposed rule would require that a risk committee meet regularly and as needed, and that the company fully document and maintain records of such proceedings, including risk management decisions.
  • Requirements for a Chief Risk Officer.  The proposed rule directs each covered company to appoint a CRO to implement and maintain appropriate enterprise-wide risk management practices for the company.  Under the proposed rule, a CRO would be required to have risk management expertise that is commensurate with the covered company’s capital structure, risk profile, complexity, activities, size, and other appropriate risk related factors.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

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