On January 15, the Basel Committee on Banking Supervision issued final guidance regarding anti-money laundering/counter-terrorism financing (AML/CTF) risk management. The Committee states that the guidelines are consistent with and supplement the 2012 International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation issued by the Financial Action Task Force. The guidelines supersede two previously-issued Basel Committee publications: Customer due diligence for banks (October 2001) and Consolidated KYC management (October 2004). The final guidelines detail the “essential elements” of sound AML/CTF risk management, including those related to (i) assessing and understanding risks; (ii) customer acceptance policies; (iii) customer and beneficial owner identification; (v) ongoing monitoring; (vi) information management and record keeping; and (vii) reporting suspicious transactions and asset freezing. The guidelines also address AML/CTF in the group-wide and cross-border context, and outlines expectations for banking supervisors.
On July 23, the FDIC proposed a rule to revise its assessments regulation. Specifically, the FDIC proposes changing the ratios and ratio thresholds for capital evaluations used in its risk-based deposit insurance assessment system to conform the assessments to the prompt corrective action capital ratios and ratio thresholds adopted by the prudential regulators. The proposal also would (i) revise the assessment base calculation for custodial banks to conform to the asset risk weights adopted by the prudential regulations; and (ii) require all highly complex institutions to measure counterparty exposure for deposit insurance assessment purposes using the Basel III standardized approach credit equivalent amount for derivatives and the Basel III standardized approach exposure amount for other securities financing transactions. The FDIC explains the changes are intended to accommodate recent changes to the federal banking agencies’ capital rules that are referenced in portions of the assessments regulation.Comments are due by September 22, 2014.
On October 24, the Federal Reserve Board issued a proposed rule it developed with the OCC and the FDIC to establish a minimum liquidity coverage ratio (LCR) consistent with the Basel III LCR, with some modifications to reflect characteristics and risks of specific aspects of the U.S. market and U.S. regulatory framework. The proposal would create for the first time a minimum liquidity requirement for certain large or systemically important financial institutions. The covered institutions would be required to hold (i) minimum amounts of high-quality, liquid assets such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash, and (ii) liquidity in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a short-term stress period. The requirements would apply to all internationally active banking organizations—i.e., those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure—and to systemically important, non-bank financial institutions designated by the FSOC. The proposal also would apply a less stringent, modified LCR to bank holding companies and savings and loan holding companies that are not internationally active, but have more than $50 billion in total assets. The regulators propose various categories of high quality, liquid assets and also specify how a firm’s projected net cash outflows over the stress period would be calculated using common, standardized assumptions about the outflows and inflows associated with specific liabilities, assets, and off-balance-sheet obligations. Comments on the proposed rule must be submitted by January 31, 2013.
On September 24, the Federal Reserve Board issued two interim final rules that clarify how companies should incorporate the Basel III regulatory capital reforms into their capital and business projections during the next cycle of capital plan submissions and stress tests. The first interim final rule clarifies that in the next capital planning and stress testing cycle, bank holding companies with $50 billion or more in total consolidated assets must incorporate the revised capital framework into their capital planning projections and into the stress tests using the transition paths established in the Basel III final rule. This rule also clarifies that for the upcoming cycle, capital adequacy at these companies will continue to be assessed against a minimum 5% tier 1 common ratio calculated in the same manner as under previous stress tests and capital plan submissions. For most banking organizations with between $10 billion and $50 billion in total consolidated assets, the second interim final rule provides a one-year transition period. During their first stress test cycle (scheduled to begin October 1), these companies will be required to calculate their projections using the current regulatory capital rules in order to allow time to adjust their internal systems to the revised capital framework. Both rules clarify that covered companies will not be required to use the advanced approaches in the Basel III capital rules to calculate their projected risk-weighted assets in a given capital planning and stress testing cycle unless the companies have been notified by September 30 of that year.
On August 15, the OCC issued bulletin OCC 2013-17 regarding its final lending limits rule. In June 2012, the OCC promulgated an interim final rule to apply its existing lending limits rule to certain credit exposures arising from derivative transactions and securities financing transactions, as required by the Dodd-Frank Act. With the interim final rule and subsequent actions, the OCC extended the compliance date while it accepted comments and prepared a final rule. As explained in the bulletin, the final rule outlines permissible methods available to banks to measure credit exposures arising from derivative transactions and securities financing transactions. For derivative transactions, banks can generally choose to measure credit exposure through (i) the Conversion Factor Matrix Method, which uses a lookup table that locks in the attributable exposure at the execution of the transaction, (ii) the Current Exposure Method, which replaces the Remaining Maturity Method included in the interim final rule and provides a more precise calculation of credit exposure, or (iii) an OCC-approved internal model. For securities financing transactions, the final rule specifically exempts securities financing transactions relating to Type I securities and for other securities financing transactions allows banks to (i) lock in the attributable exposure based on the type of transaction, (ii) use an OCC-approved internal model, or (iii) use the Basel Collateral Haircut Method, which applies standard supervisory haircuts for measuring counterparty credit risk for such transactions under the capital rules’ Basel II Advanced Internal Ratings-Based Approach or the Basel III Advanced Approaches. The final rule also extends the compliance period through October 1, 2013.
On July 9, the FDIC and the OCC approved a final rule to implement the risk-based and leverage capital requirements in the Basel III framework and relevant provisions mandated by the Dodd-Frank Act. The same rule was approved on July 2 by the Federal Reserve Board. The final rule (i) increases the minimum common equity tier 1 capital requirement from 2% to 4.5% of risk-weighted assets; (ii) increases the minimum tier 1 capital requirement from 4% to 6% of risk-weighted assets; and (iii) adds a new capital conservation buffer of 2.5% of risk-weighted assets. The rule also establishes a minimum leverage ratio of 4% for all banking organizations. In response to concerns raised by smaller and community banking organizations, the regulators did not finalize more onerous capital requirements that would have substantially increased the risk-weightings for residential mortgages, as explained in more detail in our recent post. The final rule does not change the more stringent limits on the inclusion of mortgage servicing assets and deferred tax assets in regulatory capital calculations, but does extend the phase-in period for community banks. Internationally active banks must begin to implement the new capital rules in January 2014, while all other banking organizations will have until January 2015 to begin to phase in the new capital requirements. Also on July 9, the FDIC and the OCC approved a proposed rule that would require bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody to maintain a tier 1 capital leverage buffer of at least 2% above the minimum supplementary leverage ratio requirement of 3%, for a total of 5%. Failure to exceed the 5% ratio would subject covered companies to restrictions on discretionary bonus payments and capital distributions. The proposed rule also would require insured depository institutions of covered holding companies to meet a 6% supplementary leverage ratio to be considered “well capitalized” for prompt corrective action purposes. The proposal suggests a phase-in period for the rule with an effective date of January 1, 2018. Comments on the proposal are due 60 days after it is published in the Federal Register.
On July 2, the Federal Reserve Board approved a final rule to implement the risk-based and leverage capital requirements in the Basel III framework and relevant provisions mandated by the Dodd-Frank Act. The rule will require all banks to hold increased levels of higher quality capital. Specifically, the rule (i) increases the minimum common equity tier 1 capital requirement from 2% to 4.5% of risk-weighted assets; (ii) increases the minimum tier 1capital requirement from 4% to 6% of risk-weighted assets; and (iii) adds a new capital conservation buffer of 2.5% of risk-weighted assets. These minimum capital requirements remain unchanged from the agencies proposal issued last June. The rules also establish a minimum leverage ratio of 4% for all banking organizations.
On February 28, the European Parliament announced that negotiators from the Parliament and the European Council agreed to alter bank capital rules and limit executive pay. The capital requirements, developed to implement aspects of Basel III, would raise to eight percent the minimum thresholds of high quality capital that banks must retain. The announcement does not specify what types of capital would satisfy the requirement, but does indicate that good quality capital would be mostly Tier 1 capital. With regard to executive pay, the base salary-to-bonus ratio would be 1:1, but the ratio could increase to a maximum of 1:2 with the approval of at least 65 percent of shareholders owning half the shares represented, or of 75 percent of votes if there is no quorum. Further, if a bonus is increased above 1:1, then a quarter of the whole bonus would be deferred for at least five years. Finally, the legislation would require banks to disclose to the European Commission certain information that subsequently would be made public, including profits, taxes paid, and subsidies received country by country. The European Parliament is expected to vote on the legislation in mid-April, and each member state also must approve the legislation. Once approved, member states must implement the rules through their national laws by January 2014.
On February 19, House Financial Services Committee members Shelley Moore Capito (R-WV) and Carolyn Maloney (D-NY) sent a letter to the Federal Reserve Board, the OCC, and the FDIC regarding the lawmakers’ concerns about the implementation of Basel III. Citing potential compliance costs and the potential derivative impact on consumers, Representatives Capito and Maloney ask that the agencies carefully tailor the Basel III capital requirements to ensure they are appropriate for community banks. The House and Senate have in recent months placed significant focus on the Basel III rulemakings, with both houses recently holding hearings on the issue and lawmakers previously sending letters to the regulators.
On January 7, the Basel Committee released its revised Liquidity Coverage Ratio (LCR), a component of the comprehensive Basel III accords that also address capital standards. The committee’s LCR is intended to promote short-term resilience of a bank’s liquidity risk and reduce the risk of the banking sector harming the broader economy by failing to absorb shocks arising from financial and economic stress. The LCR requires that a bank have an adequate stock of unencumbered high-quality liquid assets that can be converted into cash easily and immediately in private markets to meet a 30-day liquidity stress scenario. The revised LCR updates standards originally adopted by the Committee in 2010. Given slower than expected strengthening of the banking system and the broader economy, and in response to industry requests, the Committee decided to expand the range of eligible assets to include corporate debt, unencumbered equities, and highly-rated residential mortgage-backed securities. The Committee also clarified its intention to allow banks use their high-quality liquid assets in times of stress. Finally, the Committee revised the timetable for phase-in of the standard. The standard will take effect as planned on January 1, 2015, but the minimum requirement will begin at 60%, rising 10 percentage points each year until full implementation on January 1, 2019.