by Edmund D. Harllee
On Thursday, January 5, the Federal Reserve Board (the
"Board") issued proposed new Regulation YY, in order to implement changes
required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Sections 165 and 166 of the Act require the Board to
impose various "enhanced prudential standards" on so-called "covered
companies." Two types of covered companies would be regulated under new
Regulation YY, domestic bank holding companies having total consolidated assets
of $50 billion or more and domestic non-bank financial companies that the new
Financial Stability Oversight Counsel (the "Counsel") has designated as
requiring such regulation by the Board. The Board intends to issue
proposed additional regulations in the future with respect to the other types
of covered companies.
The Board's proposed rule would generally regulate
domestic covered companies in the following seven main areas, as required under
Capital Requirements and Leverage Limits.
The Board proposes to comply with the Act's requirements in two ways:
The Board is proposing a multi-stage approach to
implementing this requirement. Initially, covered companies would be
required to conduct internal stress tests at least monthly to measure liquidity
needs at 30-day, 90-day and one-year intervals during times of financial
instability in the market, and to hold liquid assets sufficient to cover 30-day
stressed net cash outflows under these scenarios. Other initial
requirements would be specific governance requirements, cash flow projections,
internal limits on certain liquidity metrics and the maintenance of a
"contingency funding plan."
In the future, the Board intends to implement, along with
other federal banking agencies, standard liquidity rules currently implemented
under Basel III and under review by U.S. federal banking
The Act prohibits covered companies from having credit exposure to any
unaffiliated company that exceeds 25% of the capital stock and surplus of the
covered company, but permits the Board by regulation to lower this
threshold. The proposed rule would lower this threshold to 10% where
either the covered company or the counterparty has more than $500 billion in
total consolidated assets, or is a non-bank covered company. The proposal
also contains rules for measuring the amount of credit exposure associated with
various types of credit transactions.
Management and Risk Committees.
The proposal requires enhanced risk management standards for covered
companies. Publicly traded covered companies and publicly traded bank
holding companies having $10 billion or more in total consolidated assets will
be required to establish a risk committee of the board of directors, the
composition of which is set forth in the proposed regulation. All covered
companies would have to implement "robust" enterprise-wide risk management
policies overseen by a risk committee and a "chief risk officer." All
publicly traded bank holding companies having $10 billion or more in total
consolidated assets would have to establish a risk committee.
The proposal requires two types of capital adequacy stress testing:
The results of the above stress tests are to be made
Under the Act, upon the determination by the Counsel that a covered company
poses a grave threat to the financial stability of the United States and that
such threat will be mitigated by such action by the Counsel, the Board must
require such company to maintain a debt-to-equity ratio of no more than
15-to-1. The proposed regulation defines these terms and establishes
procedures for notice to the company of the Counsel's determination.
The proposed regulation establishes a procedure for the early warning of
financial distress at covered companies and requirements for the remediation
process. This procedure includes various triggers to alert the company to
potential problems, including triggers based on regulatory capital, supervisory
stress test results, market indicators and weaknesses in enterprise-wide and
liquidity risk management.
The proposed rule is 70 pages long in the Federal
Register and contains many specific requests for comments, in addition to
the general request.
Covered companies and others may comment, and should do
so if they think that the proposed new regulation, or the specifics of the
implementation of the regulation as published in the notice, will have an
adverse effect on their businesses. According to the notice of proposed
rulemaking, comment letters should refer to Docket No. R-1438 and RIN No.
7100-AD-86 and may be mailed electronically to firstname.lastname@example.org.
There are other methods of submitting comments, as set forth in the
notice. The comment period ends March 31, 2012.
you have any questions about the information in this Alert, please contact Ed
Harllee at email@example.com.