Shortly before year-end, the Federal Reserve Board
("FRB") proposed several rules to manage systemic risks presented by bank
holding companies with consolidated assets of $50 billion or more and by
nonbank financial institutions that are designated as systemically important by
the Financial Stability Oversight Council ("FSOC"). The proposed regulation (the
"Proposal") would implement the mandatory portions of sections 165 and 166 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act").
The Proposal includes seven sets of requirements for the
bank holding companies over the $50 billion mark and the (to-be-designated)
systemically important nonbanks (collectively, the "covered companies"): (i)
risk-based capital requirements and leverage limits,3 (ii) liquidity
requirements, (iii) single-counterparty credit limits, (iv) risk management,
(v) stress tests, (vi) the debt-to-equity ceiling, and (vii) early remediation.
Portions of the risk management and stress test provisions extend to banking
organizations with less than $50 billion but more than $10 billion in
As a whole, Proposal reflects a fair reading of the Act
and provides a level of detail that is a two-edged sword. On the one hand, the
details in the Proposal are helpful for a covered company to measure its
compliance with enhanced prudential standards. On the other hand, the specifics
in many of the new standards, including those relating to capital planning by
nonbank covered companies, liquidity, restrictions on single-counterparty
exposures, mandatory stress-testing, and early remediation, will compel all but
the very largest bank holding companies to revisit their risk management
systems to ensure that all of the particular requirements have been covered.
Areas that warrant careful attention include:
In addition to these core issues, the Proposal discusses
a few specific points that could have important operational consequences.
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