Interagency framework for prudential standards, capital, liquidity, and resolution planning

Key points

• The FRB, OCC, and FDIC adopted final rules that establish a tailoring framework for the application of prudential standards and capital and liquidity requirements to large domestic banking organizations and foreign banking organizations based on their size and risk profiles. The final rules reflect few changes from the agencies’ previous proposals.
• The FRB and FDIC adopted a joint final rule that aligns resolution planning requirements with the agencies’ approach for applying prudential standards and introduces two new limited information resolution plans along with extended filing frequencies. Again, the final rule is largely unchanged from the previous proposal.
• Initial filings will be required on July 1, 2021, except for certain FBOs.
• All of the final rules will become effective 60 days after publication in the Federal Register.
• Separately, the FRB proposed to align its assessment fees for supervision and regulation of large BHCs and SLHCs with the tailoring framework.

Final Tailoring Rules

The Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) approved two final rules that together establish a framework to tailor prudential standards and capital and liquidity requirements for large domestic banking organizations (including non-insurance, non-commercial savings and loan holding companies (SLHCs) with $100 billion or more in total consolidated assets) and foreign banking organizations (FBOs) based on multiple factors of risk and complexity, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. 

The two final rules, collectively the Tailoring Rules, are comprised of:

• An FRB-only rule covering the FRB’s authority to apply enhanced prudential standards related to capital and liquidity stress testing, liquidity risk management and buffer requirements, risk management, and single counterparty credit limits (SCCL) for domestic banking organizations and FBOs (proposals released in October 2018 and April 2019, respectively).
• A joint final rule of the FRB, OCC, and FDIC that covers applicability thresholds for capital and liquidity requirements for domestic banking organizations and the U.S. intermediate holding companies (IHCs) of covered FBOs (proposals released in October 2018 and April 2019, respectively).
  
  (Please refer to KPMG’ Regulatory Alerts for the rule proposals here and here for a more detailed description of the proposal rules.)

Except for the following key changes, the structure of the proposed framework, including the calibration and calculation of the thresholds and risk-based indicators for determining each category as well as the enhanced prudential standards and capital and liquidity requirements, remains largely unchanged.

Click here to view the FRB’s summary chart of the final Tailoring Rules.

Key changes

• The final rule appears to align the LCR and NSFR calculation frequencies. It suggests that firms subject to daily LCR reporting will also be required to calculate NSFR on a daily basis rather than quarterly as in the current NSFR proposal. The reporting mechanism for NSFR was not formalized and is expected to be further contemplated in future rulemaking.
• Category III firms with less than $75 billion of weighted short-term wholesale funding (wSTWF) will be subject to a reduced Liquidity Coverage Ratio (LCR), calibrated at 85 percent of the full LCR.
• Category IV firms that have $50 billion or more in wSTWF will be subject to an LCR requirement, calibrated at 70 percent of the full LCR. The same percentages will apply to the Net Stable Funding Ratio (NSFR) when it is finalized.
• Minor modifications to certain reporting requirements: FBOs will have extended time to file the amended FR Y-15 (Systemic Risk Report); FBOs will not be required to complete the FR Y-15 with respect to their U.S. branches and agencies; covered SLHCs will have extended time to file their first FR Y-14 (Capital Assessments and Stress Testing Reports); and all Category IV firms will be permitted to submit the monthly FR 2052a on a T+10 basis.
• The FRB indicates it will be focusing attention on standardized liquidity requirements for U.S. branches and agencies of FBOs “in the coming months.”
• The standardized liquidity requirements and the SCCL will be applied based on the risk profile of an FBO’s U.S. IHC rather than the risk profile of the FBO’s combined U.S. operations.
• The final rule does not include changes to the definitions of a “large and complex” and “large and noncomplex” bank holding company (BHC) for purposes of the FR Y-14 reports. The FRB states these changes will be considered in conjunction with other changes to the capital plan rule as part of a separate proposal.

Category determination

U.S. BHCs, covered U.S. SLHCs, and U.S. IHCs must determine the category of standards that applies to them on the effective date of the Tailoring Rules using data from the FR Y-15 and FR Y-9LP reports as of March 31, 2019; June 30, 2019; September 30, 2019, and December 31, 2019. Certain specific requirements are identified for U.S. IHCs.

FBOs will be required to determine the category of standards that applies to their combined U.S. operations on the submission date of the FR Y-15 following the June 30, 2020 as-of date. As such, FBOs will be required to comply with the category standards applied to their U.S. operations beginning October 1, 2020.

Final resolution planning requirement

The FRB and the FDIC adopted a joint final rule that amends their resolution planning requirements. The final rule is largely unchanged from the agencies’ proposed rule in terms of scope of application, filing frequency, and plan content (please refer to KPMG’s earlier Regulatory Alert here for a more detailed outline of these requirements) but does contain certain modifications.

Key changes

• Biennial filers (Category I firms - U.S. G-SIBs) will not be permitted to request waivers/changes to certain informational elements in their “full” resolution plans. The agencies, however, may grant a waiver on their own initiative to any Biennial filer.
• Triennial full filers and Triennial reduced filers (Category II and III firms and Other FBOs) may request waivers/changes to information elements in their resolution plans; requested changes will be permitted only if both agencies approve the change (rather than deemed granted unless both agencies deny the request). Such requests must be submitted at least 18 months before the related resolution plan submission date.
• Triennial reduced filers that have an identified critical operation must establish and implement a process designed to identify each of its critical operations once they have submitted their required resolution plan in 2022.
• Waivers granted for a critical operations process and methodology will remain in effect until the covered company is required to submit its next full resolution plan.
• All firms will be required to affirm that no material change has occurred, if applicable, in each of their full, targeted, or reduced resolution plans.
• The agencies will identify any shortcomings or deficiencies in a resolution plan and provide feedback on the plan no later than 12 months after the plan is submitted, “absent extenuating circumstances.” Also, additional notice will be given when submission dates or plan content requirements are changed.

Requirements for covered companies’ initial resolution plans will be determined based on their categorization under the Tailoring Rules on October 1, 2020 as follows:

The agencies clarify that a firm’s total consolidated assets are determined on the basis of total consolidated assets as reported on each of its four most recent quarterly reports or two most recent annual reports.

The agencies individually addressed the requirements for firms that would have been required to file a resolution plan in 2019 or 2020 by extending the due date or limiting required submissions, as appropriate.

Proposed amendments to the assessment of fees

The FRB separately approved a proposed rule that would amend its Regulation TT (Supervision and Regulation Assessments of Fees) to:

• Raise the minimum asset threshold from $50 billion to $100 billion in total consolidated assets for BHCs and certain SLHCs to be defined as an “assessed company”.
• Align the assessment framework with the risk-based categories in the Tailoring Rules.
• Adjust (i.e., reduce) the assessment rate for Category IV firms along with “other” firms (assessed companies that are not subject to the Categories I through IV under the Tailoring Rules, such as insurance SLHCs and FBOs with a small U.S. presence) by an estimated 10 percent to reflect the decline in supervision and regulation required for this group of firms because of the Tailoring Rules.
• Preclude firms with between $100 billion and $250 billion in total consolidated assets that are subject to Category I, II, or III standards from eligibility for the adjusted (lower) assessment rate.

Comments will be accepted by the FRB through December 9, 2019.

KPMG perspective

The Tailoring Rules do not modify regulatory capital or liquidity requirements for firms subject to Category I and II standards. Similarly, Category I firms will continue to submit resolution plans every two years, as they have been recently required to do. The agencies emphasize that the final rules retain the most stringent requirements for the largest and most complex firms while imposing less burden on firms that pose less risk.

FBOs must consider the potential outcome that the use of the risk indicators, including cross-jurisdictional activity, nonbank assets, wSTWF, and off-balance exposures, could result in assignments to different standards categories for the determination of their separate prudential, capital, and liquidity requirements and may also be different than the category that would have been assigned if based solely on asset size. 

With regard to the resolution planning requirements, the intent to reduce burden both on filers and regulators will need to be met with well-documented and automated processes in order to maintain continuity of knowledge and processes between the extended filing periods. As such, it is vital that resolution plan filers maintain detailed policies and procedures covering this process as well as integrate the effort with other operational processes.