The U.S. banking agencies have proposed allowing custodial banking organizations to exclude certain central bank deposits from the calculation of total leverage exposure, the denominator of the U.S. Basel III supplementary leverage ratio (SLR). The proposal implements Section 402 of the Economic Growth, Regulatory Relief and Consumer Protection
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Andrew Rohrkemper
Mr. Rohrkemper is an associate in Davis Polk's Financial Institutions Group. [Full Bio]
Visual Memorandum: A New Cut – Federal Reserve and U.S. Banking Agencies Propose Tailored Regulatory Framework
The move away from a one-size-fits-all regulatory framework based on asset size continues.
On October 31, the Federal Reserve proposed a rule to implement Section 401 of the Economic Growth, Regulatory Relief and Consumer Protection Act, tailoring enhanced prudential standards for firms with $100 billion or more in total consolidated…
Continue Reading Visual Memorandum: A New Cut – Federal Reserve and U.S. Banking Agencies Propose Tailored Regulatory Framework
Federal Banking Agencies Relax LCR Treatment of Municipal Bonds in Line with EGRRCPA
The three Federal banking agencies jointly released an interim final rule on August 22, 2018 that amends the agencies’ respective liquidity coverage ratio (LCR) rules to treat as level 2B high-quality liquid assets (HQLAs) any municipal obligation that is both (1) “liquid and readily marketable” and (2) “investment grade.” The…
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Basel Committee Publishes Revised Assessment Methodology for GSIBs
The Basel Committee on Banking Supervision last week published a revised assessment methodology to determine whether a banking organization is a global systemically important bank (“GSIB”) and a GSIB’s associated capital surcharge requirement. The revised methodology reflects the following changes from the current methodology, which are expected…
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Federal Reserve Releases 2018 CCAR Results
The Federal Reserve last week released the results of its 2018 Comprehensive Capital Analysis and Review (CCAR). We have analyzed the 2018 CCAR results, along with the Dodd-Frank Act Stress Test results published the previous week, and have prepared a graphical summary available here. As our summary shows, on…
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Federal Reserve and OCC Propose Tailoring of Enhanced Supplementary Leverage Ratios for GSIBs and their IDIs
The Federal Reserve and the OCC have proposed a rule that would recalibrate the enhanced supplementary leverage ratio (eSLR) requirements applicable to U.S. GSIBs and their insured depository institution (IDI) subsidiaries, and related requirements, by tailoring the eSLR levels to 50 percent of each firm’s GSIB surcharge. The proposal would…
Continue Reading Federal Reserve and OCC Propose Tailoring of Enhanced Supplementary Leverage Ratios for GSIBs and their IDIs
Federal Reserve Proposes Stress Capital Buffer Requirements in Overhaul of CCAR
The Stress Buffer Requirements (SBR) Proposal would fundamentally restructure how the Federal Reserve’s stress testing and capital planning framework is used to impose capital requirements for large banking organizations. In general, the proposal would shift the quantitative capital requirements based on a firm’s pro forma stress losses, which currently are…
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Visual Memorandum: Senate Bipartisan Banking Bill to Rebalance the Financial Regulatory Landscape
The Senate passed the Economic Growth, Regulatory Relief and Consumer Protection Act (S.2155) on March 14 by a filibuster-proof vote of 67 – 31. The Senate bill still must pass the House, where Rep. Jeb Hensarling (R-TX) and other representatives have said they plan to propose a series of amendments…
Continue Reading Visual Memorandum: Senate Bipartisan Banking Bill to Rebalance the Financial Regulatory Landscape
Senate Bipartisan Banking Bill Offers Relief from Stress Testing, Capital and Liquidity Requirements
The Bipartisan Banking Bill would provide banking organizations with relief from their stress testing, capital and liquidity requirements by adjusting the thresholds, frequency and substance of these rules. The bill – which recently passed in the Senate, as described in a recent post here – is now being considered in the House, where Rep. Jeb Hensarling (R-TX) and other representatives have said they plan to propose a series of amendments.
This post summarizes how the Bipartisan Banking Bill would change the U.S. banking agencies’ stress testing, capital and liquidity rules – including by adding a new and unusual statutory override of the U.S. banking agencies’ Basel III capital rules for higher-risk commercial real estate exposures that was not included in earlier versions of the bill.
We have also published a visual memorandum here that goes into more detail on these and other elements of the bill.
Changes Surviving from Earlier Drafts of the Bill
As passed by the Senate, the Bipartisan Banking Bill preserves most of the changes that earlier versions of the bill would have made to the stress testing, capital and liquidity rules – as discussed in our previous posts here, here and here. These changes include the following:
- Supplementary Leverage Ratio (SLR) for Custody Banks. The bill would direct the U.S. banking agencies to exclude certain central bank deposits from the total leverage exposure (the SLR denominator) of a custody bank—defined as a “depository institution holding company predominantly engaged in custody, safekeeping and asset servicing activities,” together with its insured depository institution subsidiaries. Central bank reserves of a custody bank would be excluded only to the extent of the value of client deposits at the custody bank that are linked to fiduciary, custody or safekeeping accounts.
- The bill does not specifically define “predominantly engaged.”
- The bill specifically includes a rule of construction that nothing in this provision would limit the U.S. banking agencies’ authority to tailor or adjust the SLR or any other leverage ratio for any bank that is not a custody bank.
- Treatment of Municipal Securities under the Liquidity Coverage Ratio (LCR). The U.S. banking agencies would be required to consider certain investment grade municipal securities as Level 2B high quality liquid assets for purposes of the LCR. These proposed changes to the LCR are consistent with H.R. 1624, which passed the House on October 3, as discussed in an earlier post here.
- Thresholds and Frequency of Dodd-Frank Act Company-Run Stress Tests. The statutory thresholds for Dodd-Frank Act company-run stress tests for BHCs would increase to $250 billion from their current levels—more than $10 billion for annual company-run stress tests and $50 billion or more for mid-year company-run stress tests. In addition, the bill would eliminate the statutory requirement that company-run stress tests be conducted at an annual or semi-annual frequency, depending on the size of the company—adopting instead a more flexible standard of “periodic” stress tests.
- Thresholds and Frequency of Dodd-Frank Act Supervisory Stress Tests. For BHCs with total consolidated assets of $100 billion or more and less than $250 billion, the Federal Reserve would be required to conduct “periodic,” rather than annual, supervisory stress tests. We note that this requirement is in Section 401(e) of the Bipartisan Senate Bill and does not also appear in the part of the bill that would amend the Dodd-Frank Act.
- Number of Dodd-Frank Act Stress Test Economic Scenarios. The bill would also reduce the required number of economic scenarios from three to two, eliminating the middle-of-the-road adverse scenario from the Dodd-Frank Act stress testing framework and leaving the baseline and severely adverse scenarios.
- Impact on CCAR? While the changes above technically apply to the Dodd-Frank Act stress testing requirements rather than the Federal Reserve’s CCAR capital planning framework, it is difficult to imagine the Federal Reserve taking a different approach in terms of making corresponding changes to its capital planning regulations.
- Community Bank Leverage Ratio. The U.S. banking agencies would be directed to establish via rulemaking a community bank leverage ratio—of tangible equity capital to average total consolidated assets—for qualified depository institutions and depository institution holding companies with total consolidated assets of less than $10 billion. An institution or holding company exceeding the community bank leverage ratio—the calibration of which the bill specifies as being not less than 8% and not more than 10%—would be deemed to meet its otherwise applicable capital requirements, including the leverage ratio and risk-based capital requirements, and, in the case of an insured depository institution, the ratios required to be considered well-capitalized for prompt corrective action purposes.
- The bill would also require the U.S. banking agencies (1) to consult with the relevant state banking supervisors in implementing the community bank leverage ratio and (2) to notify the relevant state banking supervisor of any qualifying community bank with respect to its compliance with the community bank leverage ratio.
New Provision on the Capital Treatment of Commercial Real Estate Exposures
The Bipartisan Banking Bill includes a new change relating to the capital treatment of high volatility commercial real estate (HVCRE) exposures, which was not included in earlier versions of the bill.
Currently, the U.S. Basel III capital rules define a category of HVCRE exposures that are subject to a heightened, 150% risk weight for purposes of calculating a banking organization’s risk-based capital requirements. The Bipartisan Banking Bill would define a new category of HVCRE ADC loans and would amend the Federal Deposit Insurance Act to prevent the U.S. banking agencies from applying heightened risk weights to an HVCRE exposure unless the exposure also falls within the definition of an HVCRE ADC loan – effectively creating a specific statutory capital regulation requiring the U.S. banking agencies to align their rules with this definition.
The following table summarizes the definition of an HVCRE exposure under the current U.S. Basel III capital rules, the definition of an HVCRE ADC loan under the Bipartisan Banking Bill, and our initial analysis as to the significant differences between the two definitions:
Current Capital Rules – Defining HVCRE Exposure | Bipartisan Banking Bill – Defining HVCRE ADC Loan | Analysis of Difference |
Scope of Definition |
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HVCRE exposure includes a credit facility that finances or has financed the acquisition, development, or construction (ADC) of real property, subject to the exemptions noted below and the provision regarding the conversion to permanent financing. | HVCRE ADC loan includes a credit facility that:
The scope of an HVCRE ADC loan is subject to the exemptions noted below and the provision regarding the reclassification as a non-HVCRE ADC loan. |
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Exemptions |
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No comparable provision. | Grandfathering. Any loan made prior to January 1, 2015. |
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No comparable provision. | Cash Flow-Generating Property. Any credit facility, secured by a mortgage on existing income-producing real property:
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Residential Projects. Any credit facility that finances one- to four-family residential property. | Residential Projects. Any credit facility that finances the ADC of one- to four-family residential property. |
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Community Development. Any credit facility that finances real property that:
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Community Development. Any credit facility that finances the ADC of real property that would qualify as an investment in community development. |
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Agricultural. Any credit facility that finances the purchase or development of agricultural land, which includes all land known to be used or usable for agricultural purposes (such as crop and livestock production), provided that:
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Agricultural. Any credit facility that finances the ADC of agricultural land. |
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Qualifying Commercial Projects. Any credit facility that finances commercial real estate projects in which: | Qualifying Commercial Projects. Any credit facility that finances commercial real property projects in which: |
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No comparable provision. | The value of any real property contributed by a borrower must be the appraised value of the property as determined under standards prescribed pursuant to FIRREA. | |
Conversion to Permanent Financing |
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A credit facility ceases to be an HVCRE exposure if it is converted to permanent financing. Permanent financing may be provided by the banking organization that provided the ADC facility as long as the permanent financing is subject to the Board-regulated institution’s underwriting criteria for long-term mortgage loans. |
A banking organization may reclassify a credit facility as a non-HVCRE ADC loan – at which point it no longer may be subject to heightened risk-based capital requirements – upon:
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Senate Passes the Bipartisan Banking Bill
The Senate has passed the Bipartisan Banking Bill, which would raise the generally applicable statutory threshold for most enhanced prudential standards (EPS) from $50 billion to $250 billion in total consolidated assets and would provide other targeted relief to regional and community banks. It would also make a…
Continue Reading Senate Passes the Bipartisan Banking Bill