|
|
Title I - Financial Stability
Systemic Risk Regulation and the Roles of the Council and the Board
The goal of Title I of Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), and the regulations and studies to be conducted thereunder, is to mitigate and prevent risk and set up an early-warning system that would allow Board of Governors of the Federal Reserve System (the Board), in conjunction with Financial Stability Oversight Council (the Council) and Federal Deposit Insurance Corporation (the FDIC) as appropriate, to require companies to react immediately to a threat to financial stability.
Role of the Council and Council Recommendations
Under Title I, the Council will perform three key systemic risk functions: (1) identifying risks to the financial stability of the U.S. arising from the material financial distress or failure of large, interconnected bank holding companies (BHC) or nonbank financial companies (Board Supervised NFC);1 (2) promoting market discipline, by eliminating expectations that the U.S. government will protect shareholders, creditors, and counterparties from losses in the event of failure of a major institution; and (3) responding to emerging threats to the stability of U.S. financial markets.
The Council will be composed of 10 voting members: the Secretary of the Treasury, who will also be the Chairman of the Council; the Chairman of the Board; the Comptroller of the Currency; the Director of the Bureau of Consumer Financial Protection; the Chairman of Securities and Exchange Commission; the Chairperson of the FDIC; the Chairperson of Commodity Futures Trading Commission (the CFTC); the Director of the Federal Housing Finance Agency; the Chairman of the National Credit Union Administration; and an independent member appointed by the President, with the advice and consent of the Senate, who has insurance expertise. The Council will also include five non-voting members who will serve in an advisory capacity: the Director of the Office of Financial Research; the Director of the Federal Insurance Office (the FIO); a state insurance commissioner; a state banking supervisor; and a state securities commissioner.
Designation of Nonbank Financial Companies Subject to Board Supervision. The Council, in consultation with the primary financial regulatory agency (if any), is responsible for requiring supervision by the Board of nonbank financial companies that “may pose a risk to the financial stability of the U.S. in the event of their material financial distress or failure.”2 If a company is designated as a Board Supervised NFC, then a new and comprehensive set of financial, operational, reporting and risk management requirements could be imposed on its operation. Section 113 of the Act sets forth the requirements and the process for designating a nonbank financial company that is subject to Board oversight. The Council, by at least a two-thirds majority vote, including an affirmative vote by the Chairman (i.e., the Treasury Secretary), may determine that a U.S. or foreign nonbank financial company must be supervised by the Board and be subject to prudential standards under Title I. The Council is required to reevaluate each Board Supervised NFC at least annually to determine if supervision is still required.
Pursuant to the anti-evasion provisions of Section 113, the Council may also determine that the material financial distress related to the financial activities (excluding internal treasury, investment, and employee benefit functions) of any company incorporated or organized under the laws of the United States or any State or in a country other than the United States would pose a threat to the financial stability of the United States, in which case those financial activities must be supervised by the Board and subject to prudential standards.
Prudential Standards Recommendations and Data Collection. The Council also will be responsible for making recommendations: to the member agencies3 on general supervisory priorities and principles; to the Board on the establishment of heightened prudential standards for risk-based capital, leverage, liquidity, contingent capital, resolution plans and credit exposure reports, concentration limits, enhanced public disclosures, short-term debt limits and overall risk management for nonbank financial companies and large, interconnected bank holding companies that are supervised by the Board; and to primary financial regulatory agencies to apply new or heightened standards or safeguards on financial activities.
The Council also has an extremely broad information collection mandate and is charged with tapping member agencies, other Federal and State financial regulatory agencies and the FIO for such information related to nonbank financial companies and bank holding companies. The Council is also authorized to direct the newly formed OFR to collect information from bank holding companies and nonbank financial companies.
Role of the Board: Enhanced Supervision and Prudential Standards
Consequences of Designation as a Board Supervised Board Supervised NFC. Once a company is designated as a Board Supervised NFC, it must: register with the Board; submit reports to the Board and disclose certain information to the public; be subject to examinations and enforcement by the Board; comply with all prudential standards set by the Board; subject its functionally regulated subsidiaries to certain types of exceptional prudential regulation; be subject to limits on its acquisition activity; and develop a “living will” to provide for “early remediation” in the event of the company’s financial distress.
Prudential Standards; Examination, Reporting and Enforcement. Under Section 165 of the Act, the Board must, on its own or pursuant to recommendations by the Council, establish prudential standards for Board Supervised NFCs and BHCs with total consolidated assets equal to or greater than $50 billion. The Board is required to impose standards for such entities to address the following: risk-based capital requirements and leverage limits;4 liquidity requirements; overall risk management requirements; periodic reports; and concentration limits. The Board is permitted but not required to impose standards on such entities regarding the following: a contingent capital requirement; enhanced public disclosures; short-term debt limits; and such other prudential standards as the Board, on its own or pursuant to a recommendation made by the Council, determines are appropriate. The proposed prudential standards are the backbone of the new “tool chest” that is provided to the Board to oversee systemically important institutions.
Section 121 of the Act provides the Board with significant tools to mitigate the risks where a Board Supervised NFC or a BHC with greater than $50 billion in consolidated assets poses a threat to the financial stability of the U.S. If the Board determines that such a threat exists, and if the Council approves upon a two-thirds vote, the Board can require the company to: limit the company’s merger, acquisition or consolidation activity; restrict the ability of the company to offer financial products; terminate or impose conditions on designated activities; and compel the sale or transfer of assets or off-balance sheet items.
The Board can compel any Board Supervised NFC, or any subsidiary of a Board Supervised NFC to submit to Board examination or to submit reports, although the Board is required to use reports provided to other agencies, including State regulatory agencies, to satisfy the requirements. In addition, Board Supervised NFCs will be required to submit reports including with respect to the financial condition and controls of such Board Supervised NFC and/or any of its subsidiaries.
A Board Supervised NFC and any of its subsidiaries (other than any depository institution subsidiary) shall be subject to the provisions of subsections (b) through (n) of Section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818), in the same manner as if the Board Supervised NFC were a bank holding company. However, if the Board determines that a condition, practice, or activity of a depository institution subsidiary or functionally regulated subsidiary of a Board Supervised NFC does not comply with the regulations or orders prescribed by the Board under this Act, or otherwise poses a threat to the financial stability of the U.S., the Board may issue a written recommendation to the primary financial regulatory agency for the subsidiary that such agency initiate a supervisory action or enforcement proceeding. If the primary financial regulatory agency fails to take supervisory or enforcement action against a subsidiary that is acceptable to the Board within 60 days of receiving the Board’s recommendation, then the Board has the option to take the recommended supervisory or enforcement action.
Stress Test. The Board, in coordination with the appropriate primary financial regulatory agencies and the Federal Insurance Office, will conduct annual stress tests for Board Supervised NFCs and BHCs with total consolidated assets equal to or greater than $50 billion to evaluate whether such companies have the capital, on a total consolidated basis, necessary to absorb losses as a result of adverse economic conditions. The Board may also require these tests for bank holding companies and nonbank financial companies. In addition to the stress tests conducted by the Board, stress tests must be conducted by the company itself for (1) each Board Supervised NFC and BHC with total consolidated assets equal to or greater than $50 billion on a semiannual basis; and (2) any other financial company that has total consolidated assets of more than $10 billion that is regulated by a “primary Federal financial regulatory agency” on an annual basis.
Intermediate Holding Company. Pursuant to Section 167 of the Act, a Board Supervised NFC will be required to establish an intermediate holding company if the Board makes a determination that doing so is necessary to (1) “appropriately supervise activities that are determined to be financial in nature or incidental thereto;” or (2) to ensure that Board supervision does not extend to the Board Supervised NFC’s commercial activities.
Leverage and Risk-Based Capital Requirements. The appropriate Federal banking agencies shall establish minimum leverage capital requirements and risk-based capital requirements, in each case on a consolidated basis for insured depository institutions, depository institution holding companies, and Board Supervised NFCs.
Non-U.S. Companies and International Coordination. The Act seeks to strike a balance between providing for oversight of non-U.S. companies that are interconnected with the U.S. economy and have systemic importance for U.S. financial stability while recognizing that the non-U.S. entities are regulated in their country of domicile and may be subject to equally rigorous and/or conflicting regulation in such country. Since many foreign multinational financial institutions with significant U.S. operations are already subject to some level of U.S. regulation and oversight, it is unclear the extent to which the Act will have an impact, if any, on the operations of such institutions and their ability to conduct business in the United States. Pursuant to the Act, the Board must give due regard to the principle of national treatment and equality of competitive opportunity and take into account the extent to which the foreign financial company is subject on a consolidated basis to home country standards that are comparable to those applied to financial companies in the United States when applying prudential standards to any foreign nonbank financial company supervised by the Board or foreign-based bank holding company.
The Act requires coordination on international policy by the Council, the Board and the Treasury Secretary, and permits coordination by the President or a designee, with foreign governments and multilateral organizations, among others. The goal is to encourage coordination and consultation on policy matters to address financial stability and systemic risk on a global scale and "to encourage comprehensive and robust prudential supervision and regulation for all highly leveraged and interconnected financial companies."
_______________________________
[1]The definition of a “nonbank financial company” is broad and includes a U.S. or foreign company (other than a company treated as a bank holding company or a Farm Credit System institution and certain others) that is “predominantly engaged in financial activities” in the U.S. An entity is deemed to be predominantly engaged in financial activities generally if 85% or more of its revenues or assets are derived from activities that are financial in nature (as defined in § 4(k) of the Bank Holding Company Act of 1956).
[2] Section 113(a)(1) of the Act.
[3]Member agencies are the regulatory agencies represented by the voting members of the Council.
[4] Generally, such Board Supervised NFCs and BHCs will be limited to a debt-to-equity ratio of no more than 15 to 1, upon a determination by the Council that such company “poses a grave threat” to the financial stability of the U.S. and that the requirement is necessary to mitigate such risk. However, the Board, in consultation with the Council, may determine that such leverage requirements are inappropriate for a company subject to more stringent prudential standards because of such company’s activities (i.e., investment company activities or assets under management) or structure.
If you have questions regarding anything you have read on Title I, please contact any of the attorneys listed below or your regular Sutherland contact.
|
 |
Title I - Key Provisions and Regulatory Rulemakings
|
|