What should be of interest in Dodd-Frank to non-u.s. banks wanting to do business in the United States?

Transcription

1 Dodd-Frank Update Full title of the law is The Dodd-Frank Wall Street Reform and Consumer Protection Act Public Law was signed into law on July 21, 2010 Major changes made to financial regulation in the United States Still being implemented through numerous regulatory rulemakings 1

2 Dodd-Frank Update What should be of interest in Dodd-Frank to non-u.s. banks wanting to do business in the United States? Systemic risk issues Capital requirements Establishment and termination of offices in the United States Amendments affecting operations of U.S. branches and agencies of non-u.s. banks The Volcker Rule Swaps and derivatives Asset securitization 2

3 Dodd-Frank Update This presentation will focus on: Living Wills Prudential Standards for Banks Volcker Rule 3

4 Resolution Plans ( Living Wills ) Section 165(d) of Dodd-Frank require covered companies to submit to the FRB and FDIC, and periodically update, resolution plans that describe the companies strategy for a quick and orderly resolution in the event of material financial distress or failure. These plans are informally referred to as living wills Covered companies include non-u.s. banks that are, or are treated as, bank holding companies for purposes of the International Banking Act and have US$ 50 billion or more in global consolidated assets Reports are required to be updated annually 4

5 Resolution Plans ( Living Wills ) (cont d) Material financial distress with regard to a covered company means that: (1) The covered company has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the company to avoid such depletion; (2) The assets of the covered company are, or are likely to be, less than its obligations to creditors and others; or (3) The covered company is, or is likely to be, unable to pay its obligations (other than those subject to a bona fide dispute) in the normal course of business. Each resolution plan must be divided into a public section and a confidential section. The public sections will be available on the FRB and FDIC websites exactly as submitted by the companies, with no prior review or editing by the agencies 5

6 Resolution Plans ( Living Wills ) (cont d) Information in plan relates to the non-u.s. bank s subsidiaries, branches, agencies, critical operations and core business lines that are domiciled in the United States or conducted in whole or material part in the United States What needs to be in the plan: Executive Summary Strategic analysis Corporate governance re resolution planning Organizational structure and related information Management Information Systems Interconnections and Interdependencies Supervisory and regulatory information Contact Information Detailed explanation of how this resolution plan is integrated into the company s overall resolution or other contingency planning process 6

7 Resolution Plans ( Living Wills ) (cont d) The term nonbank assets generally refers to assets held outside the non-u.s. bank s branch, agency, U.S. commercial lending company, or depository institution subsidiary; similar separate resolution plan rule applies to FDIC-insured banks with US $50 billion or more in total assets If the non-u.s. bank just maintains a representative office in the United States it does not fall within this particular requirement but still could be caught if it is determined by the FSOC to be a systemically important financial institution 7

8 Resolution Plans ( Living Wills ) (cont d) Timeline for submission of the initial resolution plan depends upon the size of the covered companies U.S.-based nonbank operations as of November 30, 2011: July 1, 2012: non-u.s. covered companies with total U.S. nonbank assets of more than US$250 billion (already on the second round) July 1, 2013: non-u.s. covered companies with total U.S. nonbank assets between US$100 billion to US$250 billion December 31, 2013: non-u.s. covered companies with total U.S. nonbank assets of less than US$100 billion 8

9 Resolution Plans ( Living Wills ) (cont d) Tailored Plan Option Eligible for non-u.s. covered companies in the United States that operate in the U.S. primarily through insured depository institutions, branches or agencies A non-u.s. covered company is eligible for the tailored plan, if, as of the end of the prior calendar year: It had less than US $100 billion in total U.S. nonbank assets, and The U.S. banking assets comprised 85% or more of its U.S. total consolidated assets, and Files a notice of its eligibility and intent to submit a tailored resolution plan no later than 270 days prior to the date on which it is required to submit its resolution plan, and the FRB and/or FDIC have not informed the company that it must file a full resolution plan [Deadline was April 5 for this first submission] 9

10 Resolution Plans ( Living Wills ) (cont d) The tailored resolution plan focuses only on resolution of the company s U.S. nonbank operations and material business operations that are subject to resolution under the U.S. Bankruptcy Code and the interconnections of such operations with those of its U.S. insured depository institutions, branches and agencies The FRB and the FDIC in early September issued a template that can be used for the tailored resolution plans 10

11 Prudential Standards Under section 165 of Dodd-Frank, large bank holding companies (bank holding companies with total consolidated assets of more than $50 billion as of January 1, 2010), non- U.S. banks with total consolidated assets of more than $50 billion as of January 1, 2010 that are treated as bank holding companies under the International Banking and nonbank financial companies deemed to be of systemic risk and supervised by the FRB will become subject to more stringent prudential standards on their operations. Under section 165, potential enhanced prudential measures include more stringent capital and liquidity requirements, leverage and concentration limits, increased risk management requirements, and restrictions on activities 11

12 Prudential Standards (cont d) In imposing prudential standards on non-u.s. banks and non-u.s. nonbank financial companies, FRB is to (A) give due regard to the principle of national treatment and equality of competitive opportunity; and (B) take into account the extent to which the non- U.S. nonbank financial company or non-u.s.-based bank holding company is subject on a consolidated basis to home country standards that are comparable to those applied to financial companies in the United States FRB also may impose stricter regulation on certain financial activities or products because the activities may pose systemic risk 12

13 Prudential Standards (cont d) Notice of Proposed Rulemaking published in the Federal Register on December 28, 2012 [for U.S. bank holding companies, similar (not same) proposed requirements published for comments on January 5, 2012 Original Deadlines for Comments: March 31, 2013, extended to April 30, 2013 close to 1,000 comments, 925 of which were form letters To What Entities Are these Standards Applicable? Applicable to foreign banking organizations (FBOs) with at least US $10 billion in global consolidated assets that also: Maintain a branch or agency in a State Control a commercial lending company organized under State law, or Control a U.S. bank Also applicable to any company of which the FBO is a subsidiary 13

14 Key Asset Thresholds FBOs with at least $10 billion total global consolidated assets FBOs with at least $50 billion total global consolidated assets but less than $50 billion in total U.S. assets FBOs with (i) at least $50 billion or more of total global consolidated assets and (ii) at least $10 billion of U.S. assets excluding U.S. branch/agency network and 2(h)(2) companies FBOs with at least $50 billion in total assets and at least $50 billion in total U.S. assets (including U.S. branches and agencies) 14

15 KEY PROPOSED ENHANCED PRUDENTIAL STANDARDS U.S. Intermediate Holding Companies Increased Capital, Leverage and Liquidity Requirements Single Counterparty Credit Limits Risk Management and Risk Committee Stress Tests Limits on Debt to Equity Early Remediation 15

16 U. S. Intermediate Holding Company (IHC) FBOs with both $50 billion or more in global consolidated assets and U.S. consolidated assets of at least $10 billion that are booked in U.S. nonbank subsidiaries would be required to form a U.S. intermediate holding company (IHC) to hold those assets The stated purpose of the proposal is to implement a consistent supervisory program across U.S. subsidiaries of FBOs In calculating the $10 billion threshold, the FBO would exclude the assets of its U.S. branches and agencies and any U.S. subsidiaries held under section 2(h)(2) of the Bank Holding Company Act FRB: A U.S. IHC could help facilitate a resolution or restructuring by providing one top-tier U.S. legal entity to be resolved or restructured FRB: IHC requirement also would reduce the ability of FBOs to minimize or avoid enhanced prudential requirements by restructuring their U.S. operations in ways that would not reduce their U.S. risk profile 16

17 EARLY REMEDIATION Four levels of escalation of remediation actions: Heightened Supervisory Review Initial Remediation Recovery Recommended Resolution triggers include low regulatory capital ratios, market-based indicators and risk management weaknesses of the FBO Imposition of early remediation measures is at the discretion of the FRB for FBOs with less than $50 billion in total U.S. assets Imposition of early remediation measures is mandatory once the U.S. assets reach $50 billion 17

18 FBOs with at least $10 billion global assets FBOs with at least $10 billion or more of total global consolidated assets will be required to: Certify, if they are publicly traded, that they maintain a U.S. risk committee that has at least one member with risk management expertise commensurate with, among other criteria, the risk profile and complexity of the combined U.S. operations of the FBO Be subject to a home country stress testing regime that is broadly consistent with the FRB s own stress testing requirements for U.S. bank holding companies (otherwise the foreign bank will be subject to additional requirements to help ensure the capital adequacy of their U.S. operations) 18

19 FBOs with at least $50 billion global assets but less than $50 billion in the United States FBOs with at least $50 billion or more of total global consolidated assets but less than $50 billion of those consolidated assets located in the United States will be required to: Comply with the requirements for FBOs with at least $10 billion of total global consolidated assets Certify to the FRB that it meets the capital adequacy standards established by its home country supervisor on a consolidated basis and that those standards are consistent with the Basel Capital Accords Annually report to the FRB the results of an internal liquidity stress test (either on a consolidated basis or for its combined U.S. operations) pursuant to a home country stress testing regime that is broadly consistent with U.S. stress testing standards Be subject to early remediation requirements to address financial distress in the FBO s U.S. operations if deemed necessary by the FRB 19

20 FBOs with at least $50 billion global assets but less than $50 billion in the United States (cont d) Limit its aggregate net credit exposure to a single unaffiliated counterparty to 25% of regulatory capital of the FBO or its U.S. intermediate holding company subsidiary, with that limit becoming stricter the higher the amount of the FBO s total global or U.S. consolidated assets; limits would be applicable to non-u.s. sovereign governments except the FBO s own home country sovereign, and applicable to U.S. state and local governments, but not the U.S. federal government FBOs with total global consolidated assets of at least $500 billion and IHCs with assets of at least $500 billion would be subject to stricter loan to one borrower limits of between 10 to 25% Be subject to early remediation requirements to address financial distress in the FBO s U.S. operations if deemed necessary by the FRB 20

21 FBOs with at least $50 billion global assets and US assets of at least $10 billion FBOs with (i) at least $50 billion or more of total global consolidated assets and (ii) U.S. assets of at least $10 billion (excluding assets of the FBO s U.S. branch/agency network and of 2(h)(2) companies ) will be required to: Form a U.S. intermediate holding company (IHC) for its U.S. subsidiaries (except for 2(h)(2)companies), including those that hold merchant banking investments FRB is proposing to apply the U.S. bank holding company risk-based capital and leverage requirements to such IHC, regardless of whether the IHC holds a depository institution subsidiary, and other enhanced prudential requirements proposed for large U.S. bank holding companies Subject its U.S. IHC to the annual internal company-run stress requirements of Dodd-Frank for U.S. bank holding companies with assets of at least $10 billion 21

22 FBOs with at least $50 billion in total assets and at least $50 billion in U.S. assets FBOs with at least $50 billion or more of total global consolidated assets and U.S. combined assets of at least $50 billion (including those of its U.S. branches and agencies) will be required to: Comply with all of the foregoing requirements applicable to FBOs with less than $50 billion in U.S. assets Have its IHC with assets of more than $50 billion subject to the requirements to have a capital plan and to stress tests run by the FRB (in addition to internal stress tests run semi-annually imposed per Dodd-Frank on U.S. bank holding companies with more than $50 billion in assets) Have both its IHC and its direct U.S. branches/agencies subject to the monthly liquidity stress tests and 30 day liquidity buffer requirements applicable to U.S. bank holding companies; while IHCs would need to maintain the highly liquid unencumbered assets satisfying this requirement in U.S. accounts for the entire 30 days, U.S. branches and agencies of the FBO could, under certain conditions, maintain such assets at its head office after the 14 th day 22

23 FBOs with at least $50 billion in total assets and at least $50 billion in U.S. assets (continued) Whether or not publicly traded, have a U.S. Chief Risk Officer in addition to a U.S. risk committee with at least one member of such risk committee being independent Be subject to the nondiscretionary Dodd-Frank early remediation requirements if the FRB determines that the FBO s U.S. operations are in financial distress. 23

24 The Volcker Rule Section 619 of Dodd-Frank, the so-called Volcker Rule, contains prohibitions and restrictions on the ability of banking organizations and systemically important nonbank financial institutions to engage in proprietary trading or investing in or sponsoring a hedge or private equity fund The Volcker Rule covers insured banks and their holding companies and non-u.s. banks that maintain branches and agencies in the United States It also includes non-u.s. nonbank financial companies that own or control an insured depository institution that does not otherwise cause the owner thereof to become a bank holding company or savings and loan holding company 24

25 The Volcker Rule (cont d) On November 7, 2011, the U.S. federal banking agencies and the Securities and Exchange Commission issued a very complex and detailed proposed rule for comment that would implement the Volcker Rule CFTC issued a similar notice in February ,000 comments received by the time the comment period closed; over 18,000 of them were form letters 25

26 The Volcker Rule (cont d) The statute provides an exemption for [p]roprietary trading conducted by a banking entity pursuant to paragraphs (9) or (13) of section 4(c) [of the BHC Act], provided that the trading occurs solely outside of the United States and that the banking entity is not directly or indirectly controlled by a banking entity that is organized under the laws of the United States or of one or more States There is a similar statutory exception to the prohibitions on sponsoring or investing in hedge funds or private equity funds Sections 4(c)(9) and 4(c)(13) of the BHC Act are the statutory bases for the regulations issued by the FRB regulating a non- U.S. bank s non-banking activities in the United States 26

27 The Volcker Rule (cont d) Under the proposed regulations, a transaction is considered to be taking place solely outside of the United States if: (i) The covered banking entity conducting the purchase or sale is not organized under the laws of the United States or of one or more States; (ii) No party to the purchase or sale is a resident of the United States; (iii) No personnel of the covered banking entity who is directly involved in the purchase or sale is physically located in the United States; and (iv) the purchase or sale is executed wholly outside of the United States 27

28 The Volcker Rule (cont d) Many of the comments from the major non-u.s. banks, their trade associations and in some cases, their regulators, criticized the solely outside the United States exemption Their comments can be broken down into the following general themes: The proposal goes beyond the plain language of the statute The proposal does not take sufficient note of the purpose of the Volcker Rule There will be unintended consequences if the proposal is adopted as proposed There are other ways to meet the purpose of Volcker The proposal is not in keeping with the principle of international comity 28

29 Questions? Kathleen A. Scott, Esq. Counsel Arnold & Porter LLP 399 Park Avenue New York, NY (212)