ADVISORY Financial Institutins BEIJING BRUSSELS LONDON NEW YORK SAN DIEGO SAN FRANCISCO SILICON VALLEY WASHINGTON www.cv.cm December 22, 2011 FEDERAL RESERVE PROPOSES RULES IMPLEMENTING ENHANCED PRUDENTIAL STANDARDS AND EARLY REMEDIATION REQUIREMENTS IN DODD-FRANK On December 20, 2011, the Federal Reserve Bard ( Bard ) issued prpsed rules t implement the enhanced prudential standards f sectin 165 f the Ddd-Frank Act and the early remediatin requirements f sectin 166 f the Act. This client alert prvides an initial summary f key aspects f the prpsed rules, including their impact n freign banks, savings and lan hlding cmpanies, and nnbank financial cmpanies. Cmments are due n the prpsed rules by March 12, 2012. In general. The prpsed rules are intended t mitigate risk psed t financial stability thrugh the applicatin f enhanced prudential standards t bank hlding cmpanies with ttal cnslidated assets f $50 billin r mre and nnbank financial cmpanies designated by the Financial Stability Oversight Cuncil ( FSOC ) fr supervisin by the Federal Reserve Bard (cllectively, cvered cmpanies ). 1 Specifically, the prpsed rules wuld create six sets f enhanced prudential standards applicable t cvered cmpanies: 2 1. risk-based capital requirements and leverage limits; 2. liquidity requirements; 3. single-cunterparty credit limits; 4. risk management requirements; 5. supervisry and cmpany-run stress test requirements; and 6. debt-t-equity limitatins. The prpsed rules als wuld establish a regime that prvides fr the early detectin and remediatin f financial distress at cvered cmpanies. Effective dates and transitin. In general, cvered cmpanies wuld be required t cmply with the enhanced prudential standards and early remediatin requirements ne year after the rules are prmulgated r ne year after a cmpany becmes a cvered cmpany. But there are significant exceptins. Fr example, a quantitative capital surcharge n cvered cmpanies will nly be adpted in the cntext f separate rules yet t be prmulgated implementing Basel III and its surcharge fr Glbal Systemically Imprtant Banks ( G-SIBs ); any sectin 165 surcharge will be cnsistent with the Basel III surcharge and will apparently be phased in n the five-year timeline cntemplated by Basel III. The single-cunterparty credit limits wuld nt apply t any cvered 1 Hwever, as discussed belw, tw requirements als apply t certain bank hlding cmpanies having mre than $10 billin in cnslidated assets, i.e., the requirements fr an enterprise-wide risk cmmittee f the bard f directrs, and fr a cmpany-run stress test. 2 The prpsed rules prvide the Bard with discretin, in rder t preserve the safety and sundness f a bank hlding cmpany and thereby mitigate risks t U.S. financial stability, t apply ne r mre f the enhanced prudential standards t a bank hlding cmpany that is nt a cvered cmpany based n the cmpany s capital structure, size, cmplexity, risk prfile, scpe f peratins, financial cnditin, r ther riskrelated factrs.
cmpany until Octber 1, 2013. And the stress test requirements generally apply with respect t a cmpany that becmes a cvered cmpany after the rules effective date nly after a perid designed t give the cmpany time t cllect the required infrmatin. ENHANCED PRUDENTIAL STANDARDS 1. Risk-Based Capital Requirements and Leverage Limits Bank Hlding Cmpanies with Assets Greater than $50 billin. The prpsed rule itself impses n new requirements fr these cvered cmpanies, referring instead t the existing Bard regulatins related t capital plans and stress tests that apply uniquely t such cmpanies. Nnbank Cvered Cmpanies. In general, each nnbank cvered cmpany must: (1) calculate its risk-based and leverage capital requirements as if it were a bank hlding cmpany in accrdance with minimum capital requirements established by the Bard fr bank hlding cmpanies; (2) hld capital sufficient t meet a tier 1 risk-based capital rati f 4 percent and a ttal risk-based capital rati f 8 percent; and (3) hld capital sufficient t meet a tier 1 leverage rati f 4 percent. In additin, such nnbank cvered cmpanies must cmply with the same Bard regulatins related t capital plans and stress tests that apply t cvered bank hlding cmpanies. Reprting Requirements. A nnbank cvered cmpany must immediately ntify the Bard f its failure t meet these ratis, and therwise must reprt its risk-based capital and leverage ratis t the Bard n a mnthly basis. Future Basel Refrms Expected. As a next stage in establishing enhanced risk-based capital and leverage limits fr cvered cmpanies, the Bard is expected t prpse rules shrtly t implement Basel III capital refrms, perhaps as sn as the first quarter f 2012. In that cntext, the Bard will prpse additinal quantitative risk-based capital surcharges fr cvered cmpanies (r sme subset theref) based n the capital surcharge framewrk develped by the Basel Cmmittee n Bank Supervisin. Fr cvered cmpanies deemed t be G-SIBs under the Basel III framewrk, the Basel III surcharge will range frm 1 t 2.5 percent f risk-weighted assets, and there apparently will be n additinal surcharge impsed t satisfy sectin 165 f Ddd-Frank. This Basel III surcharge will be phased in frm 2016 thrugh 2019, cnsistent with the Basel III agreement. Fr cvered cmpanies that are nt deemed t be G-SIBs, the Bard has nt yet decided whether t adpt a surcharge. But if it des, the surcharge wuld be mdest (meaning less than the minimum 1 percent surcharge fr G-SIBs) and wuld presumably be phased in n the same timeline as the G-SIB surcharge. Fr cvered cmpanies that are nt subject t Basel II and its cmplicated rules, it is nt yet clear whether ther imprtant but less cmplex requirements f Basel III will apply -- fr example, the required minimum rati f 7 percent Tier 1 cmmn equity t risk-weighted assets. 2. Liquidity Requirements In general. In this first stage f enhanced liquidity standards fr cvered cmpanies, liquidity requirements are impsed fr the first time by regulatin, rather than supervisry guidance. Hwever, these initial requirements d nt impse quantitative metrics like thse envisined by Basel III. They are instead enhancements f the standards included in the Interagency Liquidity - 2 -
Risk Plicy Statement adpted by the banking regulatrs in March 2010. A secnd stage f required quantitative liquidity metrics will be adpted fr cvered cmpanies (r a subset f such cmpanies) in ne r mre separate rules implementing the final Basel III liquidity requirements. These Basel III liquidity requirements are currently underging bservatin by the Basel Cmmittee and will likely be mdified. And unlike the Basel III capital rules, it is nt clear when the banking regulatrs will adpt rules implementing Basel III s quantitative liquidity requirements, r which firms the rules will ultimately apply t. Cash Flw Prjectins. Each cvered cmpany must prduce shrt-term and lng-term cmprehensive cash flw prjectins. These prjectins must include anticipated cash flws ver shrt-term and lng-term perids that are apprpriate based n the cmpany s capital structure, risk prfile, cmplexity, activities, size, and ther risk factrs. Liquidity Stress Testing. Each cvered cmpany must establish liquidity stress test plicies and prcedures and management infrmatin systems, and each must peridically cnduct liquidity stress tests f its cash flw prjectins under different liquidity scenaris. The results f these tests must be used in establishing a liquidity buffer and a cntingency funding plan (bth discussed belw). The stress tests must: (1) incrprate a wide array f stress scenaris that may significantly impact the cmpany s liquidity; (2) address the ptential impact f market disruptins n bth the cvered cmpany and ther market participants; (3) be frwardlking and incrprate ptential changes in the cvered cmpany s activities, expsures, and risks, including brader ecnmic and financial changes; and (4) address varius time hrizns (at least 30-days, 90-days, and ne year). Liquidity stress tests must incrprate assumptins abut the surces f funding during relevant time perids. Fr the first 30 days f a scenari, nly unencumbered highly liquid assets may be used t satisfy funding needs, including cash, securities issued r guaranteed by the U.S. gvernment, a U.S. gvernment agency, r a U.S. gvernment-spnsred entity, and ther assets that can be shwn t meet certain risk and transparency standards. After the first 30 days f a stress test scenari, ther apprpriate funding surces may als be used t ffset prjected funding needs. Liquidity Buffer. Each cvered cmpany must maintain a liquidity buffer f unencumbered, highly liquid assets sufficient t meet the cmpany s prjected net cash utflws and lss f existing funding surces fr 30 days under varius stress scenaris. The size f this buffer must be established based n the liquidity stress tests. Cntingency Funding Plan. Based n the results f the stress tests, each cmpany must establish and update at least annually a cntingency funding plan with strategies t address liquidity needs during stress events. This plan must include fur cmpnents: (1) quantitative infrmatin derived frm the liquidity stress tests; (2) a liquidity management prcess t be used during stress events; (3) prcedures t mnitr emerging liquidity stress events; and (4) peridic testing f the cntingency funding plan cmpnents t ensure reliability. Limits n Funding Surces. The bard f directrs must establish limits n ptential surces f liquidity risk, including cncentratins in funding surces, prjected maturities within varius time hrizns, and ff-balance sheet expsures and ther expsures that culd create funding needs during a stress event. Mnitring. Each cvered cmpany must establish prcedures t mnitr its liquidity in relatin t assets pledged r available t be pledged as cllateral, liquidity risk and funding needs within and acrss business entities, its intraday liquidity psitins, and its cmpliance with limits n funding surces established by its bard f directrs. - 3 -
Allcatin f Cmpliance Respnsibilities. The regulatins impse management and supervisry respnsibilities n the bard f directrs and risk cmmittee, senir management, and require an independent review functin (separate frm the funding functin) t implement the liquidity requirements described abve. 3. Single-Cunterparty Credit Limits Credit expsure limit. The general rule is that a cvered cmpany, tgether with its subsidiaries, may nt have an aggregate net credit expsure t any unaffiliated cunterparty exceeding 25 percent f the cvered cmpany s cnslidated capital stck and surplus. Hwever, a much mre restrictive limit applies t any majr cvered cmpany, which is (1) any bank hlding cmpany that has mre than $500 billin in assets (ther than a freign bank r cmpany treated as a bank hlding cmpany under the Internatinal Banking Act), r (2) any nnbank cvered cmpany. A majr cvered cmpany, tgether with its subsidiaries, may nt have aggregate net credit expsure t any unaffiliated majr cunterparty exceeding 10 percent f the majr cvered cmpany s cnslidated capital stck and surplus. A majr cunterparty is a majr cvered cmpany and its subsidiaries, plus any freign banking rganizatin that has $500 billin r mre in ttal cnslidated assets. Cmputatin f net credit expsures. The definitin f net credit expsure is very brad. Rules are prvided fr determining the grss amunt f particular types f credit expsures, including lans, debt securities, repurchase agreements, securities lending transactins, credit lines, letters f credit, and derivative transactins, and fr cmputing the net amunt f a credit expsure based n repurchase agreements, market value adjustments fr cllateral, unused prtins f credit lines and revlving credit facilities, eligible guarantees, and certain hedges. A cvered cmpany must treat any f its transactins with a persn as a credit expsure t a cunterparty t the extent the prceeds f the transactin are used fr the benefit f, r transferred t, that cunterparty. Exemptins. The credit expsure limits d nt apply t certain specified categries f credit transactins: (1) direct claims n, and the prtins f claims that are guaranteed as t principal and interest by, the United States and its agencies; (2) direct claims n, and the prtins f claims that are guaranteed as t principal and interest by, Freddie Mac and Fannie Mae while the enterprises are perating under FHFA cnservatrship r receivership, and any ther bligatins issued by a gvernment spnsred enterprise as determined by the Bard; (3) intraday credit expsures t a cunterparty; and (4) any transactin that the Bard exempts if the Bard finds that such an exemptin is in the public interest and cnsistent with the Bard s prpsed rules. The Federal Hme Lan Banks are nt subject t the single-cunterparty credit limits. Cmpliance. A cvered cmpany must cmply with the single-cunterparty credit limit at the end f each business day and submit a mnthly reprt demnstrating daily cmpliance. A cvered cmpany that fails t cmply with the single-cunterparty credit limit due t a decrease in the cmpany s capital stck and surplus, merger with anther cvered cmpany, merger f tw unaffiliated cunterparties, r any ther circumstances deemed apprpriate by the Federal Reserve will have a 90-day grace perid (r lnger if determined by the Federal Reserve) t return t cmpliance, during which time the cmpany may nt, unless apprved by the Federal Reserve, engage in additinal credit transactins with the cunterparty exceeding the limit. 4. Risk Management Requirements Enterprise-wide risk cmmittee. This requirement applies nt nly t cvered cmpanies, but als t any publicly traded bank hlding cmpany hlding mre than $10 billin in cnslidated - 4 -
assets. These cmpanies are required t maintain an enterprise-wide risk cmmittee cnsisting f members f its bard f directrs. The risk cmmittee must have a frmal, written charter apprved by the cmpany s bard f directrs; have at least ne member with risk management expertise cmmensurate t the institutin s risk prfile; be chaired by an independent directr; meet with an apprpriate frequency and as needed ; fully dcument and maintain recrds f its prceedings; and versee the peratin f, n an enterprise-wide basis, an apprpriate risk management framewrk that is cmmensurate with the cmpany s capital structure, risk prfile, cmplexity, activities, size, and ther risk-related factrs. In additin, the risk cmmittee f a cvered cmpany may nt be hused within anther cmmittee r be part f a jint cmmittee, must reprt directly t the cmpany s bard f directrs, and must receive and review regular reprts frm the chief risk fficer. Chief risk fficer. A cvered cmpany (but nt ther cmpanies with mre than $10 billin in assets) is required t emply a chief risk fficer wh has risk management expertise cmmensurate t the institutin s risk prfile; is apprpriately cmpensated and incentivized t prvide bjective risk assessments f the cmpany; reprts directly t bth the risk cmmittee and chief executive fficer f the cmpany; and directly versees varius risk management respnsibilities n an enterprise-wide basis. 5. Supervisry and Cmpany-Run Stress Test Requirements The supervisry stress tests and cmpany-run stress tests are very much based n the Supervisry Capital Assessment Prgram cnducted in 2009, and the annual Cmprehensive Capital Analysis and Review that was first cmpleted in 2011 and is currently being cnducted fr cmpletin in early 2012. Supervisry Stress Tests. In crdinatin with the apprpriate primary financial regulatry agency, the Bard will cnduct an annual analysis f the capital f each cvered cmpany, taking int accunt the ability f such cmpanies t absrb lsses under varius adverse ecnmic and financial scenaris. Each cvered cmpany must submit cnslidated data t the Bard necessary t estimate prjected net incme, lsses, and pst-stress capital levels and ratis ver a perid f at least 9 calendar quarters under each relevant scenari. The Bard will evaluate whether each tested cmpany has capital necessary t absrb lsses and cntinue functining as a credit intermediary under the stress scenaris, and cmmunicate these results t the tested cmpany. The Bard will publish a summary f the results f the stress test. After the stress test has been cmpleted, each cvered bank will be required t make apprpriate changes t its capital structure, expsures, cncentratins, risk psitins, plans fr ecnmic recvery, and verall risk management. Each cmpany will als be required t update its reslutin plan within 90 days f the publicatin f the Bard s summary results. Cmpany-Run Stress Tests. This requirement applies nt nly t cvered cmpanies, but als t bank hlding cmpanies, state member banks, and savings and lan hlding cmpanies having mre than $10 billin in cnslidated assets (althugh the requirement will nt apply t savings and lan hlding cmpanies until a separate rule is prmulgated that applies cnslidated capital standards t such cmpanies). Each f these cmpanies must cnduct an annual stress test using baseline, adverse, and severely adverse financial and ecnmic scenaris develped by the Bard. (Cvered cmpanies nly must als cnduct an additinal stress test by March 31 f each year using baseline, adverse, and severely adverse scenaris that they develp.) These tests must evaluate ptential lsses, pre-prvisin net revenues, allwance fr lan lsses, and future pr frma capital psitins ver the planning hrizn, and must include calculatins f capital levels and capital ratis, including thse specified by the Bard. T cnduct these tests, - 5 -
each cmpany must establish a system f cntrls, versight, and dcumentatin t ensure effectiveness f the tests. Each cmpany cnducting such stress tests must reprt the results t the Bard n r befre January 5th (and, in the case f the March 31 tests fr cvered cmpanies, July 5th) f each year. Such cmpanies must als publicly disclse a summary f their stress test results 90 days after reprting the results t the Bard, including (1) the types f risks included in the test, (2) fr cvered cmpanies, a high-level descriptin f scenaris develped by the cmpany fr the March 31 stress test, (3) a general descriptin f testing methdlgies, and (4) aggregate lsses, pre-prvisin net revenue, allwance fr lan lsses, net incme, and pr frma capital levels and capital ratis under each scenari. 6. Debt-t-Equity Limitatins Ntice and Maximum Debt-t-Equity Rati. The FSOC may ntify a cvered cmpany that it has been identified as psing a grave threat t the financial stability f the United States, and that the impsitin f a debt-t-equity rati is necessary t mitigate such risk. N later than 180 days after receiving such a ntice, the identified cmpany must achieve and maintain a debt-t-equity rati f n mre than 15-t-1, with relevant terms defined in the prpsed rule. The Bard may extend the 180-day cmpliance perid fr up t tw additinal 90-day perids if the identified cmpany has made gd faith effrts t cmply and each extensin wuld be in the public interest. Once a debt-t-equity limitatin has been impsed by the FSOC, it will remain in effect until the FSOC ntifies the identified cmpany therwise. EARLY REMEDIATION REQUIREMENTS Early Remediatin Framewrk. The prpsed rule establishes a regime fr the early remediatin f financial distress at cvered cmpanies that includes frward-lking triggering events designed t identify emerging r ptential issues befre they develp int larger prblems and remediatin requirements. The prpsed rules establish triggering events in five categries f cvered cmpanies peratins: (1) capital and leverage, (2) stress tests, (3) risk management, (4) liquidity, and (5) market indicatrs. The prpsed rules prvide within these categries fur levels f triggering events that subject a cvered cmpany t escalating remediatin requirements. Accrdingly, a Level 1 triggering event subjects a cvered cmpany t the lwest frm f remediatin, whereas a Level 4 triggering event subjects a cvered cmpany t the greatest frm f remediatin. Ntice t and frm the Bard. A cvered cmpany that becmes subject t a triggering event is required t ntify the Bard f the event. In additin, the Bard will ntify a cvered cmpany if the Bard ascertains that a triggering event at the cmpany has ccurred. Triggering Events Capital and Leverage Level 1: Ttal Risk-Based Capital Rati f 10% r greater; Tier 1 Risk-Based Capital Rati f 6% r greater; and Tier 1 Leverage Rati f 5% r greater, and the Bard determines that the cvered cmpany s capital structure, capital planning prcesses, r the amunt f capital it hlds is nt cmmensurate with the level and nature f the risks t which the cmpany is expsed. Level 2: Ttal Risk-Based Capital Rati f less than 10% and greater than r equal t 8%; Tier 1 Risk-Based Capital Rati f less than 6% and greater than r equal t 4%; r Tier 1 Leverage Rati f less than 5% and greater than r equal t 4%. - 6 -
Level 3: (a) Fr tw cnsecutive quarters, a Ttal Risk-Based Capital Rati f less than 10%; Tier 1 Risk-Based Capital Rati f less than 6%; r Tier 1 Leverage Rati f less than 5%, r (b) Ttal Risk-Based Capital Rati f less than 8% and greater than r equal t 6%; Tier 1 Risk-Based Capital Rati f less than 4% and greater than r equal t 3%; r Tier 1 Leverage Rati f less than 4% and greater than r equal t 3%. Level 4: Ttal Risk-Based Capital Rati f less than 6%; Tier 1 Risk-Based Capital Rati f less than 3%; r Tier 1 Leverage Rati f less than 3%. Stress tests Level 1: Nn-cmpliance with Bard s capital plans and stress test regulatins. Level 2: Results under the severely adverse scenari with respect t a stress test in any quarter reflect a Tier 1 Risk-Based Capital Rati f less than 5% and greater than r equal t 3%. Level 3: Results under the severely adverse scenari with respect t a stress test in any quarter reflect a Tier 1 Risk-Based Capital Rati f less than 3%. Risk Management Level 1: Cmpany manifests signs f weakness in meeting enhanced risk management and risk cmmittee requirements in Bard s regulatins. Level 2: Cmpany demnstrates multiple deficiencies in meeting enhanced risk management and risk cmmittee requirements in Bard s regulatins. Level 3: Cmpany is in substantial nncmpliance with the enhanced risk management and risk cmmittee requirements in Bard s regulatins. Liquidity Level 1: Cmpany manifests signs f weakness in meeting enhanced liquidity risk management requirements in Bard s regulatins. Level 2: Cmpany demnstrates multiple deficiencies in meeting enhanced liquidity risk management requirements in Bard s regulatins. Level 3: Cmpany is in substantial nncmpliance with the enhanced liquidity risk management requirements in Bard s regulatins. Market Indicatrs Level 1: Bard can identify ther market indicatrs and market indicatr threshlds that, when triggered by a cvered cmpany, indicate the cmpany is experiencing financial distress. Level 1 Remediatin The Bard will, within 30 days f the cvered cmpany s entrance int Level 1 remediatin, cnduct a targeted supervisry review f the cvered cmpany. If the Bard determines that the cmpany is experiencing financial distress r material risk management weaknesses, such that further decline is prbable, the cmpany will be subject t level 2 remediatin. Level 2 Remediatin A cvered cmpany subject t level 2 remediatin-- 1. Shall nt make a capital distributin during any calendar quarter in an amunt that exceeds 50 percent f the average f the cmpany s net incme in the preceding tw calendar quarters; - 7 -
2. Shall nt permit its daily average ttal assets during any calendar quarter t exceed its daily average ttal assets during the preceding calendar quarter by mre than 5%; 3. Shall nt permit its daily average ttal assets during any calendar year t exceed its daily average ttal assets during the preceding calendar year by mre than 5%; 4. Shall nt permit its daily average risk-weighted assets during any calendar quarter t exceed its daily average risk-weighted assets during the preceding calendar quarter by mre than 5%; 5. Shall nt permit its daily average risk-weighted assets during any calendar year t exceed its daily average risk-weighted assets during the preceding calendar year by mre than 5%; 6. Shall nt, withut Bard apprval, directly r indirectly acquire any cntrlling interest in any cmpany (including an insured depsitry institutin), establish r acquire any ffice r ther place f business, r engage in any new line f business; 7. Shall be required t enter int a nn-public memrandum f understanding, r ther enfrcement actin acceptable t the Bard; and 8. May be subject t limitatins r cnditins, in the Bard s discretin, n the cnduct r activities f the cmpany r any f its affiliates. Level 3 Remediatin A cvered cmpany subject t level 3 remediatin-- 1. Shall nt make any capital distributin; 2. Shall nt permit its average ttal assets during any calendar quarter t exceed its average ttal assets during the preceding calendar quarter; 3. Shall nt permit its average ttal risk-weighted assets during any calendar quarter t exceed its average ttal risk-weighted assets during the preceding calendar quarter; 4. Directly r indirectly acquire any interest in any cmpany (including an insured depsitry institutin), establish r acquire any ffice r ther place f business, r engage in any new line f business; 5. Must enter int a written agreement r ther frm f enfrcement actin with the Bard that specifies that the cmpany must raise additinal capital and take ther apprpriate actins t imprve its capital adequacy and, if the cmpany fails t cmply with the agreement s requirements, may be required t divest assets identified by the Bard; 6. May nt increase the cmpensatin f, r pay any bnus t, its senir executive fficers r directrs; and 7. May be required by the Bard t cnduct a new electin fr the institutin s bard f directrs, dismiss frm ffice any directr r senir executive fficer f the cmpany wh had held ffice fr mre than 180 days immediately prir t receipt f ntice that the cmpany was subject t level 3 remediatin, emply qualified senir executive fficers apprved by the Bard, and cmply with restrictins applicable t the cmpany s transactins with affiliates. Level 4 Remediatin The Bard will cnsider whether the cvered cmpany pses a risk t the stability f the U.S. financial system. If the Bard determines, based n the cmpany s financial decline and the risk psed t U.S. financial stability by the failure f the cmpany r ther relevant factrs, that the cmpany shuld be reslved under Title II f Ddd-Frank, the Bard shall make a written recmmendatin that the cmpany be placed int reslutin under Title II. - 8 -
FOREIGN BANKS The enhanced prudential standards and early remediatin requirements d nt apply t freign banking rganizatins ( FBOs ), except with respect t any U.S. bank hlding cmpany subsidiary f an FBO that has ttal cnslidated assets exceeding $50 billin. The Bard is actively develping a prpsed framewrk t apply the Ddd-Frank Act s enhanced prudential standards and early remediatin requirements t FBOs, and expects t issue this framewrk fr public cmment shrtly. In extending the Act s enhanced prudential standards t FBOs, the Bard must give due regard t the principles f natinal treatment and equality f cmpetitive pprtunity, and take int accunt the extent t which FBOs are subject t cnslidated hme cuntry standards cmparable t thse in the United States. SAVINGS AND LOAN HOLDING COMPANIES The enhanced prudential standards and early remediatin requirements generally d nt apply by their terms t savings and lan hlding cmpanies. The exceptin is the cmpany-run stress test requirements, which technically apply t savings and lan hlding cmpanies, but will nt becme effective fr such cmpanies until the Bard establishes risk-based capital requirements fr savings and lan hlding cmpanies generally. Nevertheless, the Bard intends t issue a separate prpsal in the future applying the enhanced prudential standards and early remediatin requirements t all savings and lan hlding cmpanies with substantial banking activities. A savings and lan hlding cmpany has substantial banking activities if the cmpany (1) has ttal cnslidated assets f $50 billin r mre, and (2) either has savings assciatin subsidiaries that cmprise 25 percent r mre f the savings and lan hlding cmpany s ttal cnslidated assets, r cntrls ne r mre savings assciatins with ttal cnslidated assets f $50 billin r mre. NONBANK FINANCIAL COMPANIES A nnbank financial cmpany that is designated by the FSOC fr enhanced prudential supervisin by the Bard is cnsidered a cvered cmpany and accrdingly wuld be subject t the enhanced prudential standards and early remediatin requirements in the prpsed rules. While the text f the prpsed rules includes n specific exceptins r differences in the requirements t be applied t nnbank cvered cmpanies, the preamble emphasizes that the Bard, in applying any such requirements t a specific nnbank cvered cmpany r class f such cmpanies, may tailr the requirements t reflect the unique characteristics f such cmpanies. That is, the Bard may adjust the requirements, n an individual basis r by categries f financial cmpanies, based n the nnbank cvered cmpany s size, capital structure, riskiness, cmplexity, financial activities, and any ther risk-related factr the Bard deems apprpriate. On the ther hand, the Bard als may require a nnbank cvered cmpany, as well as ther cvered cmpanies, t be subject t additinal r further enhanced prudential standards, including additinal capital r liquidity requirements, limits n expsures t single cunterparties, risk management requirements, stress tests, r ther requirements r restrictins the Bard deems necessary, if the Bard determines that cmpliance with the enhanced prudential standards des nt sufficiently mitigate the risks t U.S. financial stability psed by the failure r material financial distress f the cmpany. - 9 -
In general, the enhanced prudential standards apply t a nnbank financial cmpany designated by the FSOC ne year after the cmpany s designatin by the FSOC. The risk-based capital requirements and leverage limits wuld apply 180 days after the cmpany s designatin. If yu have any questins cncerning the Bard s prpsed rules, please cntact any f the fllwing members f ur financial institutins practice grup: Jhn Dugan 202.662.5051 jdugan@cv.cm Gregry Frischmann 202.662.5256 gfrischmann@cv.cm Michael Nnaka 202.662.5727 mnnaka@cv.cm Keith Nreika 202.662.5497 knreika@cv.cm Mark Pltkin 202.662.5656 mpltkin@cv.cm Stuart Stck 202.662.5384 sstck@cv.cm D. Jean Veta 202.662.5294 jveta@cv.cm Edward Yingling 202.662.5029 yinglingel@cv.cm This infrmatin is nt intended as legal advice. Readers shuld seek specific legal advice befre acting with regard t the subjects mentined herein. Cvingtn & Burling LLP, an internatinal law firm, prvides crprate, litigatin and regulatry expertise t enable clients t achieve their gals. This cmmunicatin is intended t bring relevant develpments t ur clients and ther interested clleagues. Please send an email t unsubscribe@cv.cm if yu d nt wish t receive future emails r electrnic alerts. 2012 Cvingtn & Burling LLP, 1201 Pennsylvania Avenue, NW, Washingtn, DC 20004-2401. All rights reserved. - 10 -