On February 18, the Federal Reserve Board (Federal Reserve) approved a Final Rule to enhance supervision over the largest US bank holding companies (BHCs) and the largest foreign banking organizations (FBOs) with operations in the United States. The Final Rule was adopted pursuant to Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Final Rule applies primarily to BHCs with $50 billion or more in total assets (Large BHCs), but it also creates some requirements for certain BHCs with total assets from $10 billion to $50 billion.
Federal Reserve Chair Janet Yellen stated that the Final Rule addressed the destabilizing effect on the financial system and economy caused by the failure of large financial institutions. Although nonbank financial companies designated for oversight by the Financial Stability Oversight Council are not subject to the Final Rule, the Federal Reserve stated that it would implement rules for such entities at a later date.
Under the Final Rule, a US Large BHC will be subject to capital planning and stress testing requirements previously issued under the Dodd-Frank Act. A Large BHC must also comply with enhanced risk-management and liquidity standards, conduct liquidity stress tests and hold a buffer of highly liquid assets based on projected funding needs during a 30-day stress event. Any publicly traded US BHC with $10 billion or more in total assets is also required to establish an enterprise-wide risk committee.
The Final Rule also covers an FBO with a US presence. An FBO with $50 billion or more of US non-branch assets (i.e., the sum of the consolidated assets of each top-tier US subsidiary of the foreign banking organization) must establish a US holding company, is subject to the same capital planning and stress testing requirements as a US BHC, and must also establish a US risk committee and hire a US chief risk officer. A publicly traded FBO with more than $10 billion in total assets must establish a US risk committee and conduct stress testing. An FBO with more than $50 billion in total assets but less than $50 billion in US assets is subject to additional capital, liquidity and risk-management requirements. The Federal Reserve estimates that the holding company requirement in the Final Rule will apply to 15-20 FBOs while the Final Rule will apply to approximately 100 foreign banks in the United States overall.
US BHCs must comply with the Final Rule by January 1, 2015. FBOs must submit their plans to comply with the rule by January 1, 2015, but they will have until July 1, 2016, to implement their plans.
The 415-page final rule can be found here.