Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd Frank") to deal with the myriad problems that it believed caused the 2008 financial crisis. Among the problems the legislation sought to address was the macro issue of what to do about the "Too Big To Fail" larger financial services organizations and the impact their financial distress might have upon the stability of the United States banking or financial system. One of the lessons learned that the Congress tried to address is to get ahead of the financial distress issue and try to minimize any negative fallout onto the US economy. One approach the Congress chose is found in sections 165 and 166 of Dodd-Frank. That is, by granting the Federal Reserve Board ("Board") the authority to put in place on its own, or following recommendations by the Financial Stability Oversight Council ("Council"), in addition to what is in place for the financial services industry at large - stronger, stricter and enhanced prudential standards for the larger nonbank financial companies and for those bank holding companies with total consolidated assets of $50 billion or more.
In effect, if a bank holding company or a nonbank financial services company is designated by the Council as a Systemically Important Financial Institution, that is a SIFI or "covered company," it will become subject to regulatory standards that are more demanding than those standards imposed on their non-SIFI competitors. These more exacting standards, were put out for comment by the Board December 23, 2011, as a proposed rule ("Proposed Rule"). The Proposed Rule focuses on seven areas:
Risk-Based Capital and Leverage Requirements
Single-Counterparty Credit Limits
Risk Management Requirements
Stress Testing Requirements
Early Remediation Framework
The Board notes that key components of these proposed Enhanced Prudential Standards have been under development by the Basel Committee on Banking Supervision ("BCBS"), particularly with respect to the Basel III capital rules and the capital surcharge for SIFIs. The same Basel Committee has proposed liquidity rules that also need to be considered by the Board....
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