This article is part of the PLC Global Finance January 2011 e-mail update for the United States.
The implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act for US banks, US bank holding companies, and non-US banks that operate one or more US banking offices will become clearer in 2011, as important interpretive matters are addressed through the issuance of administrative regulations. This article highlights several of the important rulemakings expected to be issued this year by the US federal banking agencies, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve.Close speedread
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) brought about several important changes to US banking law. The implications of the Act for US banks, US bank holding companies, and non-US banks that operate one or more US banking offices will become clearer in 2011, as important interpretive matters are addressed through the issuance of administrative regulations. Several of the important rulemakings expected to be issued this year by the US federal banking agencies, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve, are highlighted below.
The so-called Volcker Rule provisions of the Act instruct the US federal financial agencies to prohibit US banking institutions and non-US banks with US banking operations from:
Conducting "proprietary trading".
"Sponsoring" and "acquiring" any interest in a "hedge fund" or "private equity fund".
Guaranteeing the performance of, or lending to, a sponsored, managed or advised hedge fund or private equity fund.
In addition, the Volcker Rule places a cap, of 10% of financial industry "liabilities", on M&A related growth for banking institutions and large financial groups operating in the United States.
The US federal financial agencies (including the OCC, FDIC and Federal Reserve) are tasked with establishing parameters for the several important exceptions to the Volcker Rule prohibitions and the Federal Reserve is charged with implementing the Volcker Rule compliance timetable within the boundaries set by the Act. The outcome of rulemakings will have an enormous impact on matters such as the extent to which non-US banks, whether or not operating in the United States, may have a relative advantage over US banking organisations in terms of trading and funds-related profits.
Important rules to watch:
Financial Stability Oversight Council recommendations to the US federal financial agencies on the interpretation and implementation of the Volcker Rule (due by 21 January 2011).
Final Federal Reserve regulations regarding the transition timetable for bringing activities and investments into compliance with the Volcker Rule (rules due by 21 January 2011). (Proposed rules relating to the compliance timetable were issued on November 2010.)
Proposed and final US federal financial agency rules interpreting and implementing the Volcker Rule (expected by end of June 2011; final rules due by 21 October 2011).
Section 171 of the Act (the "Collins Amendment") tightens minimum leverage and risk-based capital requirements for US bank holding companies (including those controlled by non-US parent companies) and certain large US banks. The Collins Amendment also effectively eliminates "Tier 1" regulatory capital treatment for trust preferred securities issued by US bank holding companies.
On 15 December 2010, the OCC, FDIC and Federal Reserve jointly proposed a rule that would implement the Collins Amendment's requirement that the federal banking agencies establish leverage and risk-based capital requirements for large financial groups that are quantitatively no less than those that currently apply to insured US depository institutions, regardless of their size. The proposed rule asks for industry feedback (due on 28 February 2011) on questions including:
How should the Collins Amendment requirements be applied to non-US banks in the context of:
applications to establish branches (where the Federal Reserve is required in certain cases to assess whether the non-US bank applicant's capital is equivalent to the capital that would be required of a US banking organisation);
in evaluating capital comparability in the context of non-US bank "financial holding company" declarations.
Important rule to watch:
Final US federal banking agency rules implementing the proposed rule issued on December 15th (possibly second half of 2011; no statutory deadline).
Under Title I of the Act, the Federal Reserve is responsible for adopting stricter prudential standards for US bank holding companies that hold US$50 billion or more in consolidated assets (for example; stricter than those standards that apply to smaller institutions). In addition, the Federal Reserve and the FDIC are required to issue joint rules requiring these institutions to periodically submit plans for their rapid and orderly resolution (resolution plans or living wills). The Federal Reserve is authorised to apply several of these stricter standards/rules to non-US banking groups operating in the United States with greater than US$50 billion in consolidated assets.
Important rules to watch:
Proposed Federal Reserve rule to implement supervisory assessment fees for bank holding companies (and savings and loan holding companies) with consolidated assets of US$50 billion or more (expected by 31 March 2011).
Proposed and final Federal Reserve rule implementing the requirement, currently in effect, that the Federal Reserve be provided with written notice prior to acquiring a non-bank company with assets of US$10 billion or more (expected by 31 March 2011; final rule expected by 30 June 2011).
Proposed joint Federal Reserve and FDIC rule establishing requirements to prepare "resolution plan" (or living will) requirements (expected by 30 June 2011).
Proposed Federal Reserve rule establishing the following enhanced prudential standards (expected by 30 June 2011):
enhanced risk-based capital and leverage requirements;
credit exposure limits to any one unaffiliated entity and requirements for reports regarding significant credit exposures;
requirements for risk committees of the board of directors (applicable to publicly traded bank holding company with assets of at least US$10 billion);
requirements that the Federal Reserve and the company conduct internal and external stress tests;
requirements that institutions take increasingly stringent corrective measures as their financial conditions deteriorate.
Title II of the Act authorises the FDIC to write regulations and policies to implement its resolution authority (referred to as the "orderly liquidation authority") over failing financial companies that could pose a significant threat to US financial stability (for example; systemically important US bank holding companies). On 19 October 2010, the FDIC proposed a rule to clarify the rights of creditors of institutions subject to the orderly liquidation authority.
Important rules to watch
Final FDIC rules regarding creditor rights (FDIC target is July 2011).
Final and proposed rules on industry assessments (on a post-failure basis) to pay the costs of an orderly liquidation (FDIC target for proposed rule is April 2011 and for a final rule is July 2011).
Important rules to watch:
New rules for approval of bank transactions. Proposed and final Federal Reserve rules implementing the requirement that the Federal Reserve consider the stability of the US financial system when making a determination regarding mergers of banks and acquisitions of US bank holding companies (proposed rule expected by 31 March 2011; final rule expected by end of June 2011).
New rules for financial holding company status. Proposed and final Federal Reserve rules implementing requirements that a bank holding company demonstrate that it is "well-capitalised" and well-managed before it can qualify as a financial holding company (proposed rule expected by end of March 2011; final rule expected by end of June 2011). Existing US law only requires that US bank subsidiaries of bank holding companies meet these criteria.
Incentive compensation rule and disclosure. Proposed and final US federal financial agency rules to prohibit incentive-based compensation arrangements that discourage inappropriate risk-taking by financial institutions and to require the disclosure and reporting of certain incentive-based compensation information (proposed rule expected by end of March 2011; final rule due by 21 April 2011).
Capital and margin requirements for bank derivatives dealers and major market participants. Final rules by the appropriate bank regulatory agency setting capital and margin requirements by banking institutions required to register as a "swap dealer" or "major swap participant" (final rule due by July 2011).
Restrictions on transactions with insiders. Proposed Federal Reserve rule providing detail on limitations on US depository institution transactions with insiders such as executive officers and directors (expected by end of March 2011).
For a detailed discussion and analysis of these as well as other areas addressed by Dodd-Frank, please see our memorandum entitled: Landmark financial regulatory reform legislation passed by US Congress.
Shearman & Sterling LLP has also published separate client alerts regarding the Volcker Rule. Please see the latest memorandum entitled: Financial regulatory reform update: The Volcker Rule continues to garner outsized attention in the wake of passage of financial reform legislation.