Prudential Regulators

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Risk-Based Capital Guidelines: Market Risk
Proposal Date Final Rule Issue Effective Date
December 21, 2011 August 30, 2012 January 1, 2013

One of the mandates of the Dodd-Frank Act is that the appropriate regulators develop a framework for swap dealers and major swap participants.

The agencies consist of:

  • Office of the Comptroller of the Currency, U.S. Department of the Treasury (OCC): The OCC charters, regulates and supervises all national banks, and also supervises national affiliates of foreign banks. [1]
  • Board of Governors of the Federal Reserve System (Fed): Founded in 1913 to provide stability to the nation's monetary and financial system, the Fed monitors and regulates banking institutions. Its dual mandate is to provide price stability and to maintain full employment. [2]
  • Federal Deposit Insurance Corporation (FDIC): The FDIC was created through the Glass-Steagall Act of 1933 to maintain stability and confidence in the nation's banks and thrift institutions. The FDIC insures deposits, audits member banks for soundness, and manages receiverships.[3]
  • Farm Credit Administration (FCA): The Federal agency responsible for regulating credit and financial services for participants in the U.S. agriculture industry and in rural areas of the country. The agency was created during the Great Depression of the 1930s, and its authority was amended by the Farm Credit Act of 1971.[4]
  • Federal Housing Finance Agency (FHFA): The Federal agency created in 2008 to regulate Government Sponsored Enterprises (GSEs) Fannie Mae, Freddie Mac, and Federal Home Loan Banks. [5]

Background

According to Dodd-Frank, entities under the jurisdiction of a prudential regulator would follow its rules. All other swaps would be under the jurisdiction of the CFTC and SEC. For more information, see the summary table of swaps definitions.

FSOC

In December 2009, the House Financial Services Committee established the Financial Stability Oversight Council in order to put an end to “too big to fail” financial firms. It was created as a nine-member council, made up of the heads of prudential regulators and financial regulatory agencies, and led by the Treasury secretary, to monitor systemic risks. The council has held periodic meetings and has commissioned several studies and white papers, including the Volcker Rule.

Credit Risk Retention

In early 2011, a group of six government agencies, the SEC, Federal Reserve, Housing and Urban Development, FDIC, Federal Housing Finance Agency, and the Office of the Comptroller of the Currency, approved a joint rule proposal and request for comment on the topic of credit risk retention. The proposed rules are intended to be a preliminary framework for the implementation of Dodd-Frank mandated changes to the retention of credit risks among financial institutions, specifically as they relate to asset backed securities.

The rule proposes a retention of risk by holding at least 5 percent of each class of ABS issued in a securitization transaction (also known as vertical retention), and a "first-loss" residual interest of 5 percent of par value of securitizations (horizontal retention). The rules also include exemptions and specific requirements for certain types of loans and asset-backed securities. The rule was re-proposed in August 2013 with an emphasis on fair value measurements without a premium capture provision.

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Margin and Capital Requirements

On April 12, 2011, five U.S. regulatory agencies ("Prudential Regulators") issued a joint rule proposal regarding the establishment of minimum margin and capital requirements for covered swap entities - registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants for which one of the Agencies is the prudential regulator. The proposal entered the Federal Register on April 12, 2011. The deadline for public comment was July 11, 2011.

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Risk-Based Capital Guidelines: Market Risk; Alternatives to Credit Ratings for Debt and Securitization Positions, December 21, 2011

On December 21, 2011, the Office of the Comptroller of the Currency (OCC), Department of the Treasury; Board of Governors of the Federal Reserve System ("Fed"); and Federal Deposit Insurance Corporation (FDIC) jointly issued a proposed rule incorporate into the proposed market risk capital rules certain alternative methodologies for calculating specific risk capital requirements for debt and securitization positions that do not rely on credit ratings. This is an amended proposal to a proposal issued in January 2011. The amended proposal includes "alternative standards of creditworthiness to be used in place of credit ratings to determine the capital requirements for certain debt and securitization positions covered by the market risk capital rules."[6]

The proposed standards for creditworthiness are based partially on risk classifications published by the Organization for Economic Cooperation and Development (OECD) and the Basel Committee on Banking Supervision. The regulators believe the implementation of these standards will be consistent with those of the Basel Committee.

Public comments will be accepted until February 3, 2012. Comments may be submitted HERE.

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Proposed Guidance on Leveraged Lending, March 2012

The proposed guidance outlines high- level principles related to safe and sound leveraged lending activities, including underwriting considerations, assessing and documenting enterprise value, risk management expectations for credits awaiting distribution, stress testing expectations and portfolio management, and risk management expectations. This proposed guidance would apply to all Federal Reserve-supervised, FDIC-supervised, and OCC-supervised financial institutions substantively engaged in leveraged lending activities. The number of community banking organizations with substantial exposure to leveraged lending is very small; therefore the Agencies generally expect that community banking organizations largely would be unaffected by this guidance. [7]

Public comments will be accepted until June 8, 2012. Comments may be submitted HERE.

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Proposed Rules for Basel III Implementation, June 2012

The proposed guidances outline an integrated regulatory capital framework that addresses shortcomings in regulatory capital requirements that became apparent during the recent financial crisis. The proposed rule would implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. [8]

The first notice of proposed rulemaking (NPR), titled Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, and Transition Provisions, would apply to all depository institutions, bank holding companies with total consolidated assets of $500 million or more, and savings and loan holding companies (collectively, banking organizations).

The second NPR, titled Regulatory Capital Rules: Standardized Approach for Risk-weighted Assets; Market Discipline and Disclosure Requirements, also would apply to all banking organizations. This NPR would revise and harmonize the Board's rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses that have been identified over the past several years. Banks and regulators use risk weighting to assign different levels of risk to different classes of assets--riskier assets require higher capital cushions and less risky assets require smaller capital cushions.

The third NPR, titled Regulatory Capital Rules: Advanced Approaches Risk-based Capital Rule; Market Risk Capital Rule, would apply to banking organizations that are subject to the banking agencies' advanced approaches rule or to their market risk rule.1 This NPR would enhance the risk sensitivity of the current rule for internationally active firms to better address counterparty credit risk and interconnectedness among financial institutions. It also would apply the advanced approaches rule and market risk capital rule to savings and loan holding companies that meet the relevant size, foreign exposure, or trading activity thresholds.

The deadline for public comment was September 7, 2012.

Implementation of Basel III

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Advanced Approaches Risk-based Capital Rule

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Standardized Approach for Risk-weighted Assets

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Stress Test Final Rules, October 2012

On October 9, 2012, three prudential regulators, the FDIC, the OCC, and the Federal Reserve published a set of final rules implementing Section 165 of the Dodd-Frank Act, the requirement of annual stress tests. To view a summary of each of the rules, click the links below.

Office of the Comptroller of the Currency

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Federal Deposit Insurance Corp.

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Federal Reserve Board

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OCC Guidance: Transition Period for Swap "Pushout" Provision - January 2013

On January 4, 2012, the Office of the Comptroller of the Currency (OCC) issued guidance regarding compliance with Section 716 of the Dodd-Frank Act, the swap "pushout" provision, which prohibits banking institutions that are considered "swap entities" from using any federal assistance they receive to support swap activities. swap entities may request an extension of up to two years.

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References

  1. About the OCC. Office of the Comptroller of the Currency. Retrieved on July 14, 2011.
  2. Overview of the Federal Reserve System. Federal Reserve. Retrieved on July 14, 2011.
  3. About FDIC. Federal Deposit Insurance Corporation. Retrieved on July 14, 2011.
  4. FCA in Brief. Farm Credit Administration. Retrieved on July 14, 2011.
  5. About FHFA. Federal Housing Finance Agency. Retrieved on July 14, 2011.
  6. Agencies Seek Comment on Additional Revisions to the Market Risk Capital Rules. Board of Governors of the Federal Reserve System. Retrieved on December 22, 2011.
  7. Proposed Guidance on Leveraged Lending. FDIC. Retrieved on April 20, 2012.
  8. Basel III. Federal Reserve. Retrieved on July 10, 2012.

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