On October 14, 2022, the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”) issued an advance notice of proposed rulemaking indicating whether they should impose additional requirements related to resolution to the largest regional banks (“ANPR”).1 ANPR is an important development that could result in some large regional banks being treated more as Global Systemically Important Banks (“G-SIBs”) despite their smaller size and less complex operations.
Comments on the ANPR should be submitted within 60 days of its publication in the federal register, which is expected shortly. We expect the Federal Reserve and FDIC to issue a new notice of proposed rulemaking in 2023 containing proposed rule text. In this legal update, we provide general information about ANPR and touch on some of its main topics.
Under the Dodd-Frank Act, banking organizations with more than $50 billion in total assets were subject to a wide range of enhanced prudential standards, including capital and resolution planning requirements.2 In 2018, Congress enacted the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) (“Relief Act”), which raised the threshold for many of the standards prudential improved to $100 billion or $250 billion.3 Federal banking regulators have implemented the relief act through several regulations that have tailored the application of the enhanced prudential standards to be applied to banking organizations based on the asset size and complexity of each organization.4 These regulations established a framework that sorted banks with total assets of $100 billion or more into four different categories based on several factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale, non-bank assets and off-balance sheet. exposure.
However, in late 2021, the sands began to shift and federal banking regulators began to consider applying additional requirements to large banking organizations. In particular, the Interim Comptroller of the Currency announced in April 2022 a bold framework of additional resolution-related standards that would be imposed on large regional banks. This was all the more remarkable given that his agency, the Office of the Comptroller of the Currency, did not administer most of the relevant standards imposed.
ANPR Key Points
ANPR focuses on Category II and Category III banking organizations and seeks public input on a dozen specific questions covering a number of different topics. Category II banking organizations have $700 billion or more in average total consolidated assets or $75 billion or more in cross-jurisdictional activity. Tier III banking organizations have between $250 billion and $700 billion in average total consolidated assets or $75 billion or more in off-balance sheet exposures, non-banking assets, or short-term wholesale funding. Currently, there is one U.S. Class II banking organization, approximately five U.S. Class III banking organizations, and a similar number of similarly sized U.S. intermediary holding companies of foreign banking organizations.5
ANPR says all eight US G-SIBs have adopted a Single Point of Entry (“SPOE”) resolution strategy, in which only the top-tier holding company would initiate resolution proceedings and in which losses would be ignored subsidiaries to shareholders of the parent company and holders of long-term debt to recapitalize the subsidiaries. This contrasts with the multiple-point-of-entry (“MPOE”) resolution strategy adopted by U.S. Tier II and Tier III banking organizations, in which the parent holding company would go bankrupt and the subsidiary of the depository institution insured would be subject to FDIC-led resolution under the federal deposit insurance law.
Federal banking regulations do not require an organization to adopt SPOE or MPOE as a resolution strategy, but it is widely accepted that regulators prefer SPOE for most large banking organizations. For example, ANPR notes that regulators have designed total loss-absorbing capacity (“TLAC”), long-term debt and clean holding company requirements for large banking organizations specifically to support an SPOE strategy.
Therefore, ANPR is seeking comments on whether and how the Federal Reserve and FDIC should adapt G-SIB resolution-related requirements for large banking organizations (presumably, Category II banking organizations and category III). The study-specific requirements are as follows:
- Require large banking organizations (or their subsidiary insured depository institutions) to hold qualifying forms of long-term debt that could be used to absorb losses before or during a resolution event.
- Adopt the G-SIB TLAC requirement eligibility criteria for long-term debt instruments issued by large banking organizations, such as the requirement that debt be issued by an organization’s senior holding company banking.
- Adopt own holding company requirements for large banking organizations.
- Require major banking organizations to disclose to holders of long-term debt the potential treatment of that debt in resolution.
Finally, ANPR is also seeking comment on whether the Federal Reserve and FDIC should impose separability requirements on G-SIBs and large banking organizations, which could include the identification and design of ” separability options” which provide alternatives to a wholesale acquisition by a large institution. as an existing GSIB. These options could involve the sale, transfer or divestiture of significant assets, portfolios, legal entities or lines of business on a separate product line or on a regional basis and, in some respects, resemble the MPOE resolution strategy currently favored by many large banking organizations.
Take away food
Imposing new prudential and resolution-related obligations on regional banking organizations would defeat Congress’ intent in passing the Relief Act to differentiate regulation for GSIBs and regional banks. Therefore, if the Federal Reserve and FDIC propose regulations to enforce the proposals contained in the ANPR, we should expect vigorous debate in Congress and outside.
Further, it is unclear how the changes outlined in the ANPR would interact with the ongoing review of the bank merger regime. Conceptually, merger approval should not be conditional on additional ongoing prudential standards, as existing regulatory requirements are based on where a bank falls into existing categories. However, the Federal Reserve has indicated that in some cases it will still impose new standards as a condition of approving a merger. This approach has the potential to create an uneven playing field for banking organizations that would otherwise find themselves in the same situation.
Finally, the G-SIB requirements are a relatively blunt instrument that arguably addresses the unique characteristics of larger organizations, which typically have significant capital markets activities and substantial assets held by non-bank subsidiaries. Applying the existing G-SIB framework to regional banking organizations, which do not have significant capital markets activities and most of the assets of which are owned by the bank, may establish a regulatory regime that does not correspond to the risk profiles of these organizations or imposes substantial costs.
1. Press release, The Federal Reserve Board invites the public to comment on a notice of regulatory proposal aimed at strengthening the ability of regulators to resolve large banks in an orderly manner in the event of failure (Oct 14, 2022), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20221014a.htm.
2.See for example, SCRRegulation of banking systemic risk: the threshold of 50 billion dollars provided for by the Dodd-Frank Act(December 6, 2017).
3. For instance, Global and US financial regulators have devised several quantitative measures of a banking organization’s systemic risks, which have revealed the wide differences in systemic risk between institutions. Financial Research Office, Banking Systemic Risk Monitor (Oct 18, 2022), https://www.financialresearch.gov/bank-systemic-risk-monitor/.
4. See Press releaseThe Federal Reserve Board is finalizing rules that tailor its regulations to domestic and foreign banks to better match their risk profiles (October 10, 2019), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20191010a.htm.
5. Federal Reserve, Supervisory and Regulatory Report, app. A (May 2022), https://www.federalreserve.gov/publications/2022-may-supervision-and-regulation-report-appendix-a.htm.
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This article by Mayer Brown provides information and commentary on interesting legal issues and developments. The foregoing is not a complete treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action regarding the matters discussed here.