U.S. financial regulators found themselves on the receiving end of an outpouring of concern from lawmakers last Wednesday about the risks to the banking sector and debt markets from the treatment of collateralized loan obligations (“CLOs”) in the Volcker Rule final regulations. Regulators and others have come to realize that treating CLOs as if they were hedge funds is a problem and we now understand from Governor Tarullo’s testimony that the treatment of CLOs is at the top of the list for the new interagency Volcker task force. … Read More
The Federal Reserve has scheduled an open meeting for Tuesday, February 18, 2014, at 3:15 p.m., to vote on a final rule establishing Dodd-Frank enhanced prudential standards for U.S. bank holding companies with ≥$50 billion in total consolidated assets (Large U.S. BHCs) and foreign banking organizations with ≥$50 billion in total consolidated assets (Large FBOs).
By way of background, Section 165 of the Dodd-Frank Act requires the Federal Reserve to establish enhanced prudential standards, including heightened capital standards, liquidity standards, single counterparty credit limits, enhanced risk management requirements, capital stress testing requirements (final rules already issued) and an early remediation framework, for Large U.S.… Read More
The OCC has proposed a set of enforceable and specific risk governance guidelines to formalize its heightened expectations for large national banks and federal savings associations. The risk governance guidelines would set new, and much higher, minimum standards for the design and implementation of a bank’s own risk governance framework and the oversight of such framework by the bank’s board of directors.
State banks that are not subject to the OCC’s proposed risk governance guidelines should still pay attention because the same or similar principles will likely be applied by the Federal Reserve and the FDIC to large state member and non-member banks.… Read More
The Basel Committee recently finalized its revisions to the Basel III leverage ratio. Compared to its June 2013 proposal, the Basel Committee has made several important changes to the denominator of the Basel III leverage ratio. Davis Polk’s visual memorandum uses diagrams, comparison tables, examples and formulas to illustrate the Basel Committee’s revisions to the Basel III leverage ratio and potential U.S. implementation issues.
Here is the bottom line for the Volcker TruPS CDOs interim final rule issued by the U.S. regulators yesterday.
No Relief for CLOs: The rule does not help CLOs at all.
TruPS CDOs: For TRuPS CDOs we believe it will be very helpful.
Specifically, the interim final rule permits any banking entity, large or small, to retain an interest in, or to act as sponsor (including as trustee) of, an issuer that is backed by TruPS so long as:
- The TruPS CDO issuer was established before May 19, 2010;
- The banking entity reasonably believes that the offering proceeds received by the issuer were invested primarily in Qualifying TruPS Collateral; and
- The banking entity’s interest in the vehicle was acquired on or before December 10, 2013 (unless acquired pursuant to an M&A).
Today, the Basel Committee’s oversight body, the Group of Governors and Heads of Supervision (GHOS), endorsed a number of important proposed and final revisions to the Basel III capital and liquidity standards, including:
- Revisions to the Basel III leverage ratio, which are intended to reflect agreement on a consistent measure of leverage “to overcome differences in national accounting frameworks” and to maintain the leverage ratio as a “backstop” to risk-based capital requirements;
- Proposed changes to the Basel III net stable funding ratio (NSFR), for which the Basel Committee has released a consultative document;
- Final Pillar 3 disclosures standards relating to the Basel III liquidity coverage ratio (LCR);
- Revisions to the Basel III LCR providing that committed liquidity facilities of a type already recognized for jurisdictions with insufficient high-quality liquid assets (HQLAs) may have a role to play within the LCR framework; and
- The Basel Committee’s strategic priorities for the next two years, which include ongoing monitoring and assessment of Basel III implementation; further examining the Basel framework’s balance between simplicity, comparability and risk sensitivity; and improving effectiveness of supervision.