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
In his written testimony before the Senate Banking Committee on Dodd-Frank implementation, Federal Reserve Board Governor Daniel K. Tarullo outlined the Federal Reserve’s prudential regulatory and supervisory priorities for 2014. As discussed further in this blog post, these priorities include, among other things: (1) finalizing, in the “near term,” Dodd-Frank enhanced prudential standards for large domestic and foreign banking firms; (2) proposing, “fairly soon,” to implement the Basel Committee’s risk-based capital surcharge for global systemically important banks (G-SIBs); (3) finalizing, in the “coming months,” higher Basel III supplementary leverage ratio standards for the 8 U.S.… Read More
Overview of European Commission’s Proposal on Reporting and Transparency of Securities Financing Transactions (SFTs)
Alongside its proposed EU banking sector structural reforms, the European Commission (EC) has issued a proposal regarding the reporting and transparency of securities financing transactions (SFTs). This blog post provides a high-level overview of certain aspects of the EC’s SFT proposal.
EC’s Stated Rationale for the SFT Proposal: The EC stated that “[t]o prevent banks from shifting parts of their activity to the less-regulated shadow banking sector, it is important that any structural separation measure [such as the EC’s proposed banking sector structural reforms] is accompanied by measures improving the transparency of shadow banking.” According to the EC, transparency helps ensure that authorities and market participants have an appropriate understanding of how the markets work and the magnitude and nature of any potential risks. … Read More
The European Banking Authority (EBA) has announced key components of the forthcoming 2014 EU stress test that will be conducted on a sample of 124 EU banks covering at least 50% of the national banking sector in each EU Member State. According to the EBA, the EU stress test aims at ensuring consistency and comparability of the outcomes across all sample banks based on common methodologies, scenarios and disclosures.
Key Features of the 2014 EU Bank Stress Test: According to the EBA, the 2014 EU stress test will include the following key features:
Capital Thresholds: A Common Equity Tier 1 (CET1) risk-based capital ratio of 8% will be the capital hurdle rate for the baseline scenario and a CET1 risk-based capital ratio of 5.5% will be the capital hurdle rate for the adverse scenario. … Read More
Basel Committee Chairman Stefan Ingves has delivered a speech discussing the Basel Committee’s policy agenda over the next year, noting that “there is still a lot on the Committee’s plate – at last count, a total of around 50 projects.” Among other topics, Chairman Ingves discussed the variation of risk-weighted assets (RWAs) among banks and potential policy responses.
The Basel Committee has published three studies on the variation of RWAs among banks – two for the trading book (our earlier blog post on this topic is available here) and one for the banking book (our earlier blog post on this topic is available here). … Read More