Financial Services Spotlight

What Does the Dodd-Frank Relief Bill mean for Enhanced Prudential Standards for Foreign Banks?

Posted by Roy Andersen on May 25, 2018 7:49:06 AM

On May 23, Congress passed a bill to revise Dodd-Frank to reduce regulatory burdens on banks. Just as with the original Dodd-Frank Act, the real work will have to be done by the banking agencies and thus months will have to elapse before we see real changes. Like most legislation, this bill is approximately 200 pages long and contains a host of changes, covering activities at banks from community organizations up to the largest banks. The major change affecting many foreign banks in the U.S. is with respect to enhanced prudential standards.

This memorandum focuses on the changes in the enhanced prudential standards for foreign banks doing business in the U.S., with particular focus on foreign banking organizations with between $50 and $100 billion in global total consolidated assets and less than $50 billion in U.S. assets. The changes made by the new law are effective immediately for banks under $100 billion; for larger banks there is an 18-month phase-in unless the Fed decides to act faster. For U.S. banking organizations, the threshold where enhanced prudential standards were imposed was raised to $250 billion for many items. The new law gives the Fed the power to raise the threshold above $250 billion for certain banking organizations but, on the other hand, may also apply enhanced prudential standards to certain banking organizations with assets over $100 billion if needed to address safety and soundness or financial stability issues.

The new law continues to use a foreign bank’s global assets as the measuring stick for the application of enhanced prudential standards, without regard to the assets in the U.S. Large foreign banks with small U.S. operations are still subject to most of the enhanced prudential standards.

Major Changes

The new law does not make any changes to the enhanced prudential standards for foreign banking organizations that have $100 billion in global total consolidated assets or more. The new law changes the threshold for the application of enhanced prudential standards from $50 billion to $250 billion except for risk committees and supervisory stress testing unless the Fed decides on a case-by-case basis to impose a lower threshold for a particular bank.

Risk Committees

Regulation YY and Section 165 of the Dodd-Frank Act applied the requirement of a risk committee to supervise U.S. activities as part of enhanced prudential standards to foreign banking organizations with over $50 billion in total consolidated assets. The new law still maintains this requirement.

Capital Stress Testing

Regulation YY and Section 165 of the Dodd-Frank Act applied capital stress testing as part of enhanced prudential standards to foreign banking organizations with over $50 billion in total consolidated assets. The new law still maintains this requirement.

Resolution Planning

Section 165 of the Dodd-Frank Act applied resolution planning as part of enhanced prudential standards to foreign banking organizations, banks and holding companies with $50 billion in total consolidated assets. The new law raises the threshold from $50 billion to $250 billion. On a case-by-case basis, the Fed may continue to impose enhanced prudential standards on holding companies with over $100 billion in assets. Accordingly, foreign banking organizations with less than $100 billion in total assets, a large portion of the “Third Wave” filers of the resolution plans, are home free and we can expect the Fed to change its rules to conform to the new law.

Liquidity Stress Testing

Regulation YY and Section 165 of the Dodd-Frank Act applied liquidity stress testing as part of enhanced prudential standards to foreign banking organizations with over $50 billion in total consolidated assets. Regulation YY required an annual report either on the foreign banking organizations as  whole or the consolidated U.S. operation. The new law raises the threshold to $250 billion. Accordingly, foreign banking organizations with less than $100 billion in total assets will become exempt from this requirement. Regulation YY will need to be amended to reflect these changes.

Single Counterparty Credit Limit

Regulation YY and Section 165 of the Dodd-Frank Act applied a single counterparty credit limit of 25% of the bank’s total capital and surplus as part of enhanced prudential standards to foreign banking organizations with over $50 billion in total consolidated assets. The new law raises this threshold to $250 billion. Accordingly, foreign banking organizations with less than $100 billion in total assets will become exempt from this requirement. Regulation YY will need to be amended to reflect these changes. 

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The Financial Services Spotlight examines the regulatory and technology developments impacting banks, asset managers and other financial services providers—where challenges meet opportunities.

The material on this site is for general information only and is not legal advice. No liability is accepted for any loss or damage which may result from reliance on it. Always consult a qualified lawyer about a specific legal problem.

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