Bank Prudential Regulation & Regulatory Capital
Acting US Comptroller Of The Currency Discusses Removing The Separation Between Banking And Commerce
On November 8, 2017, Acting Comptroller of the US Office of the Comptroller of the Currency Keith Noreika questioned the US regulatory requirement for banks to maintain a separation between banking and commerce. Noreika noted that the Glass-Steagall Act was enacted at a time when there were very few banks, distinguishing today's economy where there are many more banks that are subject to a "robust regulatory regime." He suggested that preventing commercial firms from engaging in banking activities has concentrated US banking operations in a few large banks. He reiterated a commonly expressed view that the financial crisis demonstrated that the separation of banking and commerce does not make the financial system inherently safer. Noreika also rebuked calls to reinstate the Glass-Steagall Act, challenging the notion that the separation of commercial banking from investment banking in any way serves the best interest of the financial system and economy.
Acting Comptroller Noreika's speech is available at: https://occ.gov/news-issuances/speeches/2017/pub-speech-2017-134.pdf .
New Federal Reserve Governor Randal Quarles Calls For Fresh Look At Various Dodd-Frank Regulatory Requirements
On November 7, 2017, Randal Quarles made his first public address after being formally sworn in as the new Vice Chairman for Supervision of the US Board of Governors of the Federal Reserve System at The Clearing House's Annual Conference in New York. Although Quarles's remarks have not yet been posted publicly, he notably called for taking a "fresh look" at various Dodd- Frank regulatory requirements, including stress testing, living wills and the leverage ratio. Although he generally did not discuss any specifics, he indicated his support for improving transparency, including seeking input for how to improve the Federal Reserve's stress testing process. He also expressed support for tailoring regulation to reflect the risks associated with a bank's activities and not just its size. Specifically, he noted that making adjustments to the $50 billion threshold for enhanced prudential supervision under Section 165 of the Dodd-Frank Act are not dependent on Congressional action.
European Banking Authority Consults On Prudential Consolidation Methods
On November 9, 2017, the European Banking Authority launched a consultation on draft Regulatory Technical Standards on the methods of prudential consolidation under the Capital Requirements Regulation. The CRR provides that banks, investment firms, financial institutions and, when certain criteria apply, ancillary services undertakings, fall within the scope of the prudential consolidation framework. Banks and investment firms are required to fully consolidate all subsidiaries that are banks, investment firms and financial institutions. Different methods of consolidation, such as proportional consolidation, the equity method or the aggregation method, are allowed as an alternative to full consolidation.
The proposed draft RTS set out conditions and indicators for the application of different methods of consolidation. The proposed draft RTS also include indicators for banks and investment firms to use to identify undertakings that could lead to step-in risk. The inclusion of these indicators is a result of the publication by the Basel Committee on Banking Standards on October 25, 2017 of final Guidelines on the identification and management of step-in risk. Step-in risk is the risk that a bank decides to provide financial support to an unconsolidated entity that is under stress in the absence of, or in excess of, any contractual obligations to do so. The indicators in the proposed draft RTS are limited in scope because the purpose of the RTS is to establish methods of prudential consolidation under a Pillar I approach, whereas the Basel Guidelines follow a Pillar II approach. It is proposed that national regulators should consider the conditions and indicators set out in the proposed draft RTS to decide on the appropriate method of consolidation for a firm.
The consultation closes on February 9, 2018. Final draft RTS for submission to the Commission will be prepared on the basis of feedback to the consultation. The European Commission will then consider whether to adopt the final draft RTS.
The consultation paper is available at: http://www.eba.europa.eu/documents/10180/2019694/Consultation+Paper+on+RTS+on+methods+of+prudential+consolidation+%28EBA-CP-2017-20%29 and the Basel Committee's Guidelines on the identification and management of step-in risk are available at: https://www.bis.org/bcbs/publ/d423.pdf.
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