Federal Reserve Finalizes U.S. And Foreign Bank Prudential Standards

The long-awaited standards establish significant structural, liquidity, risk management, and capital requirements for the largest U.S. and foreign banks operating in the United States, including new intermediate holding company requirements for foreign banks.

The Federal Reserve Board (Federal Reserve) has adopted final rules (Final Rules) implementing the enhanced prudential standards of section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) for U.S. bank holding companies and foreign banking organizations (FBOs) with $50 billion or more in total consolidated assets.1 The Final Rules, adopted on February 18, are based on the Federal Reserve's previously proposed rules to implement section 165 of the Dodd-Frank Act for domestic bank holding companies (domestic proposal) and FBOs (foreign proposal) (collectively, the Proposed Rules), published in December 2011 and December 2012, respectively.2

The Final Rules establish enhanced liquidity and risk management requirements for U.S. top-tier bank holding companies with total consolidated assets of $50 billion or more. In addition, the Final Rules impose a U.S. intermediate holding company requirement for FBOs with $50 billion or more in U.S. non-branch/agency assets, and they impose enhanced risk-based and leverage capital requirements, liquidity requirements, risk management requirements, and stress-testing requirements on FBOs with total consolidated worldwide assets of $50 billion or more. Lastly, the Final Rules establish a risk committee requirement for publicly traded bank holding companies and FBOs with total consolidated assets of $10 billion or more and a stress-testing requirement for FBOs with total consolidated assets of $10 billion or more.

The Final Rules will be effective for covered U.S. top-tier bank holding companies beginning on January 1, 2015 and covered FBOs beginning on July 1, 2016.

Enhanced Prudential Standards for U.S. Bank Holding Companies

Capital Planning and Stress Testing. The Federal Reserve previously adopted enhanced risk-based and leverage capital requirements and stress-testing requirements for large bank holding companies. In 2011, the Federal Reserve issued a capital plan rule requiring capital plans and governing capital distributions for bank holding companies with total consolidated assets of $50 billion or more. Thereafter, in 2012, the Federal Reserve issued final stress-test rules for bank holding companies with total consolidated assets of more than $10 billion. The Final Rules confirm these previously adopted rules and require compliance with the Federal Reserve's regulations regarding capital planning and stress testing.

Liquidity and Risk Management Requirements. The Final Rules impose new liquidity and risk management requirements on large domestic bank holding companies. Under the new liquidity requirements, a bank holding company with total consolidated assets of $50 billion or more must meet liquidity risk management standards, conduct internal liquidity stress tests, and maintain a 30-day buffer of highly liquid assets. Liquidity risk management strategies, policies, and procedures must be established by the bank holding company's senior management and approved by its board of directors and must also be subject to annual independent review.

The Final Rules further require a bank holding company with total consolidated assets of $50 billion or more to...

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