Federal Reserve Board finalized tailoring Prudential Standards for foreign banking organizations has been saved
Perspectives
Federal Reserve Board finalized tailoring Prudential Standards for foreign banking organizations
Key takeaways from the final rule
On October 10th, 2019, the Federal Reserve Board (FRB) finalized the tailoring of the post-crisis regulatory framework for foreign banking organizations (FBOs) Enhanced Prudential Standards (EPS). The tailoring of EPS for FBOs is intended to “maintain the resilience built up across the US financial system over the past decade, while at the same time making appropriate adjustments for firms that present less risk.
October 21, 2019 | Federal Reserve Board finalized tailoring Prudential Standards for foreign banking organizations
On October 10th, 2019, the Federal Reserve Board (FRB) finalized the tailoring of the post-crisis regulatory framework for foreign banking organizations (FBOs) Enhanced Prudential Standards (EPS).1 According to Chair Jerome H. Powell the rule "kept the toughest requirements on the largest and most complex firms, because they pose the greatest risks to the financial system and our economy".2 Governor Lael Brainard was the sole objection to the final rule stating the rule provides "little benefit to the banks or the system from the proposed reduction in core resilience that would justify the increased risk to financial stability in the future" She also noted that by deferring liquidity requirements for US branches of FBO the rule fails to take into considerations one of the key outstanding risks in the current landscape.3
The final rule marks a significant new stage in the evolution of tailoring by bank regulators that have intensified since its early start decades ago. As designed, the EPS tailoring rule fine-tunes requirements for capital, stress testing, liquidity, large exposures, and reporting based on financial metrics that serve as a proxy for a firm’s size, complexity, interconnectedness, and systemic importance.
While the Fed used its discretion in establishing the tailoring metrics, the rule is largely consistent with the asset-size thresholds laid out in in the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA)4 and in some cases provides tailoring relief beyond that in the legislation; that legislation gave the FRB greater discretion to tailor or eliminate EPS requirements. In a complementary rulemaking, the FRB and Federal Deposit Insurance Corporation (FDIC) also tailored requirements related to resolution plans or "living wills" in a similar manner.5 Moreover, the banking agencies are working to finalize their related EPS and other rules at the insured depository level.
Efforts to tailor the post-crisis reform standards reflect concern that the initial efforts had gone too far and did not adequately balance the tradeoff between safety and soundness and burden, especially for smaller and less complex firms. Much of the tailoring reflects the experience of the industry and regulators in implementing and enforcing the latest rules and guidance. To date, only very modest relief has been granted to the largest banks, while smaller banks have received modest to substantial relief.
The final rule will be effective 60 days from being published in the Federal Register.
April 16, 2019 | Federal Reserve Board proposes tailoring Prudential Standards for foreign banking organizations
On April 8, 2019, the Federal Reserve Board (FRB) proposed tailoring the post-crisis regulatory framework for foreign banking organizations (FBOs) known as Enhanced Prudential Standards (EPS). Substantively similar to the FRB’s November 2018 proposal to tailor EPS for large, domestic banking institutions by size, complexity, business model, and risk of each firm, the proposal creates a comparable model for foreign banks. According to FRB Vice Chairman for Supervision Randal Quarles, the proposal will create a "level playing field between foreign banks operating in the United States and domestic firms of similar size and business models" and will give "due regard to the principle of national treatment."5 The proposal was required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).6
Endnotes
2 Opening Statement by Chair Jerome H. Powell (Oct 10, 2019), available at https://www.federalreserve.gov/newsevents/pressreleases/powell-opening-statement-20191010.htm
3 Statement by Governor Lael Brainard https://www.federalreserve.gov/newsevents/pressreleases/brainard-statement-20191010.htm
4 The EGRRCPA was signed into law on May 24, 2018. It increased the asset threshold for a banking organization to be designated as a systemically important financial institution (SIFI) from $50
5 Statement by Vice Chairman Randal Quarles (Apr. 8, 2019), available at
https://www.federalreserve.gov/newsevents/pressreleases/99A5C407E998418CB2CB9DDB85C54B0B.htm.
6 Ibid.
This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.
Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.
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