Short- and long-term EPS compliance for foreign banks
Twenty weeks. Eight challenges. One goal.
The July 1, 2016 effective date for the Federal Reserve Board's final rule on Enhanced Prudential Standards for Foreign Banking Organizations is coming up fast. Nearly two years after the rule was finalized, affected banks need to focus on this go-live date.
Although banks need to prepare themselves for the upcoming go-live date, they also need to look beyond it—and realize that the Enhanced Prudential Standards (EPS) go-live date is only the beginning of a new approach to governance, risk management, capital, and liquidity.
We expect regulators to have high expectations for July 1, 2016, as they would argue that Foreign Banking Organizations (FBOs) have already had more than three years to put this in motion since the first notice of proposed rulemaking. The regulators are ramping up their supervision and have changed their approach to align FBOs to the same portfolio as US Bank Holding Companies (BHC), and FBOs should expect the same level of attention.
FBOs with more than $50 billion in US non-branch assets are subject to the most expansive requirements1 under the new rule. Most notably, they must create US intermediate holding companies (IHCs) and will be subject to heightened expectations for governance, risk management, capital planning, and stress testing. Already, many of these large FBOs have devoted significant resources and efforts to that mandate—they've reviewed their business strategies, implemented infrastructure and organizational changes, and restructured certain operations. Affected FBOs must finalize their IHC structure and capitalization by the July 1 date, and they must certify their compliance with EPS by August 1, 2016.
However, the job doesn't end there. Many other key processes, deliverables, federal reserve reviews and final requirements will unfold over the course of the first 24 months.
Everyone from first-line risk managers to board members should understand and agree upon what will be in place by July 1, 2016, and what will need additional plans to address down the road.
What should FBOs be doing at this stage?
The impact of these regulations and the starting point in legal entity structure and the business strategy and product mix drive the complexity of implementation. No two situations are alike.
Deloitte has identified eight critical challenges that apply to many FBOs as they work to implement the new EPS rules:
- Demonstrate readiness to go live on July 1
- Build sustainable compliance
- Demonstrate US governance using clearly defined roles within the “three lines of defense”
- Align with the group or parent
- Plan for life beyond July 2016
- Manage the talent dimension
- Don't take on EPS in a vacuum
- Get a step ahead of data and automation challenges
What are the critical next steps?
It's not possible to envision and list every step that must go into EPS compliance. But with only 20 weeks before July 1, 2016, the reality is that most FBOs will have to set priorities.
Above all else, FBOs should identify and understand the areas where they are likely to fall short—and invest in the steps that can deliver meaningful progress prior to Day One.
Achieving readiness is critical, but so is effectively demonstrating it, and that puts a premium on use cases, dry runs, and full-scale simulations. And whether someone is new to the organization or just facing a new role, everyone with a role to play will require time to train.
The two years since the FBO EPS rule first appeared in draft form have sped by. The handful of days that remain before the go-live date will go by even faster. By taking on the eight discrete challenges outlined here, FBOs can keep up their speed, accelerate to and through the target, and build sustainable compliance that can not only satisfy regulators, but also improve performance.