Regulatory interventions in the banking space: October 23 – 30, 2017

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By Olakunle Komolafe

…a compilation of most recent banking regulatory developments from around the world.

October 30, 2017

1. United States: Federal Deposit Insurance Corporation, the Federal Reserve System, and the Office of the Comptroller of the Currency – Proposed Amendment of the Capital Rule

The Office of the Comptroller of the Currency, the Federal Reserve System, and the Federal Deposit Insurance Corporation are seeking comments on a proposed amendment that would simplify certain aspects of the capital rule.

Largely impacting banking organizations that are not subject to the advanced approaches capital rule, the proposed amendment would:
• replace the complex treatment of high-volatility commercial real estate exposures with a more straightforward treatment for most acquisition, development, or construction loans;

• simplify the current regulatory capital treatment for mortgage servicing assets, temporary difference deferred tax assets, and holdings of regulatory capital instruments issued by other financial institutions; and

• simplify the current limitations on minority interest includable in regulatory capital.

2. United Kingdom: European Banking Authority – Final Timeline for the 2018 European Union-Wide Stress Test

The European Banking Authority (EBA) published its final timeline for the 2018 European Union-wide stress test. Expected to start in early 2018, the results of the stress test will be published by November 2, 2018.

The EBA is in the process of finalizing the stress test methodology and templates. It will share the final methodology templates and guidance with participating banks by the end of this year.

October 27, 2017

1. United States: Commodity Futures Trading Commission – Swap Dealers and Compliance with Variation Margin Requirements Applicable to Swaps with Legacy Special Purpose Vehicles

The Commodity Futures Trading Commission (CFTC) announced that it was providing no-action relief to registered swap dealers in relation to compliance with the variation margin requirements of CFTC regulation 23.153.

The no-action relief applies when amending or novating swaps in existence prior to March 1, 2017 with issuers that are special purpose vehicles (SPVs), otherwise known as legacy SPV swaps.

Through a 2015 no-action letter, the CFTC had provided similar relief from certain business conduct standards concerning legacy SPV swaps.

2. United States: Office of the Comptroller of the Currency – Proposed Amendment of the Annual Stress Test Rule

The Office of the Comptroller of the Currency (OCC) announced it was seeking comments on a proposed amendment of the OCC’s annual stress test rule.

The proposed amendment would:
• change the range of possible “as-of” dates used in the global market shock component of the annual stress tests to conform with rule revisions recently made by the Federal Reserve System;

• extend the transition process for certain banks and savings associations that cross the $50 billion asset threshold; and

• make several non-substantive changes to promote clarity.

October 25, 2017

Switzerland: Basel Committee on Banking Supervision – Final Guidelines on Identification and Management of Step-in Risk

The Basel Committee on Banking Supervision (BCBS) released its final Guidelines on Identification and Management of Step-in Risk. Step-in risk is the risk that a bank provides financial support to an entity beyond, or in the absence of, its contractual obligations should the entity experience financial stress.

According to the BCBS, the guidelines would help to mitigate the risk that potential distress faced by shadow banking entities spills over to banks.

Banks will be required to assess their step-in risk based on a wide range of indicators and a self-defined but transparent materiality policy. The guidelines do not prescribe any automatic Pillar 1 liquidity or capital charge, but rather rely on the application of existing prudential measures available to mitigate significant step-in risk.

The guidelines are expected to be implemented in member jurisdictions by 2020.

October 24, 2017

1. Australia: The Treasury – Draft Legislation on Enhanced Regulatory Sandbox

The Australian Government introduced a draft framework for an enhanced regulatory sandbox to enable new and innovative financial technology products and services to be tested in Australia.

The framework extends regulation-making powers to enable an exemption from obtaining an Australian Financial Services Licence and/or an Australian Credit Licence under certain conditions for the purposes of testing financial and credit services and products.

Comment period on the framework is open until December 1, 2017.

2. United States: United States Senate – Consumer Financial Protection Bureau’s Rule on Arbitration Agreements Overturned

Last week, I reported on the Treasury Department’s conclusion on the Consumer Financial Protection Bureau’s (CFPB) arbitration rule. The Treasury had concluded the CFPB did not appropriately consider whether prohibiting arbitration clauses would advance consumer protection or serve the public interest.

The United States Senate has now joined the House of Representatives in voting to overturn the Consumer Financial Protection Bureau’s (CFPB) arbitration rule. According to the Senate banking committee Chairman, Mike Crapo, “the CFPB failed to demonstrate that consumers will fare better in light of its arbitration rule. In fact, they may be worse off.”

October 23, 2017

United States: Federal Deposit Insurance Corporation, the Federal Reserve System, and the Office of the Comptroller of the Currency – Liquidity Coverage Ratio: Frequently Asked Questions

The Federal Deposit Insurance Corporation, the Federal Reserve System, and the Office of the Comptroller of the Currency (collectively, the agencies) issued Frequently Asked Questions to address questions received by the agencies regarding the applicability of the liquidity coverage ratio (LCR) rule in specific situations.

Applicable to depository institutions with $10 billion or more in total consolidated assets that are consolidated subsidiaries of internationally active banking organizations, the LCR rule implements a quantitative liquidity requirement consistent with the Basel Committee on Banking Supervision’s standard.

Olakunle Komolafe holds an LL.M. from Harvard Law School, United States of America and another LL.M. in Energy, Natural Resources and Environmental Law from University of Calgary, Canada.

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