Federal Reserve Proposes Enhanced Prudential Standards and Early Remediation Requirements

The Federal Reserve has released proposed rules to implement the enhanced supervisory and prudential requirements in Sections 165 and 166 of the Dodd-Frank Act. These proposed rules represent the Federal Reserve’s primary effort, one and a half years after the enactment of Dodd-Frank, to put in place prudential standards that will govern the largest bank holding companies in the United States and any nonbank financial firm designated in the future as systemically important and subject to Federal Reserve oversight. Our memorandum, Federal Reserve Proposes Enhanced Prudential Standards and Early Remediation Requirements For Large BHCs and Nonbank SIFIs, describes the Federal Reserve’s proposal.

Of particular interest, the Federal Reserve is proposing, for the first time, to formally limit the consolidated exposures that a large BHC or nonbank SIFI, together with its subsidiaries, may have to any other counterparty at 25% of its capital and surplus, and to limit such exposures between the very largest institutions to 10% of capital and surplus. In addition, the Federal Reserve is proposing, for the first time, to require large BHCs and nonbank SIFIs to comply with a formal regulatory liquidity standard. While these proposed rules are consistent with Dodd-Frank’s requirements, and in some cases tie in with international regulatory efforts, they represent a new chapter in the regulation of large banks and non-bank financial institutions and efforts to reduce systemic risk. The proposed rules, however, defer rulemaking on several important topics to a future release. For example, despite press reports, the proposed rules do not contain the Basel Committee’s G-SIB surcharge but instead state that the Federal Reserve will implement the surcharge by 2014, with it taking effect between 2016 and 2019.

The full memorandum is available here.