US regulatory outlook – second half of 2013: Final enhanced prudential standards and Basel III rules

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07/10/2013 by Financial services regulatory practice
US regulatory outlook – second half of 2013: Final enhanced prudential standards and Basel III rules

At a glance

This Regulatory Brief provides (a) the “regulatory scorecard” for 2013 and (b) our view of the Basel III and enhanced prudential standards rulemakings that will occur over the rest of 2013.

The word “soon” has been used often by regulators to describe when delayed rulemakings would be released under the Dodd-Frank Act. Despite expectations that by this juncture – nearly three years since Dodd-Frank’s passage – banks would finally gain some needed regulatory clarity, the fog still has not lifted. Key US rulemakings remain outstanding, including the elusive final Volcker Rule and several other rules pertaining to risk retention, affiliate transactions, and broker-dealer duties.

However, 2013 has brought some important regulatory developments so far, even if not enough. Regulators finalized several key mortgage rules early this year (0n time), and provided some important derivatives specifications with respect to swap execution facilities, block trading, and the swap push-out rule (late). It is our view that the second half of 2013 will see far more regulatory development. Not just because of the additional derivatives guidance we expect (e.g., cross-border), but because we believe that a host of rules will be finalized implementing outstanding prudential standards in the US – namely, Basel III quantitative capital and liquidity rules, and enhanced prudential standards (“EPS”) affecting systemically important financial institutions (“SIFIs”).

Regardless, it is our view that US regulators are eager to complete the Basel III and EPS rules in 2013 in order to put in place the new baseline supervisory framework and deflect further criticism. Treasury Secretary Jack Lew hinted as much in his testimony before Congress in May when, in response to Congressional skepticism of Dodd-Frank, he asserted it is too early to judge Dodd-Frank’s effectiveness until its outstanding supervisory remedies take effect. Shortly thereafter, on June 3rd, three non-bank financial firms disclosed that the Financial Stability Oversight Council proposed designating them as SIFIs subject to Federal Reserve bank-like supervision (including elements of Basel III and EPS) – a prediction we made in April 2012.

This Financial Services Regulatory Brief provides (a) the “regulatory scorecard” for 2013 – what expectations were met by regulators and which were not – and (b) our view of the timing and content of the Basel III and EPS rulemakings that will occur over the rest of 2013.