Our take: PwC's financial services update

Change remains a constant in financial services regulation. Read "our take" on the latest developments and what they mean.

Current topics - July 13, 2018

Resolution plan public sections released

On July 9, the Federal Reserve (Fed) and Federal Deposit Insurance Corporation (FDIC) released the public portions of the resolution plans that were due on July 1 for four of the largest, most complex foreign banking organizations (FBOs). The plans are the first submissions for these FBOs since 2015 and reflect substantial changes to their US operations as well as changes to regulatory expectations. For example, the 2016 implementation of Intermediate Holding Company (IHC) requirements for FBOs required stronger capital, liquidity, and overall risk management. Importantly, and following the lead of the US Global Systemically Important Banks (GSIBs), the new IHC structures enabled these FBOs to shift to a Single Point of Entry (SPOE) resolution strategy for their US operations, where only the IHC goes into bankruptcy, while operating subsidiaries are wound down or sold over time.

In addition, the FDIC released the public portions of plans submitted on July 1 by 41 US insured depository institutions (IDIs), which are required to submit plans separately from those submitted by bank holding companies (BHCs) to both the Fed and FDIC. Eleven of the 41 banks are part of GSIBs, while 30 are mid-sized, mostly regional, banks. The GSIBs generally provide the most information, in part to clarify the differences between their BHC and IDI strategies but also to demonstrate their improved resolvability. In contrast, the mid-sized banks largely limited their public disclosure to the required elements. However, several of the mid-sized banks enhanced their disclosures, particularly regarding options to separate the bank’s businesses and assets for disposition or sale to multiple acquirers.

Our take

The FBOs seem to have followed the US GSIBs’ lead by using their public portions to highlight the material financial, structural, and operational enhancements to resolvability made since 2015. Whether these enhancements hold up to regulatory scrutiny and expectations will be determined from the much more substantial confidential portions, but it remains to be seen if new referees at the agencies are willing to issue the hammer of a ‘not-credible’ determination.

In contrast, the IDI plans are stay-the-course submissions, with no real surprises or meaningful changes. We take this as a welcome by-product of the maturation of the resolution planning process that began in earnest in 2011. Conspicuously absent, however, is any indication of whether the FDIC will find a path for granting resolution planning relief to IDIs in organizations with less than $100 billion in total consolidated assets, as this requirement is not directly affected by the recently passed financial regulation relief law.

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Regulators clarify impact of regulatory relief law

On July 6, bank regulators issued two statements to clarify their approach to implement changes to regulatory thresholds in the recently enacted financial regulation relief law, which removes a number of Dodd-Frank Act statutory requirements for firms with less than $100 billion in total consolidated assets.

The Fed, FDIC, and Office of the Comptroller of the Currency (OCC) issued an interagency statement covering relief from numerous requirements applicable to depository institutions (i.e., state member banks, nonmember banks and national banks), including company-run stress testing, BHC-level resolution planning, risk-weighting of High Volatility Commercial Real Estate (HVCRE) exposures, and the qualification of municipal debt as high quality liquid assets. While some of this relief is effective immediately, the agencies note that they will enforce the requirements in line with changes from the financial regulation relief bill until they formally amend the regulations implementing these requirements.

A separate statement from the Fed follows a similar track by clarifying the immediate relief it will provide to BHCs with less than $100 billion in total consolidated assets, including exemption from fees assessed to cover their supervision, enhanced prudential standards, modified liquidity coverage ratio requirements, and stress testing – both supervisory and company-run. The Fed further specifies its approach to HVCRE risk weighting as well as reporting and recordkeeping. 

Finally, in both statements the regulators note that they will continue to supervise institutions that have received relief in line with safety and soundness principles.

Our take

It’s good to have relief spelled out as the official position at the regulators while the regulations remain on the books. The $100 billion asset bright line relief continues to become the bar beneath which regulations do not apply. It is interesting to note, however, that relief is not a complete reprieve from supervision. The fact that the regulators point out that they will continue to assess capital planning and risk management through regular supervision means that firms should not let these capabilities slip.

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Basel methodology revisited

On July 5, the Basel Committee on Banking Supervision (BCBS) provided updates to its GSIB systemic importance assessment methodology, which is used to determine whether a bank is a GSIB and the size of the capital surcharge each GSIB must maintain. The methodology was originally developed in 2013 and is made up of both quantitative and qualitative indicators – including size, interconnectedness, substitutability, global cross-jurisdictional activity, and complexity. An updated list of GSIBs based on the new methodology will be published in November 2021, with the resulting surcharges becoming effective in January 2023. The next review of the methodology will take place in three years, with a particular focus on potential replacements for the substitutability criteria.

While the core of the methodology remains the same, BCBS did make a number of enhancements. One key change was the introduction of a trading volume indicator – weighted at 3.33% – into the substitutability category, which is designed to reflect the systemic importance of a bank’s market making and agency-based trading activities. Another important change is the consolidation of exposures and activities of a bank’s insurance subsidiaries into some of the systemic indicators for size, interconnectedness, and complexity. Under the existing framework, insurance subsidiaries were excluded from all systemic indicator calculations. Additionally, in a move that brings the BCBS methodology in line with the US implementation, if a bank’s new GSIB score falls into a lower surcharge bracket, the change immediately results in a lower surcharge. Under the current BCBS methodology, the change would only have occurred after 12 months.

Our take

These changes to the BCBS methodology are unlikely to impact the surcharges for US GSIBs because the Fed requires banks to calculate their GSIB score under two separate methods: Method 1, the US implementation of the BCBS framework and Method 2, a measure which replaces substitutability with short-term wholesale funding and is calibrated to produce a higher score than Method 1. While US banks are therefore still subject to higher surcharges via Method 2, the new refs at the Fed may be more receptive to banks’ calls to roll back some of the agency’s gold plating of Basel standards (like the Method 2 calculation), which have long been a thorn in the side of US banks.

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More privacy, more compliance - California Consumer Privacy Act

In late June, the California state legislature passed the California Consumer Privacy Act (CCPA) which creates a sweeping new privacy and data protection regime that aims to protect the “personal information” of all Californians by imposing new restrictions and requirements on the way businesses collect, use, store, and share personal information. Personal information is defined broadly to include any information that relates to a particular consumer or household, with additional protections for data of children under age 16.

CCPA compliance is required by any business that receives personal data from California residents and exceeds one of three thresholds: (1) annual gross revenues of $25 million; (2) obtains personal information of 50,000 or more California residents, households or devices annually; or, (3) generates 50 percent or more of its annual revenue from selling California residents’ personal information. These thresholds, particularly the first, will cover many financial institutions.

To comply with the new regime, covered businesses will have to make a number of changes, such as adding new California-specific disclosures to existing privacy policies and creating mechanisms for individuals to exercise their rights to access, transfer, or request deletion of their data and “opt-out” of data sharing.

Businesses have until January 1, 2020 to comply with the new law.

Our take

California just opted-in to privacy, European-style and then some. Financial institutions should brace themselves for ambiguity and many tough decisions, including whether to take their California privacy program nationwide as a leading customer practice, but those who are GDPR ready (or close) will have a head start. Like the fiduciary rule, this law might end up resulting in heightened consumer expectations and pressure for transparency and data privacy beyond the requirements of the law.

For more on the California privacy law, see PwC’s America’s GDPR? Seven Workstreams to implement California’s CCPA

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Holiday recap: CCAR, SEC and CFTC MOU, FED and FDIC resolution planning, BCBS, and FINRA and digital assets

These notable developments took place in the last few weeks:

●    CCAR Results. Last month, the Fed published the results of its Comprehensive Capital Analysis and Review (CCAR) 2018, the first overseen by new Fed referees – Chairman Jerome Powell and Vice Chair for Supervision Randal Quarles. The results strongly suggest a departure from recent history with new flexibility in the Fed’s stress testing and capital planning program. For more, see PwC’s Key Points from the Fed’s 2018 CCAR

●    SEC and CFTC Memorandum of Understanding. On June 28, the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) approved a Memorandum of Understanding that will help ensure continued coordination and information sharing between the two market regulators with respect to swaps and security-based swaps.

●    Fed and FDIC seek feedback on GSIB resolution planning guidance and extend deadline for 14 banks. On June 29, the Fed and FDIC announced that they are seeking public comment on revisions to the April 2016 resolution plan guidance for the eight US GSIBs. The proposed changes concern the capabilities “dealer” firms should have to book, monitor, and identify derivatives exposures and include refinements firms should make to plans for maintaining payment, clearing. and settlement activities in resolution. Further, on July 2 the Fed and FDIC extended the deadline for 14 US banks to file their next resolution plan from December 2018 to December 2019. The agencies also noted that over the next 18 months they will determine how resolution planning requirements will apply to firms with between $100b and $250b in assets, including 11 of the firms that received an extension, going forward.

●    BCBS amends NSFR. In June, BCBS finalized a technical amendment to its Net Stable Funding Ratio (NSFR). In the case of exceptional central bank liquidity absorbing operations, claims on central banks with a residual maturity equal to or greater than six months may receive a reduced required stable funding (RSF) factor as low as 5%. Currently the RSF is 50% for loans to central banks with maturities between six months and one year, and 100% for those with maturities over one year. The change provides some relief on RSF and gives banks greater opportunity to adjust their funding structures in order to achieve better returns, for example by shifting from expensive long-term funding to less expensive short-term funding. PwC analysis shows that European banks have already increased cash and balances at central banks, possibly anticipating this change.

●    FINRA seeking information on digital assets activity. Last week, the Financial Industry Regulatory Authority (FINRA) released a regulatory notice encouraging its members to promptly notify the self-regulatory organization of any market activity related to digital assets, including cryptocurrencies. The notice also encouraged firms to coordinate with their compliance departments in the event firms opt to engaged in market activities related to digital assets.

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On our radar: Executive Order, FSOC, CFTC and LIBOR

These notable developments hit our radar this week:

●    Executive Order creates task force on market integrity and consumer fraud. Earlier this week, the Trump Administration issued an Executive Order establishing a task force on market integrity and consumer fraud to be led by the Attorney General. The task force has broad authority to provide guidance to the Department of Justice for investigation and prosecution of cases related to fraud in the financial markets.

●    FSOC meeting scheduled for July 17. The Treasury Department announced the next meeting of the Financial Stability Oversight Council (FSOC) will be held next Tuesday, July 17. Agenda topics include an application for a bank holding company, an update on the Fed’s stress tests, and an update on the reevaluation of the sole remaining systemically important nonbank designation. While this nonbank, Prudential, was not de-designated in last month’s FSOC meeting, that could change next week.

●    CFTC MRAC discusses LIBOR. On Thursday, the CFTC’s Market Risk Advisory Committee (MRAC) convened to discuss LIBOR reform, specifically covering the role of interest rate benchmarks in the economy, the current efforts of the Financial Stability Board and Alternative Reference Rates Committee, and the overall impact of LIBOR on the derivatives markets. Further, Chairman Giancarlo stressed the importance of market participants preparing to transition away from LIBOR.

 

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Julien Courbe
Financial Services Advisory Leader, PwC US
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