capital requirements

OCC, Federal Reserve and FDIC Propose Revised Capital and Liquidity Framework for Foreign Banking Organizations


On May 24, the OCC, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) published a notice of proposed rulemaking that would establish a revised framework for determining capital and liquidity requirements for large foreign banking organizations. Comments on the proposal must be submitted by June 21. Notice of Proposed Rulemaking.

CTFC Approves Minimal Capital Requirements for Swap Dealers and Major Swap Participants


On December 2, 2016, the U.S. Commodity Futures Trading Commission (CFTC) unanimously approved proposed rules that establish minimum capital requirements for swap dealers and major swap participants. The proposed rules set out minimum levels of qualifying capital for swap deals and major swap participants that are not subject to the capital rules of a prudential regulator. The comment period ends 90 days after publication of the proposal in the Federal Register. Release.

EBA Publishes Report on Leverage Ratio Requirements under Article 511 of the CRR

On August 3, 2016, the European Banking Authority (EBA) published a report on the leverage ratio (LR) requirements under the Capital Requirements Regulation (CRR).

The EBA report recommends the introduction of a minimum LR requirement in the EU to mitigate the risk of excessive leverage, which is in line with the discussions held by the Group of Central Bank Governors and Heads of Supervision (GHOS) – the governing body of the Basel Committee on Banking Supervision (BCBS) – in January 2016.

The analysis suggests that the potential impact of introducing a LR requirement of 3 percent on the provision of financing by credit institutions would be relatively moderate, while, overall, it should lead to more stable credit institutions. Similarly, on the basis of econometric analysis, it has been estimated that risk taking should not be strongly affected. The EBA considers that the introduction of a 3 percent LR should lead to more stable credit institutions overall and the combined application of a risk-based ratio and a LR requirement will reduce the overall cyclicality of capital requirements.

The EBA also assessed the exposure of different categories of credit institutions to the risk of excessive leverage (REL) concluding that the results do not give a strong indication of differences in the degree of exposure to REL across different types of credit institutions. However, global systemically important institutions (GSIIs) show a higher exposure to REL and therefore a higher LR requirement may be warranted.

The report also flags that while the Basel LR standard fits well with the EU banking sector, the same cannot be said for all business models covered by other EU prudential regulations. For example, the EBA recommends that central counterparties (CCPs) and central securities depositaries (CSDs) be exempted. The report describes the characteristics of various specialized business models, such as public development banks, concluding that there is little room for differentiating the LR without opening the door to cases of circumvention of the basic principles of the LR. The report did not find evidence to exempt certain credit institutions from being subject to compliance with the LR minimum requirement of 3 percent on the basis of their limited size. However, the EBA will explore in more detail a reduced frequency and granularity of reporting requirements in the case of smaller credit institutions in future updates of the implementing technical standards (ITS) on LR reporting.

The Commission is required to submit a report on the impact and effectiveness of the LR, and potential legislative proposals, to the European Parliament and the Council of the EU by December 31, 2016.

EBA Final Draft RTS on Assessment Methodology for Internal Ratings-Based Approach

The European Banking Authority (EBA) has published final draft regulatory technical standards (RTS) on the specification of the assessment methodology for competent authorities regarding compliance of an institution with the requirements to use the internal ratings-based (IRB) approach in accordance with Articles 144(2), 173(3) and 180(3)(b) of the Capital Requirements Regulation (Regulation 575/2013) (CRR).

The final draft RTS provide a mapping of the minimum IRB requirements as laid down in Chapter 3, Title II, Part Three of the CRR, into fourteen chapters. Each chapter starts with a brief description of the assessment criteria to be used by competent authorities relating to verification requests and of the methods to be used by competent authorities in this context.  Under the IRB approach, institutions determine their own funds requirements for credit risk, taking into account their own estimates of risk parameters.  Competent authorities may, under the CRR, permit institutions to use the IRB approach, provided that the relevant conditions set out in the CRR are met.

The draft RTS are available here and will now be submitted to the European Commission for endorsement.

European Commission Issues Call for Advice on Own Fund Requirements for Market Risk

On April 22, 2016, the European Banking Authority published a call for advice it had received from the European Commission regarding revisions to the own fund requirement for market risk as part of the CRR review.

The call for advice sets out that the EC is undertaking a review of the Capital Requirements Regulation and is considering the impact of implementing the agreed Basel Committee on Banking Supervision framework detailed in the document “Minimum capital requirements for market risk.” The EC notes that to date there has been no EU-specific assessment of the convenience and impact of updating these rules in the ways proposed by the BCBS.

EBA Final Draft RTS on Prudential Requirements for CSDS

On December 16, the EBA published its final report setting out draft RTS on prudential requirements for central securities depositories (“CSDs”) under the Regulation on improving securities settlement and regulating CSDs (Regulation 909/2014) (“CSDR”). The final draft RTS relate to:

  1. The capital requirements for CSDs (required under Article 47);
  2. The additional risk-based capital surcharge reflecting the risks resulting from ancillary banking services (required under Article 54); and
  3. Details of the frameworks and tools for the monitoring, the measuring and management, the reporting and the public disclosure of credit and liquidity risks (required under Article 59).

Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) Regulations 2015 Published

On January 13, 2015, the Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) Regulations 2015 were published.

The Regulations amend the Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014 to introduce a systemic risk buffer (SRB) that will apply to ring-fenced banks (RFBs) and certain large building societies. This measure implements Articles 133 and 134 of the Capital Requirements Directive IV (CRD IV).

The Financial Policy Committee (FPC) will be responsible for setting out the framework for determining which institutions should hold the buffer and, if so, how large the buffer should be. It will need to publish this methodology by May 31, 2016. The Prudential Regulation Authority (PRA) will be responsible for applying the framework and will have ultimate discretion over which firms must hold the buffer and its size.

The Regulations were made on January 12, 2015 and come into force, unless otherwise stated, on May 31, 2016. The systemic risk buffer is applicable from January 1, 2019.  Regulations.

CFTC Proposed Rules on Capital Requirements for Swap Dealers and Major Swap Participants

On April 27, pursuant to Section 731 of the Dodd-Frank Act, the CFTC proposed rules that would mandate capital requirements for swap dealers and major swap participants that are not subject to prudential regulation by the Fed, OCC, FDIC, FCA, or FHFA. Capital requirements would be adjusted depending on whether a swap dealer or major swap participant is a futures commissions merchant, a nonbank subsidiary of a U.S. bank holding company, or neither of the foregoing. CFTC Fact Sheet.

European Parliament Approves Stricter Rules on Bankers’ Bonuses and Capital Requirements

On July 7, the European Parliament approved stricter rules on bankers’ bonuses and capital requirements.  The adopted resolutions call for, among other things: (i) capping upfront cash bonuses at 30% of the total bonus and at 20% for particularly large bonuses, (ii) deferring between 40% and 60% of any bonus for at least three years, and (iii) awarding at least 50% of the total bonus in non-cash instruments.  The more stringent capital requirements are expected to result in banks having to hold three to four times more capital against their trading risk than at present, and will tighten capital reserve requirements for resecuritizations. The EU Council of Ministers is set to formally approve the resolutions next week.  The rules on bonus provisions will take effect in January 2011 and the rules on capital requirements will take effect by the end of 2011. Release. Resolution.