Other Federal Reserve Operations
Throughout 2016, the Federal Reserve continued to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (Pub. L. No. 111-203), which gives the Federal Reserve important responsibilities to issue rules and supervise financial companies to enhance financial stability and preserve the safety and soundness of the banking system. The Board also continued to implement other regulatory reforms to increase the resiliency of banking organizations and help to ensure that they are operating in a safe and sound manner.
The following is a summary of the key regulatory initiatives that were completed during 2016.
The Board's Framework for Implementing the Countercyclical Capital Buffer (Appendix A to Regulation Q)
In September 2016, the Board issued a policy statement detailing the framework the Board will follow to set the U.S. Countercyclical Capital Buffer (CCyB) for private-sector credit exposures located in the United States. The CCyB is a macroprudential tool in the Board's regulatory capital rule that can be used to increase the resilience of the financial system by raising capital requirements on internationally active banking organizations when the risk of above-normal losses is elevated. In particular, the CCyB increases the size of the capital conservation buffer for these banking organizations. Banking organizations that hold an amount of capital that is less than the amount of the capital conservation buffer face restrictions on capital distributions and discretionary bonus payments to senior executives. In this regard, the CCyB would be available to help the banking organizations absorb shocks associated with declining credit conditions. Implementation of the buffer could also help moderate fluctuations in the supply of credit.
The policy statement provides background on the range of financial system vulnerabilities and other factors the Board may take into account as it evaluates settings for the buffer, including but not limited to leverage in the nonfinancial sector, leverage in the financial sector, maturity and liquidity transformation in the financial sector, and asset valuation pressures. The policy statement also provides that the Board expects that the CCyB will be activated when systemic vulnerabilities are meaningfully above normal and that the Board generally would expect to provide notice to the public and seek comment on the proposed level of the CCyB as part of making any final determination to change the CCyB. The policy statement became effective on October 14, 2016.
Long-Term Debt and Total Loss-Absorbing Capacity Requirement (Regulation YY)
In December 2016, the Board issued a final rule to strengthen the ability of government authorities to resolve in an orderly way the largest domestic and foreign banks operating in the United States without any support from taxpayer-provided capital.
The final rule requires the parent holding companies of U.S. global systemically important banking organizations and the top-tier U.S. intermediate holding companies of foreign global systemically important banking organizations (collectively known as covered companies) to maintain outstanding a minimum amount of long-term unsecured debt, as well as a minimum amount of total loss-absorbing capacity and related buffers. The final rule also subjects the covered companies to "clean holding company" limitations at the top-tier holding company level that would prohibit or limit those companies from entering into certain financial arrangements that could impair their resolvability and the resiliency of their operating subsidiaries. Covered companies are required to comply with the final rule by January 1, 2019.
Liquidity Risk Measurement Standards (Regulation WW)
In April 2016, the Board issued a final rule that amends the liquidity coverage ratio (LCR) rule to include certain U.S. general obligation municipal securities as high-quality liquid assets (HQLA). The final rule applies only to entities supervised by the Board that are subject to the LCR. The final rule permits companies to include as level 2B liquid assets U.S. general obligation municipal securities that meet the same criteria as corporate debt securities that are included as level 2B liquid assets. To ensure appropriate diversification of the assets included in the total HQLA amount and address the liquidity structure of the U.S. municipal securities market, the final rule also limits the amount of U.S. general obligation municipal securities that may be included in a company's total HQLA amount. The final rule became effective on July 1, 2016.
Liquidity Coverage Ratio Rule Disclosures (Regulation WW)
In December 2016, the Board issued a final rule that amends the liquidity coverage ratio (LCR) rule to implement public disclosure requirements for certain companies subject to the LCR rule. The final rule applies to bank holding companies and certain savings and loan holding companies with total consolidated assets of $50 billion or more or total on-balance sheet foreign exposure of $10 billion or more, and to nonbank financial companies designated by the Financial Stability Oversight Council for Board supervision to which the Board has applied the LCR rule. These companies are required to disclose information about certain components of their LCR calculations on a quarterly basis in a standardized format and to discuss certain features of their LCR results. In addition, the Board simultaneously amended the modified LCR rule to provide one full year for bank holding companies and certain savings and loan holding companies to come into compliance with the rule. The final rule will become effective on April 1, 2017.
Key Regulatory Initiatives Proposed
The following is a summary of additional regulatory initiatives that the Board proposed in 2016.
Single-Counterparty Credit Limits (Regulation YY)
In March 2016, the Board proposed a rule that would apply single-counterparty credit limits to bank holding companies with total consolidated assets of $50 billion or more for public comment, as required by section 165(e) of the Dodd-Frank Act. The proposed rule addresses the risk associated with excessive credit exposures of large banking organizations to a single counterparty and included limits that are tailored to increase in stringency as the systemic footprint of a bank holding company increases, as well as similarly tailored requirements for foreign banks operating in the United States. The public comment period for the proposed rule ended on June 3, 2016.
Restrictions on Qualified Financial Contracts (Regulations Q, WW, and YY)
In May 2016, the Board proposed a rule to support U.S. financial stability by enhancing the resolvability of very large and complex financial firms. The proposed rule would require U.S. global systemically important banking institutions (G-SIBs) and the U.S. operations of foreign G-SIBs (collectively, covered entities) to amend their derivative, securities financing, and other qualified financial contracts (QFCs) to prevent the disorderly unwind of the contracts if the parent or another entity within the firm enters bankruptcy or a resolution process. Given the large volume of QFCs to which these entities are a party, the exercise of default rights en masse as a result of the failure of one of the firms could lead to a disorderly resolution if the failed firm were forced to sell off assets, which could spread contagion by increasing volatility and lowering the value of similar assets held by other firms, or to withdraw liquidity that it had provided to other firms. The proposed rule would require these entities to make clear in their QFCs that the U.S. resolution regimes for financial companies and institutions (i.e., title II of the Dodd-Frank Act and the Federal Deposit Insurance Act) apply to the contracts, which should reduce the risk of a foreign court disregarding provisions of those acts that would temporarily stay the termination of QFCs. The proposed rule also would require these entities to ensure that their QFCs restrict the ability of their counterparties to terminate the contract, liquidate collateral, or exercise other default rights based on the resolution or liquidation of an affiliate in bankruptcy or in a resolution. The proposed rule states that QFCs amended by the International Swaps and Derivatives Association 2015 Universal Resolution Stay Protocol would comply with the proposed rule. The proposed rule also would make technical, conforming amendments to the Board's capital and liquidity rules. The public comment period for the proposed rule ended on August 5, 2016.
Net Stable Funding Ratio (Regulation WW)
In May 2016, the Board, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) jointly proposed a rule that would implement the net stable funding ratio (NSFR), a stable funding requirement for large and internationally active banking organizations. The NSFR is designed to reduce the likelihood that disruptions to a firm's regular sources of funding will compromise its liquidity position. The NSFR would be the second quantitative liquidity requirement for U.S. banking firms and would be established as an enhanced prudential liquidity standard under section 165 of the Dodd-Frank Act.
The proposed rule, which would complement the liquidity coverage ratio, would require covered companies to maintain a minimum level of stable funding based on the liquidity characteristics of the covered company's assets, funding commitments, and derivative exposures over a one-year time horizon. The most stringent NSFR requirements would apply to banking organizations with total consolidated assets of $250 billion or more or total consolidated on-balance-sheet foreign exposure of $10 billion or more, and their subsidiary insured depository institutions with $10 billion or more of total consolidated assets. The proposed rule would apply a less stringent NSFR requirement to certain smaller depository institution holding companies with $50 billion or more in total consolidated assets that are not otherwise covered by the rule. The public comment period for the proposed rule ended on August 5, 2016.
Incentive Compensation (Regulation JJ)
In May 2016, the Board, the OCC, the FDIC, the Securities and Exchange Commission, the Federal Housing Finance Agency, and the National Credit Union Administration jointly reproposed a rule that would prohibit incentive-based compensation arrangements that encourage inappropriate risks at covered financial institutions as required by section 956 of the Dodd-Frank Act. The proposed rule would apply to covered financial institutions with total assets of $1 billion or more. The requirements are tailored based on total consolidated asset size. Covered institutions would be divided into three categories: institutions with assets of $250 billion and above (Level 1); institutions with assets of $50 billion to $250 billion (Level 2); and institutions with assets of $1 billion to $50 billion (Level 3). This proposal sought comments on revisions to a previous proposal made by the agencies in 2011.
The proposed rule primarily addresses heightened requirements for senior executive officers and employees who are significant risk-takers at Level 1 and Level 2 institutions. These requirements include mandatory deferral of incentive-based compensation, mandatory consideration of forfeiture and downward adjustment if certain adverse outcomes occur, and the inclusion of clawback provisions in incentive-based compensation arrangements. Boards of directors of covered institutions would be required to conduct oversight of incentive-based compensation programs. All covered institutions would be subject to general prohibitions on incentive-based compensation arrangements that could encourage inappropriate risk-taking by providing excessive compensation or that could lead to a material financial loss. The public comment period for the proposed rule ended on July 22, 2016.
Capital Standards for Supervised Institutions Significantly Engaged in Insurance Activities
In June 2016, the Board sought comment on an advance notice of proposed rulemaking (ANPR) regarding conceptual frameworks for capital standards that could apply to certain nonbank financial companies with significant insurance activities that the Financial Stability Oversight Council has determined should be supervised by the Board (otherwise known as systemically important insurance companies), insurance companies that own a bank or savings association, and holding companies with significant insurance activities. The ANPR presents one approach that would apply to systemically important insurance companies (the consolidated approach), and a second approach for less complex insurance companies that also own a bank or thrift (the building block approach).
The consolidated approach would classify the total consolidated assets and insurance liabilities of a company that is significantly engaged in insurance activities into risk segments, apply appropriate risk factors to each segment at the consolidated level, and then set a minimum ratio of required capital. The building block approach would aggregate existing capital requirements across a firm's different legal entities to arrive at a combined, group-level capital requirement, subject to adjustments to reflect the Board's supervisory objectives. The public comment period for the ANPR ended on August 17, 2016.
Enhanced Prudential Standards for Systemically Important Insurance Companies (Regulation YY)
In June 2016, the Board proposed a rule that would apply enhanced prudential standards to systemically important insurance companies. The proposed rule would require systemically important insurance companies to comply with certain corporate governance, risk-management, and liquidity risk-management standards that are tailored to the business models, capital structures, risk profiles, and systemic footprints of those companies. The public comment period for the proposed rule ended on September 16, 2016.
Capital Planning and Stress Testing Requirements (Regulations Y and YY)
In September 2016, the Board proposed a rule that would modify its capital plan and stress testing rules to remove certain large and noncomplex firms from the qualitative assessment in the capital plans rule and from the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR). Through CCAR, the Federal Reserve evaluates the capital planning processes and capital adequacy of bank holding companies with $50 billion or more in total consolidated assets. Under the proposed rule, bank holding companies and intermediate holding companies of foreign banking organizations with total consolidated assets between $50 billion and $250 billion, on-balance-sheet foreign exposure of less than $10 billion, and total consolidated nonbank assets of less than $75 billion would be considered large and noncomplex firms and would be removed from the qualitative assessment of CCAR. Large and noncomplex firms would remain subject to the quantitative review in the capital plan rule and CCAR.
The proposed rule would also reduce reporting and supporting documentation requirements for large and noncomplex firms. In addition, the proposed rule would decrease the amount of capital any firm subject to CCAR can distribute to shareholders outside of an approved capital plan without seeking prior approval from the Board (from 1 percent of tier 1 capital to .25 percent of tier 1 capital) and would implement a one-quarter blackout period for such requests while the Federal Reserve is conducting CCAR. The proposed rule would simplify the initial applicability provisions of the capital plan and stress test rules for all firms and would require all firms to report total nonbank assets. Finally, the proposed rule would extend the range of potential as-of dates for the trading and counterparty scenario components used in the stress test rules and make other necessary technical changes to the capital plan and stress test rules. The public comment period for the proposed rule ended on November 25, 2016. The Board adopted a final rule in January 2017.
The Board of Governors and the Government Performance and Results Act
The Government Performance and Results Act (GPRA) of 1993 requires federal agencies to prepare a strategic plan covering a multiyear period and requires each agency to submit an annual performance plan and an annual performance report. Although the Board is not covered by GPRA, the Board follows the spirit of the act and, like other federal agencies, prepares an annual performance plan and an annual performance report.
Strategic Plan, Performance Plan, and Performance Report
On July 7, 2015, the Board approved the Strategic Plan 2016-19, which identifies and frames the strategic priorities of the Board. In addition to investing in ongoing operations, the Board identified and prioritized investments and dedicated sufficient resources to six pillars over the 2016-19 period, which will allow the Board to advance its mission and respond to continuing and evolving challenges.
The annual performance plan outlines the planned initiatives and activities that support the framework's long-term objectives and resources necessary to achieve those objectives. The annual performance report summarizes the Board's accomplishments that contributed toward achieving the strategic goals and objectives identified in the annual plan.
The strategic plan, performance plan, and performance report are available on the Federal Reserve Board's website at www.federalreserve.gov/publications/gpra.htm.