Financial Services Report - Fall 2012

Beltway Report

MOU on Supervisory Coordination

Five federal supervisory agencies released a Memorandum of Understanding (MOU) clarifying how the agencies will coordinate their supervisory activities, consistent with the Dodd-Frank Act. Section 1025 of the Dodd-Frank Act requires that the CFPB and the prudential regulators—the FRB, FDIC, NCUA, and OCC—coordinate important aspects of their supervision of institutions with more than $10 billion in assets and their affiliates. The MOU is intended to establish coordination and cooperation between the CFPB and the prudential regulators, minimize unnecessary regulatory burden, and decrease the risk of conflicting supervisory directives. Under the MOU, the agencies will coordinate examinations and other supervisory activities and share certain material supervisory information.

First Impressions

Banking organizations required to file resolution plans, or "living wills," received some additional instruction on July 3, 2012, when the FDIC and FRB released the public portions of the living wills that had been submitted on July 2, 2012. These submissions marked the first wave of filings, those by nine banking institutions with U.S. operations and $250 billion or more in nonbank assets. The living wills are required by section 165(d) of the Dodd-Frank Act, and the requirement extends to all banking organizations with $50 billion or more in consolidated assets. The $50 billion threshold applies to assets located outside the U.S. as well as within; as a result, more than 90 foreign banking organizations (FBOs) are expected to file resolution plans.

The next wave of filings will come ashore on July 1, 2013, when banking organizations with $100 billion or more in total nonbank assets must submit living wills. The remainder of the organizations subject to the requirement must submit living wills by December 31, 2013. The FDIC has made available the public sections of the initial resolution plans submitted to the FDIC and FRB under Title I of the Dodd-Frank Act. Firms in this group include U.S. bank holding companies with $250 billion or more in total nonbank assets and foreign-based bank holding companies with $250 billion or more in total U.S. nonbank assets. Although the public portions of the resolution plans that were filed on July 2, 2012, do not give much indication of exactly how any of those filing organizations might be resolved, they do contain important information for those organizations required to file resolution plans next year. For a more in-depth discussion, please review our client alert at: http://www.mofo.com/files/Uploads/Images/120705-Living-Wills-Public-Portions-Released.pdf .

Once Burned, Twice Shy

The Basel Committee on Banking Supervision published its Compilation of Capital Disclosure Requirements (Disclosure Rules) setting forth a uniform scheme for Basel II banks to disclose the composition of their regulatory capital. These rules are intended to be implemented by national supervisors by June 30, 2013, and affected banks will be expected to comply with all but one of the new requirements for any balance sheet financial statements published after that date. One fully phased-in requirement, a "common disclosure template," becomes effective on and after January 1, 2018. In announcing these rules, the Basel Committee noted that the financial crisis revealed the difficulties that market participants and national supervisors had in their efforts to undertake detailed assessments of banks' capital positions and make cross-jurisdictional comparisons, as a result of "insufficiently detailed disclosure" by banks and a lack of consistency in reporting between banks and across jurisdictions. The Disclosure Rules are intended to address these perceived disclosure deficiencies, and promote uniform and meaningful capital disclosures within and across national jurisdictions. Basel II banks in the U.S. can expect future banking agency rulemaking to implement the Disclosure Rules. These rules presumably will be integrated with the disclosure provisions in the new capital and resolution planning regulations. Review of the announcement should not be limited to Basel II banks in the U.S., however; as with other Basel standards, the Disclosure Rules may lead to new disclosure requirements for a large number of non-Basel II banks in the U.S. For a more in-depth look at the issue, please review our client alert at: http://www.mofo.com/files/Uploads/Images/120627-New-Basel-Disclosure-Rules.pdf .

Proposed Capital Rules

On June 12, 2012, the OCC, FRB, and FDIC proposed for comment, in three separate but related proposals, significant changes to the U.S. regulatory capital framework: the Basel III Proposal, which applies the Basel III capital framework to almost all U.S. banking organizations; the Standardized Approach Proposal, which applies certain elements of the Basel II standardized approach for credit risk weightings to almost all U.S. banking organizations; and the Advanced Approaches Proposal, which applies changes made to Basel II and Basel III in the past few years to large U.S. banking organizations subject to the advanced Basel II capital framework. Comments on the three proposals were due September 7, 201 For a more in-depth look at the proposals, please review our client alerts at: http://www.mofo.com/files/Uploads/Images/120613-Federal-Banking-AgenciesRegulatory-Capital-Proposals-Summary.pdf and http://www.mofo.com/files/Uploads/Images/120613Banking-Agencies-New-Regulatory-Capital-Proposals.pdf .

Appraisals for Higher-Risk Mortgages

The FRB, CFPB, FDIC, FHFA, NCUA, and OCC issued a proposal to establish new appraisal requirements for "higher-risk mortgage loans." This would implement amendments to the Truth in Lending Act enacted by Dodd-Frank. Under Dodd-Frank, mortgage loans are higher-risk if they are secured by a consumer's home and have interest rates above a certain threshold. For higher-risk mortgage loans, the proposal would require creditors to use a licensed or certified appraiser who prepares a written report based on a physical inspection of the interior of the property. The proposal would require creditors to disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report. Creditors would also have to obtain an additional appraisal at no cost to the consumer for a home-purchase higher risk mortgage loan if the seller acquired the property for a lower price during the past six months, which would address fraudulent property flipping by seeking to ensure that the value of the property being used as collateral legitimately increased. Comments on the proposal are due October 15, 2012.

Some Reprieve on Getting Stressed

The OCC, FDIC, and FRB separately announced that they are considering a delay of the implementation timeline for the annual capital-adequacy stress testing requirement under Section 165 of the Dodd-Frank Act for banks and other covered financial institutions with consolidated assets between $10 billion and $50 billion. The changes would delay implementation until September 2013 for covered institutions with total consolidated assets between $10 billion and $50 billion. Under a proposed rule, financial institutions with more than $10 billion in assets would have to conduct annual capital-adequacy stress tests. As proposed, the stress-testing requirements would become effective immediately upon the issuance of a final rule. The proposed rule is still under consideration at this time. The agencies are considering a timeline under which covered institutions with assets from $10 billion to $50 billion would be required to conduct initial stress tests in accordance with the rule in late 2013. The delay would help ensure that all covered institutions have sufficient time to develop sound stress-testing programs.

Regulation HH

The FRB announced the approval of a final rule establishing risk-management standards for certain financial market utilities (FMUs) designated as systemically important by the Financial Stability Oversight Council. The final rule also establishes requirements for advance notice of proposed material changes to the rules, procedures, or operations of certain designated FMUs. FMUs, such as payment systems, central securities depositories, and central counterparties, provide the infrastructure to clear and settle payments and other financial transactions. The final rule implements two provisions of Title VIII of the Dodd-Frank Act. It establishes risk-management standards governing the operations related to the payment, clearing, and settlement activities of designated FMUs, except those registered as clearing agencies with the SEC or as derivatives clearing organizations with the CFTC. The risk management standards are based on the recognized international standards developed by the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) that were in existence at the time of the proposed rulemaking, which were incorporated previously into the Board's Policy on Payment System Risk. The final rule became effective on September 14, 2012.

Corporate Debt Securities Investment Ban

The FDIC issued a final rule that prohibits federally insured state and federal savings associations from acquiring or holding a corporate debt security when the security's issuer does not have an adequate capacity to meet all financial commitments under the security for the projected life of the security. The rule was issued under Section 939(a) of the Dodd-Frank Act and released as a Financial Institution Letter. Before acquiring a...