Other Federal Reserve Operations
Regulatory Developments
Dodd-Frank Implementation
Throughout 2017, 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 2017.
Capital Planning and Stress Testing Requirements (Regulations Y and YY)
In January 2017, the Board adopted a final rule amending its capital plan and stress testing rules;1 the changes took effect for purposes of the 2017 Comprehensive Capital Analysis and Review (CCAR) cycle. The final rule removed large and noncomplex firms from the qualitative assessment and qualitative objection criteria in the Board's capital plan rule in order to reduce burden on these firms and focus the qualitative review in CCAR on the largest and most complex financial institutions.
Through CCAR, the Federal Reserve evaluates the capital planning processes and capital adequacy of large financial institutions through quantitative and qualitative assessments.2 The qualitative assessment evaluates the strength of each firm's capital planning process, whereas the quantitative assessment evaluates each firm's capital adequacy based on hypothetical scenarios of severe economic and financial market stress. Under the previous capital plan rule, the Board could object to the annual capital plan of any CCAR firm based on the quantitative or qualitative findings of the CCAR exercise.
Under the final rule, a large and noncomplex firm is defined as a financial institution (1) with total consolidated assets between $50 billion and $250 billion, (2) with total consolidated nonbank assets of less than $75 billion, and (3) that has not been identified as a global systemically important bank (G-SIB) under the Board's capital rules. Large and noncomplex firms will be required to continue meeting capital requirements under stress as part of CCAR's quantitative assessment, and the Federal Reserve will examine the capital planning processes of large and noncomplex firms through regular supervisory assessments outside of the CCAR exercise. Under the final rule, the Board may object to the capital plans of large and noncomplex firms on quantitative grounds, and may object to the capital plans of the largest and most complex firms on both qualitative and quantitative grounds.
Restrictions on Qualified Financial Contracts (Regulations Q, WW, and YY)
In September 2017, the Board adopted a final rule to support U.S. financial stability by enhancing the resolvability of very large and complex financial firms.3 The rule requires global systemically important bank holding companies 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.
The final rule requires covered entities to make clear in their QFCs that both of 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. This requirement should reduce the risk of a foreign court disregarding provisions of title II of the Dodd-Frank Act and the Federal Deposit Insurance Act that temporarily stay the termination of QFCs. The rule also requires covered 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 of the G-SIB in bankruptcy or in a resolution. The rule identifies protocols, including the International Swaps and Derivatives Association 2015 Universal Resolution Stay Protocol, that comply with the rule. The final rule also makes technical, conforming amendments to the Board's capital and liquidity rules.
Key Regulatory Initiatives Proposed in 2017
The following is a summary of additional regulatory initiatives that the Board proposed in 2017.
Stress Testing Transparency (Regulation YY)
In December 2017, the Board requested comment on a package of proposals that would increase the transparency of its stress testing program through enhanced model disclosures regarding the Federal Reserve's supervisory stress testing,4 a Stress Testing Policy Statement,5 and amendments to the Board's Policy Statement on the Scenario Design Framework for Stress Testing6 (together, the transparency proposals).
The proposed enhanced model disclosures would provide greater information about the models the Federal Reserve uses to estimate the hypothetical losses in the Board's supervisory stress tests. In particular, the following information would be made public for the first time: a range of loss rates, estimated using the Board's models, for loans held by CCAR firms; portfolios of hypothetical loans with loss rates estimated by the Board's models; and more detailed descriptions of the Board's models, such as certain equations and key variables that influence the results of those models.
The Stress Testing Policy Statement would describe the Board's approach to model development, implementation, use, and validation. The Stress Testing Policy Statement would elaborate on prior disclosures and would provide details on the principles and policies that guide the Board's development of its stress testing models.
The amendments to the Scenario Design Policy Statement would modify the Board's framework for the design of the annual hypothetical economic scenarios used in the supervisory and company-run stress tests required under the Dodd-Frank Act. The modifications aim to enhance transparency and to further promote the resilience of the banking system throughout the economic cycle. In particular, the revisions would include more information on the hypothetical path of house prices and provide notice that the Board is exploring the addition of variables to test for funding risks in the hypothetical scenarios.
The comment period for the transparency proposals ended on January 22, 2018.
The Board of Governors and the Government Performance and Results Act
Overview
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.
Footnotes
1. 82 Fed. Reg. 9308 (February 3, 2017). Return to text
2. Large institutions subject to the Board's capital plan and stress testing rules include (1) bank holding companies with total consolidated assets of $50 billion or more, (2) any nonbank financial company supervised by the Board that becomes subject to the capital planning and stress test requirements pursuant to a rule or order of the Board, and (3) U.S. intermediate holding companies of foreign banking organizations in accordance with the transition provisions under the capital plan rule and subpart O of the Board's Regulation YY (12 CFR part 252). Currently, no nonbank financial companies supervised by the Board are subject to the capital planning or stress test requirements. A U.S. intermediate holding company that was required to be established by July 1, 2016, and that was not previously subject to the Board's capital plan rule was required to submit its first capital plan in 2017 and will become subject to the Board's stress test rules beginning in 2018. Return to text
3. 82 Fed. Reg. 42,882 (September 12, 2017). Return to text
4. 82 Fed. Reg. 59,547 (December 15, 2017). Return to text
5. 82 Fed. Reg. 59,528 (December 15, 2017). Return to text
6. 82 Fed. Reg. 59,533 (December 15, 2017). Return to text