Board of Governors of the Federal Reserve System

Other Federal Reserve Operations

Regulatory Developments

Passage and Implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act

On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) was signed into law.¹ In addition to a number of standalone provisions, EGRRCPA amended the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) as well as other statutes administered by the Board. For example, EGRRCPA provides for additional tailoring of various provisions of federal banking law while maintaining the authority of the federal banking agencies to apply enhanced prudential standards to address financial stability and ensure the safety and soundness of depository institutions and their holding companies.

On July 6, 2018, the Board released two statements regarding regulations and associated reporting requirements that EGRRCPA immediately affected. The Board issued one statement that related to regulations and reporting requirements administered solely by the Board, and a second interagency statement with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies). Both statements detailed interim positions that the Board and the agencies would take until the relevant regulations and reporting forms were amended to reflect EGRRCPA's changes. Specifically, in the Board's statement, the Board provided that it would not take action to enforce certain regulations and reporting requirements for firms with less than $100 billion in total consolidated assets, such as rules implementing enhanced prudential standards and the liquidity coverage ratio requirements. Additionally, the interagency statement provided relief regarding company-run stress testing, resolution planning, the Volcker rule, high-volatility commercial real estate exposures, and the treatment of certain municipal obligations as high-quality liquid assets, among other topics mentioned in the statement.

Since issuance of the two statements in July, the Board has made substantial progress in implementing EGRRCPA. The following is a summary of the regulatory initiatives undertaken in response to EGRRCPA's changes that have taken effect, as well as initiatives that have been proposed but are not yet effective. Interim final rules are effective immediately upon publication.

Effective EGRRCPA Initiatives

Treatment of Certain Municipal Securities as High-Quality Liquid Assets (Regulation WW)

In August 2018, the agencies adopted an interim final rule to implement section 403 of EGRRCPA.² Section 403 amended section 18 of the Federal Deposit Insurance Act and required the agencies, for purposes of their liquidity coverage ratio (LCR) rules and any other regulation that incorporates a definition of the term "high-quality liquid asset" (HQLA) or another substantially similar term, to treat a municipal obligation as an HQLA if the obligation is "liquid and readily marketable" and "investment grade," as those terms were defined in EGRRCPA.

To effect this change, the interim final rule amended each agency's LCR rule to include a definition of "municipal obligation" that is consistent with the definition in section 403. The interim final rule also amends the HQLA criteria by adding municipal obligations that are both liquid and readily marketable as well as investment grade to the list of assets eligible for treatment as level 2B liquid assets. In addition, the interim final rule rescinds certain amendments the Board made to its LCR rule in 2016 related to the treatment of certain U.S. municipal securities as HQLA so that municipal obligations under the Board's rule will be treated consistently with section 403.

Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (Regulations Q and Y)

In August 2018, the Board adopted an interim final rule to implement section 207 of EGRRCPA, which directed the Board to revise its Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (Policy Statement).³ Bank holding companies and savings and loan holding companies that are subject to the Policy Statement are exempt from the Board's regulatory capital rule. Section 207 required the Board to raise the consolidated asset threshold for application of the Policy Statement from $1 billion to $3 billion. In accordance with section 207, the interim final rule increased the Policy Statement's asset size threshold from $1 billion to $3 billion and made other conforming amendments to the Policy Statement.

Expanded Examination Cycles for Qualifying Small Banks and U.S. Branches and Agencies of Foreign Banks (Regulations H and K)

In December 2018, the agencies adopted final rules to implement section 210 of EGRRCPA.⁴ Section 210 amended section 10(d) of the Federal Deposit Insurance Act to permit the agencies to conduct on-site examinations of qualifying insured depository institutions with under $3 billion in total assets not less than once during each 18-month period. Prior to EGRRCPA's enactment, qualifying insured depository institutions with less than $1 billion in total assets were eligible for an 18-month on-site examination cycle.

The final rules generally allow qualifying insured depository institutions with under $3 billion in total consolidated assets to benefit from the extended 18-month examination schedule. In addition, the interim final rules make parallel changes to the agencies' regulations governing the on-site examination cycle for U.S. branches and agencies of foreign banks, consistent with the International Banking Act of 1978.

Proposed EGRRCPA Initiatives

Regulatory Capital Treatment for High Volatility Commercial Real Estate Exposures (Regulation Q)

In September 2018, the agencies requested comment on a proposed rule that would amend the regulatory capital rule to revise the definition of "high volatility commercial real estate exposure" (HVCRE) to conform to the statutory definition of "high volatility commercial real estate acquisition, development, or construction (HVCRE ADC) loan," in accordance with section 214 of EGRRCPA.⁵ Section 214 amended the Federal Deposit Insurance Act by adding a new section 51 to provide a statutory definition of an HVCRE ADC loan. The statute stated that the agencies may only require a depository institution to assign a heightened risk weight to an HVCRE exposure, as defined under the capital rule, if such exposure is an HVCRE ADC loan under EGRRCPA.

In accordance with section 214 of EGRRCPA, the agencies proposed to revise the HVCRE exposure definition in section 2 of the agencies' capital rule to conform to the statutory definition of an HVCRE ADC loan. Loans that meet the revised definition of an HVCRE exposure would receive a 150 percent risk weight under the capital rule's standardized approach.

Although not expressly required by EGRRCPA, the proposed rule also would apply the revised definition of an HVCRE exposure to all Board-regulated institutions that are subject to the Board's capital rule, including bank holding companies, savings and loan holding companies, and intermediate holding companies of foreign banking organizations. The comment period ended on November 27, 2018.

Prudential Standards for Large Bank Holding Companies and Savings and Loan Holding Companies (Regulations Y, LL, PP, and YY) and Proposed Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements (Regulations Q and WW)

In October 2018, the Board requested comment on a Board-only proposal that would establish risk-based categories for determining prudential standards for large U.S. banking organizations, consistent with section 401 of EGRRCPA. At the same time and in connection with the Board-only proposal, the agencies also requested comment on an interagency proposal that would establish risk-based categories for determining liquidity and capital standards for large U.S. banking organizations, again consistent with section 401 of EGRRCPA.

Section 401 raised the minimum asset threshold from $50 billion to $250 billion for general application of enhanced prudential standards under section 165 of the Dodd-Frank Act. In addition, section 401 authorized the Board to apply such standards to bank holding companies with total consolidated assets of $100 billion or more but less than $250 billion, provided that the Board take into consideration certain statutory factors—capital structure, riskiness, complexity, financial activities (including financial activities of subsidiaries), size, and any other risk-related factors that the Board deems appropriate—when doing so. EGRRCPA also raised the threshold from $10 billion to $50 billion in total consolidated assets for application of risk committee and risk-management standards to publicly traded bank holding companies and required the Board to implement periodic supervisory stress testing for bank holding companies with $100 billion or more but less than $250 billion in total consolidated assets.

The first proposal would establish four categories of prudential standards for large U.S. bank holding companies and certain savings and loan holding companies.⁶ Consistent with EGRRCPA, risk-committee and risk-management requirements would be required for all bank holding companies and certain savings and loan holding companies with at least $50 billion in total consolidated assets. Likewise, bank holding companies and certain savings and loan holding companies with at least $100 billion in total consolidated assets would be subject to supervisory stress tests, with the periodicity depending on the applicable category of standards. The first proposal also included proposed changes to related reporting forms, as well as proposed definitional changes in the Board's Regulation PP.

The second proposal, which was proposed by the agencies, would utilize the categories introduced in the Board-only proposal and apply tailored capital and liquidity requirements for banking organizations subject to each category.⁷ Specifically, the agencies proposed to amend the scope of certain aspects of the regulatory capital rule and the LCR rule and re-propose the scope of the net stable funding ratio rule to incorporate the four categories of standards and differentiate the application of standards in each category to align with the risk profile of banking organizations.

The comment period for both proposals ended on January 22, 2019.

Reduced Reporting for Covered Depository Institutions (Regulation H)

In November 2018, the agencies requested comment on a proposal to implement section 205 of EGRRCPA.⁸ Section 205 amended section 7(a) of the Federal Deposit Insurance Act and required the agencies to issue regulations that allow for a reduced reporting requirement by "covered depository institutions" for the first and third reports of condition in a year. "Covered depository institution" is defined in section 205 as an insured depository institution "that—(i) has less than $5,000,000,000 in total consolidated assets; and (ii) satisfies such other criteria as the [agencies] determine appropriate."

The proposed rule would implement section 205 by (1) authorizing covered depository institutions to file the Federal Financial Institutions Examinations Council (FFIEC) 051 Call Report (the most streamlined version of the Call Report), and (2) reducing the information required to be reported on the FFIEC 051 Call Report by covered depository institutions in the first and third calendar quarters. The proposal would define "covered depository institution" to include certain insured depository institutions that have less than $5 billion in total consolidated assets and satisfy certain other proposed criteria. The OCC and the Board also proposed to establish reduced reporting for certain uninsured institutions under their supervision that have less than $5 billion in total consolidated assets and meet the proposed criteria. In addition, the Board proposed a technical amendment to its Regulation H to implement the requirement in section 9 of the Federal Reserve Act pursuant to which state member banks are required to file Call Reports. The comment period ended on January 18, 2019.

Regulatory Capital Rule: Capital Simplification for Qualifying Community Banking Organizations (Regulation Q)

In November 2018, the agencies requested comment on a proposal that would provide for a simple measure of capital adequacy for certain community banking organizations, consistent with section 201 of EGRRCPA.⁹ Section 201 directed the agencies to develop a community bank leverage ratio of not less than 8 percent and not more than 10 percent for qualifying community banking organizations, which are depository institutions or depository institution holding companies with total consolidated assets of less than $10 billion that the agencies have not determined are ineligible based on the banking organization's risk profile.

Under the proposal, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets, meet qualifying criteria, and have a community bank leverage ratio (as defined in the proposal) of greater than 9 percent would be eligible to opt in to a community bank leverage ratio framework. Such banking organizations that elect to use the community bank leverage ratio and maintain a community bank leverage ratio of greater than 9 percent would not be subject to other risk-based and leverage capital requirements. In addition, these banking organizations would be considered to be "well capitalized" for purposes of section 38 of the Federal Deposit Insurance Act and regulations implementing that section, as applicable, and the generally applicable capital requirements under the agencies' capital rule. The comment period ended on April 9, 2019.

Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds (Regulation VV)

In December 2018, the agencies, along with the Securities and Exchange Commission and Commodities Futures Trading Commission, requested comment on a proposal that would amend Regulation VV (known as the Volcker rule) to align with amendments in sections 203 and 204 of EGRRCPA.¹⁰ Section 203 amended section 13 of the Bank Holding Company Act by narrowing the definition of banking entity, and section 204 revised the statutory provisions related to the naming of hedge funds and private equity funds.

The Volcker rule generally restricts banking entities from engaging in proprietary trading and from owning or sponsoring hedge funds or private equity funds. The proposed rule would exclude community banks with $10 billion or less in total consolidated assets, and total trading assets and liabilities of 5 percent or less of total consolidated assets, from the restrictions of the Volcker rule. Additionally, the proposal would, under certain circumstances, permit a hedge fund or private equity fund to share the same name or a variation of the same name with an investment adviser that is not an insured depository institution, company that controls an insured depository institution, or bank holding company. The comment period ends on March 11, 2019.

Real Estate Appraisals (Regulation Y)

In December 2018, the agencies requested comment on a proposal that would raise the transaction value threshold for residential real estate transactions requiring an appraisal from $250,000 to $400,000, as well as align the agencies' appraisal regulations with section 103 of EGRRCPA.¹¹ Section 103 provided an exemption to the appraisal requirement for certain transactions with values of less than $400,000 involving real property or an interest in real property that is located in a rural area.

The proposal would eliminate the requirement under the agencies' appraisal regulations for regulated financial institutions to obtain an appraisal for real estate-related financial transactions with a transaction value of $400,000 or less, or that are exempted by the rural residential exemption in section 103 of EGRRCPA. Instead, the proposal would require evaluations for such transactions that are consistent with safe and sound banking practices. The comment period ended on February 5, 2019.

Other Dodd-Frank Implementation

Throughout 2018, in addition to implementing EGRRCPA, the Federal Reserve continued to implement the Dodd-Frank Act, 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 following is a summary of the key Dodd-Frank regulatory initiatives that were finalized during 2018 that were not related to EGRRCPA.

Single Counterparty Credit Limits (Regulation YY)

In June 2018, the Board adopted a final rule to establish single-counterparty credit limits for bank holding companies and foreign banking organizations with $250 billion or more in total consolidated assets, including any U.S. intermediate holding company of such a foreign banking organization with $50 billion or more in total consolidated assets and any bank holding company identified as a global systemically important bank holding company (G-SIB) under the Board's capital rules.¹² The final rule implements section 165(e) of the Dodd-Frank Act, which requires the Board to impose limits on the amount of credit exposure that such a bank holding company or foreign banking organization can have to an unaffiliated company in order to reduce the risks arising from the unaffiliated company's possible failure.¹³

Under the final rule, a bank holding company with $250 billion or more in total consolidated assets that is not a G-SIB is prohibited from having aggregate net credit exposure to an unaffiliated counterparty in excess of 25 percent of its tier 1 capital. A U.S. G-SIB is prohibited from having aggregate net credit exposure in excess of 15 percent of its tier 1 capital to an unaffiliated counterparty that is a G-SIB or a nonbank financial company supervised by the Board (major counterparty) and in excess of 25 perfect of its tier 1 capital to any other unaffiliated counterparty. The final rule also includes requirements for any foreign banking organization operating in the United States with $250 billion or more in total global consolidated assets and any U.S. intermediate holding companies of such an organization with $50 billion or more in total assets.

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 https://www.federalreserve.gov/publications/gpra.htm.

 

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