Banks should get ready for “a relatively active fall” when it comes to capital and liquidity, as well as Basel rules, one expert said.
Ben Weiner, a partner at law firm Sullivan & Cromwell, told members of NeuGroup’s bank treasurers group to be ready for lots of activity when it comes to managing capital and liquidity. New rules like accounting for current expected credit losses (CECL) have dominated the conversation but there are other areas that need to be considered:
- Trading book review. The Basel Market Risk Capital Standard, which is referred to as a fundamental review of the trading book, is on the horizon, Mr. Weiner said. He said this issue was on the regulatory agendas published by the OCC and the FDIC this past spring, indicating that the release of a proposal to revise market risk capital requirements is a priority of the banking agencies.
- Basel IV. There’s the more comprehensive implementation of what’s commonly referred to by industry participants as Basel IV, which are the standards that the Basel committee released in December 2017.
This again presents complex questions that relate to many different aspects of the bank capital framework, including the future role and relevance of the advanced approaches (that is, the internal ratings-based approach for credit risk), how the standardized approach for operational risk will factor into the overall capital and stress testing framework, and which banking entities will be subject to the revised Basel standards.
- Share repurchases. Mr. Weiner also discussed what has changed for non-CCAR bank holding companies in terms of the overall requirements for share repurchases. He said the reg requirements relating to share purchases developed over time and the framework “as it exists now has duplicative, overlapping and inconsistent requirements.”
For a long time, there’s been a rule that requires bank holding companies to provide notice and gain prior approval for repurchases in some circumstances if they would make aggregate repurchases net of any issuances that exceed 10% of their net worth.
In 2009, the Fed released SR letter 09-4, which established a supervisory expectation that bank holding companies would consult with supervisory staff and seek a non-objection before repurchases in some cases. The Basel III capital rules introduced graduated constraints through the “capital conservation buffer,” as well as a stand-alone requirement that banking entities obtain prior approval for any repurchase of common stock.
The stand-alone prior approval requirement, which was eliminated in the simplifications rulemaking, had presented significant practical difficulties for non-CCAR bank holding companies, especially when they sought to conduct repurchases promptly in response to market conditions.
Tailoring. The Fed and other banking agencies have proposed tailoring the application of capital and liquidity requirements, as well as enhanced prudential standards, to large domestic banking organizations and the US operations of foreign banking organizations. Agency principals have signaled that the goal is to finalize the proposals this fall, by the 18-month anniversary of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act.