In an attempt to prevent future liquidity issues similar to those that occurred during the financial crisis of 2008, the Federal Reserve System—together with the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation—has proposed a minimum liquidity requirement on large and international banks with over $250 billion in assets or $10 billion or more in on-balance sheet foreign exposure. Pursuant to this requirement, the banks must hold high quality liquid assets (HQLAs) that are easily convertible into cash. Each bank shall be obligated to maintain a liquidity coverage ratio of 1-to-1 on the day with the highest projected net cash outflows during each 30-day stress period. In other words, the bank is required to hold enough HQLAs to cover its projected cash outflows minus its projected cash inflows on the most expensive day within the 30-day period. Additionally, a modified (light) version of the US LCR Proposal shall apply to specific domestic non-banking financial companies that hold assets in excess of $50 billion but less than $250 billion.
The Fed’s New Liquidity Proposal
Obama Nominates Yellen to Replace Bernanke as Federal Reserve Chair
On October 9th, President Obama nominated Janet L. Yellen to be the chairwoman of the Federal Reserve and his independent co-steward of the economy. In his nomination, Obama described her as one of the nation’s foremost economists and policy makers.
Stocks Hit Record High As Fed Keeps Bond Buying At $85B A Month
The Federal Reserve announced on Wednesday that it would continue its current quantitative easing policies indefinitely, despite the unanimity on Wall Street that a scale-back was imminent. This announcement sent the Dow and S&P 500 to record highs.
According to Bernanke, with the federal funds rate remaining in the 0 – 0.25% range and unable to decrease any further, the central bank’s measures to stimulate the economy have been focused on complementary methods of “asset purchases and forward guidance about short-term interest rates.” For example, in September 2012, the Federal Open Market Committee (FOMC) initiated a stimulus plan to purchase $40 billion per month in agency mortgage-backed securities in addition to the $45 billion per month in longer-term securities that it was already acquiring as part of its Maturity Extension Program (MEP). In December 2012, the Fed announced that it would maintain its $85 billion per month asset purchase program, even after the MEP had ended, by continuing to purchase $45 billion per month in longer-term Treasuries.
However, in June 2013, the Federal Reserve suggested that it would begin a modest reduction in the pace of its purchases by as early as September 2013, and possibly end the program around mid-year 2014. This caused some turmoil on Wall Street over the summer, as the markets tried to adjust to the idea of a departure from the asset purchase program, and consequently lead to a decrease in stock prices and an increase in interest rates.
FDIC Approves Regulatory Capital Interim Final Rule
This month the FDIC Board of Directors approved the Regulatory Capital Interim Final Rule. The final rule implements a revised definition of regulatory capital, a new common equity tier 1 minimum capital requirement, a higher minimum tier 1 capital requirement, and, for FDIC-supervised institutions subject to the advanced approaches risk-based capital rules, a supplementary leverage ratio that incorporates a broader set of exposures in the denominator. It goes into effect January 1, 20104. (more…)
Swaps Pushout Rule: Federal Reserve Clarifies Treatment of U.S. Branches of Foreign Banks
[Editor’s Note: The following post is authored by Davis Polk & Wardwell LLP]
The Federal Reserve has issued an interim final rule clarifying the treatment of uninsured U.S. branches and agencies of foreign banks under Section 716 of the Dodd-Frank Act (“Swaps Pushout Rule”). The interim final rule clarifies that, for purposes of the Swaps Pushout Rule, all uninsured U.S. branches and agencies of foreign banks are treated as insured depository institutions. Accordingly, a foreign bank swap dealer’s uninsured U.S. branch or agency will benefit from the Swaps Pushout Rule’s exemptions, transition period and grandfathering provisions to the same extent as an insured depository institution. The interim final rule also establishes a process for uninsured state branches and agencies of foreign banks and state member banks to apply to the Federal Reserve for a transition period from the July 16, 2013 effective date of the Swaps Pushout Rule. The interim final rule became effective on June 5, 2013, and comments on the rule are due on August 4, 2013. (more…)
Online Currency Exchange Accused of Laundering $6 Billion
Saying it was the world’s largest international money laundering prosecution in history, federal authorities announced charges against the operators of Liberty Reserve, an online currency exchange that prosecutors say enabled more than a million people worldwide to launder about $6 billion.
The investigation of the Costa Rican based company involved law enforcement officials from 17 countries, highlighting the complexity and globalization of illicit financing systems that have gone digital. With Liberty Reserve, any user could open an online account from anywhere in the world, without providing identification, and then trade virtual currency anonymously through an easily accessible online banking infrastructure.
Sallie Mae to Split into Two Companies
Sallie Mae recently announced that it will split into two companies: one to handle the servicing of federal student loans and the other to handle the origination of private student loans. Each company will be publicly traded and the split is expected to be complete within 12 months.
Currently, the company that will service federal student loans will control the majority of Sallie Mae’s pre-split assets. However, Sallie Mae’s split sends strong signals that the lending giant is most interested in the future market for private student loans. (more…)
BHCs Instructed to Conduct First Round of Mid-Cycle Stress Tests
This month the Federal Reserve instructed 18 Bank Holding Companies (BHCs) to conduct their first biannual Mid-Cycle Stress Test in compliance with the Dodd-Frank Act. While the Federal Reserve has conducted its own stress tests since 2009, this is the first time firms will conduct the test based on their “own processes and analyses.” (more…)
Firm Advice: Implementing Dodd-Frank
The comment period recently expired on the Federal Reserve’s proposal to require foreign banking organizations with at least $50 billion in global assets and $10 billion in U.S assets to form an intermediate holding company for most of their U.S. assets. The proposal is part of the Board’s implementation of Sections 165 and 166 of the Dodd-Frank Act. In a recent Client Alert, Gibson Dunn advises that “the IHC requirement likely exceeds the Board’s legal authority in implementing Sections 165 and 166 of Dodd-Frank, has the tendency to increase, rather than reduce, financial instability in the United States and globally, threatens other adverse effects, and does not effectively respond to the developments that the Board perceives in the U.S. operations of FBOs and in international banking regulation generally.” Gibson Dunn explains why here.
On April 10th, the White House released its proposed budget, which contained significant new tax proposals. While often general, the budget laid out specific proposals for: 1) the Buffet Rule, 2) marking to market of derivatives, and 3) alternative treatment for debt purchased on the secondary market. Skadden’s recent Client Alert explains the various proposals and both their foreign and domestic tax implications.