October 2013


OCC Basel III Implementation Guidance

On October 28, the OCC announced that it established a website to provide guidance for institutions on technical matters relating to the implementation of the advanced approaches risk-based capital rule.  The first document released addresses implementation of the Supervisory Formula Approach (SFA) for securitization exposures.

Under the Advanced Approaches, the SFA is identified as the top of the hierarchy of approaches for risk-weighting securitization exposures.  The Simplified Supervisory Formula Approach (SSFA) is the second tier of the hierarchy under the Advanced Approaches.  The BOLI industry (carriers, investment managers and administrators) continue to work toward resolutions that will assist institutions in applying one of the applicable look-through approaches for separate account BOLI under the revised Advanced Approaches.  The revisions become effective 1/1/2014.


Uniform Agreement on Classification and Appraisal of Securities Held by Depository Institutions

On October 29, the OCC, FRB and FDIC collectively issued a joint Agreement to revise the 2004 Uniform Agreement on the Classification of Assets and Appraisal of Securities Held by Banks and Thrifts (2004 Agreement).  The revisions replace references to credit ratings with alternative standards of creditworthiness consistent with section 939A of Dodd-Frank.

The Agreement notes that “Fundamental credit analysis is central to understanding the risk associated with all assets and should be applied to investment securities as part of a pre-purchase and ongoing due diligence process…”  It also references the revised definition of “investment grade debt securities,” indicating that the issuer of the security must have an adequate capacity to meet the financial commitments for the life of the asset, and, therefore, the issuer’s risk of default must be low and the institution must expect the full and timely repayment of principal and interest.


Annual Stress-Test Reporting Template and Instructions for Banks between $10 Billion and $50 Billion

On October 21, the FDIC released Dodd-Frank Act stress testing instructions and a reporting template (the FDIC DFAST 10-50 report) for institutions that have between $10 billion and $50 billion of total consolidated assets.

Although it is not explicitly stated, BOLI holdings would appear to be included in the following items:

  • Income Statement Line 16 (Non-interest income);
    • Note: Any amounts that represent greater than 15% of non-interest income are to be itemized and described beginning in line 26.
  • Balance Sheet Line 30 (All other assets).

The FDIC will provide details about the macroeconomic scenarios to institutions on or before November 15th of each year.


Managing Sensitivity to Market Risk in a Challenging Interest Rate Environment

On October 8, the FDIC issued FIL-46-2013 to re-emphasize the importance of prudent interest rate risk management processes and to ensure that institutions are prepared for a period of rising interest rates.  The letter refers to the January 2010 Advisory on Interest Rate Risk Management and notes that the processes outlined in that advisory continue to be relevant today.

The FDIC states that it is increasingly concerned that certain institutions may not be sufficiently prepared or positioned for sustained increases in, or volatility of, interest rates.  The letter stresses the importance of adopting a comprehensive asset-liability and interest rate risk management process, including:

  • Board and Management Oversight,
  • Policy Framework and Prudent Exposure Limits,
  • Effective Measurement and Monitoring of Interest Rate Risk, and
  • Risk Mitigation Strategies.

Under the measurement and monitoring section, institutions are encouraged to review multiple types of data as opposed to a single measurement.  Additionally, stress tests that consider the impact of 300 to 400 basis point changes in interest rates are recommended.


Supplementary Leverage Ratio Proposal – Update

As we reported in July, the US banking regulators proposed a supplementary leverage ratio (SLR) rule that would be applicable to the largest financial institutions.  The proposal was published in the Federal Register on August 20 and open to public comment through October 21.  A number of institutions and trade associations submitted comments.

Most commenters were supportive of the regulators’ efforts to implement a leverage ratio as a supplemental, backstop measure; however, several emphasized that it should not be calibrated at a level that makes it the binding regulatory constraint.  Many commenters also recommended that the regulators wait until the Basel Committee on Banking Supervision (BCBS) completes its ongoing work regarding the SLR’s denominator before moving forward with the US SLR proposal.

Other material observations and recommendations included:

  • The calculation of the SLR should exclude cash on hand as well as cash placed with central banks.

End users of derivatives and securities financing transactions cautioned that the proposal could have unintended, negative consequences for these financial markets.



Prudential Accepts Final Designation as Non-Bank SIFI

On October 18, Prudential announced that it will not seek to rescind FSOC’s designation of the company as a non-bank SIFI.  Prudential said it will work with the Federal Reserve and other regulators to develop regulatory standards that take into account the differences between insurance companies and banks.