US regulatory developments

Author: | Published: 5 Sep 2017
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After nearly a decade of post-crisis financial regulatory reforms, changes in the political landscape stemming from the 2016 US presidential election are beginning to impact the direction of financial industry regulation. A more industry friendly stance is expected to prevail in the foreseeable future with a slow-down in the pace of any new regulations or guidance geared toward implementation of past legislation or other regulatory reform initiatives. Efforts are underway to repeal or amend certain provisions of the Dodd-Frank Act and other statutes. Although there are political obstacles to significantly amending or repealing aspects of the existing framework, the presidential transition marks an inflection point, with a change in emphasis from the sustained issuance of new regulations to a moratorium on new rules and a call for recalibration of those in effect.

However, this shift does not change the reality that financial services institutions, especially the largest and most complex firms, must continue their work to operationalise key regulations, including capital planning and stress testing, recovery and resolution planning (RRP), and new liquidity standards. And while some relief may be on the horizon, we expect that the bar for largest firms will remain high – and compliance with these standards an important priority.

Looking ahead, the prospect of a sweeping deregulatory bill being enacted into law appears low. However, modest regulatory relief proposals–especially those that affect community and regional banks–have bipartisan appeal, and could be enacted into law. It should be noted that significant modifications to existing regulations can be enacted at the agency level through amendments to such regulations and guidance – and we expect this vehicle to be increasingly used as the new US administration fills key positions at many agencies.

In order to better understand the new regulatory paradigm, this article summarises several key political developments and dynamics at play. Subsequently, implications will be discussed in seven areas: capital, liquidity, RRP, the uniform fiduciary standard, foreign banking organisations (FBOs), anti-money laundering (AML), and cybersecurity.


Republican lawmakers view the existing financial regulatory framework as burdensome to industry, and adversely impacting banks' ability to enable growth in the broader economy.

In early June 2017, the House passed a bill (the Financial CHOICE Act of 2017) that would significantly amend several aspects of the Dodd-Frank Act. It offers all banks the option to maintain a 10% leverage ratio in exchange for relief from enhanced prudential standards, and Basel III capital and liquidity standards.

The Senate is taking a more bipartisan approach by focusing on potential areas of agreement across the aisle and among regulators, such as raising the statutory $50 billion threshold for enhanced prudential standards, exempting certain banks from stress testing requirements, simplifying the Volcker Rule, and simplifying capital requirements for smaller banks.

The administration, through an executive order in February 2017, set forth seven Core Principles for regulating the US financial system, which directs the Treasury Secretary to assess the current framework and recommend changes as appropriate.

In June, Treasury released its first report pursuant to the Core Principles executive order, which sets forth a series of recommendations to amend the regulations governing depository institutions. Treasury noted that it will issue three additional reports covering capital markets and derivatives markets, asset management and insurance, and nonbank financial institutions and fintech. Notably, about two-thirds of the recommendations can be enacted by the federal regulatory agencies (i.e., they would not require Congressional action), and they impact critical areas such as capital, liquidity, and stress testing.


For the first time since the Comprehensive Capital Analysis and Review (CCAR) was instituted seven years ago, the Federal Reserve Board (FRB) did not object to any bank's capital plan or proposed capital distributions. However, the FRB has indicated that additional changes to the program are forthcoming. Some of the proposed changes likely will be welcomed by the industry, while others are likely to pose additional challenges for the largest firms. These changes can be implemented by FRB without Congressional action.

First, the FRB may eventually eliminate the assessment of qualitative factors as part of CCAR for all firms, and such considerations would revert to the FRB's ongoing supervisory process. The exclusion of qualitative factors from impacting regulator assessment of capital plan and dividend strategy would be a matter of significant relief to industry.

Second, the FRB is considering making assumptions around balance sheet growth and capital distributions less conservative. However, according to FRB Governor Jay Powell, such adjustments would be made in conjunction with (i) the integration of the risk-based capital buffer for global systemically important banks (G-SIBs) into the CCAR post-stress capital requirements, and (ii) replacement of the Basel III capital conservation buffer (CCB) with a calculation of peak-to-trough stress (the so-called 'stress capital buffer' (SCB)). While these changes have offsetting impacts, the overall impact of these changes is likely to be negative for several G-SIBs and somewhat positive for the other CCAR participants.

The FRB plans to enhance the transparency surrounding its CCAR and stress testing processes, and expects to seek public feedback on possible forms of enhanced disclosures. The FRB may also disclose more information about risk characteristics that contribute to the loss estimate ranges. However, according to FRB Chair Janet Yellen, the FRB does not intend to make its models public.

Beyond capital planning, US implementation of planned changes in the Basel Committee's global capital framework also faces an uncertain future. Revisions to the market risk capital framework, issued in January 2016 and aimed at improving trading book capital requirements by incorporating Fundamental Review of the Trading Book (FRTB) guidance, are expected to be implemented in member jurisdictions by January 1 2019. However, this timeline will likely not be achieved in the US as the FRB has not yet issued any proposals to start the rulemaking process on FRTB or issued guidance. US banks with large global trading operations (and EU-based intermediate holding companies (IHCs)) will have divergent market risk capital reporting between their home and host jurisdictions resulting in duplicative infrastructure and associated costs for the impacted banks.

The Basel Committee's proposals on credit and operational risks are intended to reduce excessive variability in capital measures, and improve comparability across institutions, and are generally favoured by the industry. The Committee is also considering ways of designing a capital output floor to ensure there is a backstop against inconsistent implementation across jurisdictions of the new standards. If and when these proposals are finalised, it remains unclear how they will be implemented in the US.


Following Basel Committee guidance, the FRB, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) finalised the Liquidity Coverage Ratio (LCR) rule in October 2014, which established higher standards for short-term liquid assets under stress. Subsequently, the FRB finalised public disclosure requirements related to the LCR. Depending on the nature of the institution, the implementation timeframe varies from April 2017 to October 2018. US banks appears to be well on their way to compliance with the LCR regime.

Conversely, the future of the Net Stable Funding Ratio (NSFR) is much less clear. Although the FRB, FDIC, and OCC proposed the rule for large US banks in May 2016, the industry has expressed significant objections about the unintended adverse effects the rule may have. The aforementioned Treasury report also recommends that US regulators delay implementing the NSFR until they can "appropriately assess and calibrate" the rule. Given this backdrop, it remains unclear if and when the NSFR may be finalised in the US.


The future of the recovery and resolution regime in the US also faces some degree of uncertainty. The FRB and FDIC jointly determined in April 2016 that the resolution plans of five US G-SIBs were "not credible or would not facilitate an orderly resolution under the Bankruptcy Code". Subsequently, the firms remediated the deficiencies and submitted revised plans that were approved by the regulators in all except one case. The firm was subject to restrictions on the growth of international and nonbank activities until both agencies determined that the deficiencies were remediated in April 2017.

These developments–the first time that these agencies identified deficiencies under the resolution planning process, as well as the first time that they imposed penalties related to resolution planning–demonstrate the continued significance of resolution planning as a supervisory tool, and underscore the need for banks to continue to devote attention and resources to operationalising these requirements.

It is likely that resolution plans will move to a two-year submission cycle, as such a move is supported by Treasury and agency heads, as noted in recent Congressional testimony. The largest US banks continue to make significant investments in improving their "resolvability profile" by making operational and legal entity changes, simplifying their booking models, and establishing shared services organisations.

Although resolution planning certainly receives greater attention, it is important to note that the OCC's recovery planning requirements, which were finalised in October 2016, become effective for the largest institutions (i.e., those with over $750 billion in total assets) this year. The next tier of banks will be required to comply in 2018.


The US Department of Labor's (DOL) April 2016 final Conflict of Interest Rule on fiduciary investment advice continues to be one of the most contentious financial regulations, even as the rule's initial applicability date has taken effect.

In February 2017, President Trump issued a memorandum directing the DOL to prepare an "updated economic and legal analysis concerning the likely impact" of the rule and determine whether it "may adversely affect the ability of Americans to gain access to retirement information and financial advice." If it makes an affirmative determination, the memorandum directs the DOL to issue a proposal to revise or rescind the rule. Following this directive, the DOL delayed the rule's initial applicability date, as well as the date for compliance with certain key requirements around investor disclosure and representations. In addition to conducting an updated economic and legal analysis, the DOL is also seeking input and comments that could provide the basis for significant changes to the rule. It may also extend the full January 1 2018 applicability date.

The investment management industry has already spent an estimated $100 million preparing for compliance with the rule. If certain components of the rule are amended or repealed pursuant to the Presidential memorandum, some firms may elect to stay the current course given their sunk preparation costs and their past commitment to implementing a new financial advisor strategy. On the other hand, other firms may welcome the modifications, despite having made such large investments.


On July 1 2016, the largest FBOs in the US were required to establish new IHCs that are subject to capital, liquidity, governance, risk management, capital planning, and stress testing requirements. The road to operationalising run-the-bank functions for these organisations has just begun. The FBOs are striving to demonstrate to regulators that they can govern and manage risk for their combined US operations on a standalone and sustainable basis. There will likely be a heavy regulatory focus on how the IHCs' various control functions, such as Risk, Compliance, Modelling, Treasury, Audit, as well as the business units, are implementing the requirements of Regulation YY.

Five of the recently established IHCs were not full participants in the FRB's 2017 CCAR program and only had to submit capital plans subject to a confidential review process. Beginning 2018, they will be subject to the full public CCAR process, including publication of the FRB's stress tests of their IHCs. The largest FBOs in the FRB's Large Institution Supervision Coordinating Committee (LISCC) portfolio will also be required to submit their resolution plans in the next cycle, and the FRB and FDIC will likely expect significant progress on the next submissions.


Numerous regulators continue to characterise cyber concerns as a major threat to the financial system, and regulators at both the federal and state levels are focusing more intently on the issue.

In February 2017, the New York State Department of Financial Services (DFS) finalised what it characterises as a "first-in-the-nation" cyber regulation for New York-based banks and insurance companies, which requires these companies to establish a cybersecurity program and comply with prescriptive requirements. The regulation, which goes beyond current federal cybersecurity requirements for covered entities, is already becoming a catalyst for significant action to manage cyber risk and is expected to be adopted by different states.

In October 2016, the FRB, FDIC, and OCC issued an advance notice of proposed rulemaking (ANPR) on cyber risk management and resilience standards for large banking organisations, which contemplates a two-tiered approach: enhanced standards, which would apply to all cyber systems of covered entities; and sector-critical standards, which would apply to systems determined to be critical to the financial system. Although regulators at the FRB, FDIC, and OCC continue to stress the importance of strong cyber protections, it remains unclear whether the ANPR will advance to the formal proposal stage given the administration's approach to regulation.

The aforementioned Treasury report called for better coordination among federal and state regulators, including harmonisation of regulations, guidance, and implementation. The report also calls for using the Financial and Banking Information Infrastructure Committee (FBIIC) as a forum for that effort.


Combating financial crime and terrorism financing has been established as a "core mission" of the Treasury Department. Treasury also has the responsibility to administer and enforce regulations and sanctions from the Office of Foreign Assets Control (OFAC). Federal and state regulators have recently levied substantial fines as a result of enforcement actions against several of the largest banking organisations for AML and OFAC violations. With the advent of the recently enacted sanctions against Russia, Iran, and North Korea, financial institutions will need to be ever diligent to ensure they do not inadvertently run afoul of the seemingly ever-changing US laws governing international trade and finance.

New sanctions are not the only new regulatory challenge facing financial institutions. The Financial Crimes Enforcement Network (FinCEN) may seek to finalise an August 2015 proposal that would extend AML requirements to investment advisers registered with the Securities and Exchange Commission (SEC). If the proposed rule is finalised, investment advisors need to look at the growing enforcement actions that followed the licensed broker-dealers when they became subject to increased regulation in this area. Many of these broker-dealers recently faced large fines for not having a required comprehensive AML program in place.

In a broader move, FinCEN also issued a May 2016 final rule that requires financial institutions to identify and verify the identity of beneficial owners of legal entity customers and conduct and maintain ongoing customer due diligence information. Although the rule was finalised in May 2016, covered financial institutions have until May 11 2018 to fully implement the rule into their AML compliance programs.


Notwithstanding the new approach to financial regulation in Washington, firms should not assume that key requirements will be significantly amended or repealed. Notably, many of the post-crisis fundamental regulatory requirements and expectations–especially those governing capital, liquidity, RRP, and governance–will likely remain intact, though certain refinements and relief may be issued. There is also industry acceptance that many of the practices to comply with these regulations are essential for establishing strong risk and capital management regimes, which provide institution specific and macro benefits.


The authors would like to thank David Wright, Chris Spoth, Frederick Curry, and David Thompson for their contributions to this article.

The views expressed herein are those of the author and should not be attributed to Deloitte or its affiliates. This article contains general information only and Deloitte is not, by means of this article, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

About Deloitte: Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ("DTTL"), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as "Deloitte Global") does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the "Deloitte" name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see to learn more about our global network of member firms.

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About the author

Alok Sinha

Financial Services Industry Leader, Deloitte Risk & Financial Advisory, Deloitte & Touche LLP
San Francisco, US
T: +1 415 783 5203

Alok Sinha is the Financial Services Industry leader for Deloitte & Touche LLP and leads Deloitte's Basel / Regulatory Capital practice in the United States. He has approximately 25 years of experience in the financial services industry, specialising in bank regulatory capital and capital management, credit risk management and banking infrastructure.

Sinha and his team assist some of the largest financial institutions with Basel II programs, both in the US and globally. He advises several leading banks on topics such as capital strategy and optimisation, regulatory strategy and credit portfolio management. He has assisted several large banks with technology infrastructure initiatives relating to the design, architecture and implementation of credit risk rating systems, risk data warehouses, regulatory capital processes and data management solutions.

Sinha served on the RMA task force to provide the industry's response to the Basel Committee, and recommend revisions to US regulators. He is a frequent speaker on capital-related topics at industry conferences such as GARP and Knowledge Congress, and has been extensively quoted in industry publications such as American Banker, Risk magazine, Financial Foresights, Operational Risk, etc.

About the author

Alex LePore

Deloitte Risk & Financial Advisory, Deloitte & Touche LLP
McLean, Virginia, US
T: +1 571 766 7684

Alex LePore joined Deloitte Risk & Financial Advisory in 2015 with a focus on business and regulatory risk for financial institutions, specifically large US and foreign banking organisations. He leads the Center for Regulatory Strategy’s research on emerging regulatory and legislative issues impacting the financial services industry, particularly with respect to the implementation of Dodd-Frank. Prior to joining Deloitte, he was a policy analyst in Sullivan & Cromwell’s financial institutions group, where he advised several top executives at leading global financial institutions on key regulatory issues.




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