Today the Federal Reserve announced its long-awaited
proposal for prudential regulation of systemically important
financial institutions (Sifis).
The release indicates US Sifis will be subject to a more
onerous regime than their European counterparts; an outcome US
banks have lobbied against.
Tuesdays proposal is the Feds proposed rule to
implement sections 165 and 166 of Dodd-Frank, and Basel III
requirements. It comes after a year of speculation over whether
US banks will suffer from an uneven playing field of capital
Based on US attorneys first reaction, it seems this
will be the case.
Theres no question that this proposal is way
ahead and beyond Basel, and clearly will put US banks at a
competitive disadvantage compared to non-US based banks,
said Bob Bostrom, co-head of the global financing institution
and funds sector at SNR Denton.
The proposed US Sifi framework goes beyond the capital
surcharges and risk-based capital requirements of Basel,
outlining stress testing, debt to equity limits, risk
management requirements, and single counterparty limits.
The 173-page document poses 80 questions, but it
doesnt lack the clarity of other proposed rules and
Bostrom predicts little change between this and the final
An area which could require clearer standards is stress
testing. Each Sifi must determine its own methodology to
respond to the specified stressed scenarios. This interpretive
discretion will lead to discrepancies between how Sifis assess
their standing at times of market stress.
The proposal is consistent with the Dodd-Frank provisions
mandating the rules, but it is a blow to the industry which has
asked for more lenient prudential regulation.
As others have predicted, Bostrom said based on todays
release Sifis can expect increased expenses and decreased
profit, and may reconsider their business mix and size.
Non-bank Sifis will suffer the most under the regime, as
they will switch from being outside of the Federal
Reserves oversight, to falling under a new enhanced level
The Federal Reserve press release can be viewed
here. The deadline for comments is March 31 2012.
Check back in the early new year for IFLRs detailed
analysis of the proposed rules.