US Regulatory Developments

Author: | Published: 30 Sep 2016
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Many financial services institutions, especially large complex firms, have struggled to keep pace with the scope and complexity of new regulations since the 2008 credit crisis. Designed to improve financial stability, these regulations' primary goals are on improving capital, liquidity, and resolvability, as well as promoting stronger governance. In particular, revisions to the Basel Capital Requirements, Federal Reserve Board's (FRB) Comprehensive Capital Analysis and Review (CCAR) program, the new Recovery and Resolution Planning (RRP) guidance, as well as new liquidity standards, have been in focus. In addition to these regulations that are central to the structural reform agenda, US regulators are also prioritizing additional requirements relating to risk taking (e.g. the Volcker Rule on proprietary trading, etc.), risk data embodied in Basel Committee for Banking Supervision's (BCBS) guidance 239 and model risk management (SR 11-7 / OCC 2011-12) among others related to anti-money laundering and fiduciary activities.

As the pace of regulatory reform shows no real signs of slowing down, banks are being forced to rethink their overall strategy and operating model to ensure long term sustainability and profitability. The global footprint of the US-headquartered SIFIs also poses significant complexity and burden given the need to meet both US and local jurisdictional requirements. That burden continues to rise as the rules multiply and nuances between jurisdictions proliferate.

Across new capital, stress testing, liquidity, and resolution planning requirements, banks are still adjusting to shifting regulatory expectations as well as reacting to ongoing feedback in the form of Matters Requiring Attention (MRAs) and Matters Requiring Immediate Attention (MRIAs). There continues to be a lengthy pipeline of forthcoming regulations to contend with. One example is the so-called "Basel IV" package, a reference to several proposed and final capital rules from the BCBS, including a number of significant changes to the treatment of trading portfolios and operational risk that US banks are expecting to eventually adopt.

Banks continue to considerably increase the size of their compliance staff, especially in the case of Foreign Banking Organizations (FBOs), as they attempt to comply with new rules for their Intermediate Holding Companies (IHCs) and US operations. While they have made good progress, there still remains much work to be done to sustainably operationalize in a business as usual (BAU) mode. This ties directly into the regulatory point of view that rules and requirements should be integrated and normalized into business line operations and strategic decision making.

In the following sections, we will be focusing on a number of areas including Capital/CCAR, liquidity and RRP. For each, we will explore the key themes and trends in the US marketplace.


The annual CCAR exercise has greatly influenced and formalized capital planning and stress testing of the largest firms and drives key business decisions regarding dividends, buybacks, and even potential acquisitions and new products. As evident from speeches from FRB Governor Daniel Tarullo, it is clear that the FRB will continue to use the CCAR process as a key mechanism to assess not only capital adequacy and solvency under stress conditions, but also as an indication of the strength and comprehensiveness of an institutions ability to identify, monitor and manage key risks.

Loss rates and risk-weighted asset (RWA) forecasts have generally stabilized over the last few cycles, and all banks have been able to exceed the quantitative criteria; however, certain aspects (e.g. phase-in percentage of Basel III calculations, incorporation of the supplemental leverage ratio capital surcharge for US GSIBs, etc.) will require close monitoring as the thresholds rise going forward.

FRB objections to capital plans in 2015 and 2016 have been on qualitative grounds. To that end, regulatory emphasis has shifted to fundamental aspects, such as data integrity / reconciliation, risk identification, and controls. These areas, which were originally highlighted in a "Dear CEO letter" in late 2014, are now formalized vis-a-vis CFO attestation expectations starting with the 2017 cycle. In particular, CFOs must attest to the accuracy and integrity of the regulatory reports summarizing a firm's actual starting positions and internal stress test results as well as the myriad of inputs that the FRB's models are dependent upon to produce their own stress test results. Banks have been working diligently to implement a control environment to ensure compliance with this requirement.

The regulatory focus on CCAR submissions and their underlying processes is unlikely to abate for the foreseeable future given their significance for the FRB's efforts to maintain financial stability. That said, for regional firms with less than $250 billion in assets and without international activities, the FRB intends on eliminating the qualitative side of CCAR, but will retain the quantitative side, consistent with statutory requirements. Even without being subjected to the formal CCAR process, the FRB is still likely to prioritize sound capital planning and stress testing as part of its review of a firm's ongoing safety and soundness.

Starting in 2017, the IHCs of FBOs will be required to submit a capital plan and stress test results to the FRB in a "dry run" of CCAR. The following year, they will be fully subject to the CCAR process. As such, we observe a significant level of program activity at the FBOs across various facets – risk models, validation, process, data management and controls – to enable a successful program.

As part of the evolution of capital management beyond mere compliance, there are significant efforts underway to optimize the relationship between risk, return and levels of capital. These efforts can help free up capital to enable institutions to not only increase their capital ratios, but also to pursue attractive investment opportunities and bolster financial performance. Banks are pursuing these savings by identifying opportunities to reduce excessive conservatism in their methodologies and risk models as well as streamlining and improving the quality of data and the effectiveness of systems and processes.

Additionally, there is some swirl and uncertainty regarding the long-term direction of regulatory capital as there is a growing perceived shift towards non-modelled capital adequacy measures, (i.e. Standardized Approach RWA and leverage ratios). There are concerns that new frameworks by the BCBS are less risk-sensitive and more constraining than the Advanced Approaches which may be phased out in the future.


Although liquidity issues experienced by several large institutions were a key driver during the financial downturn, the regulations focused on liquidity risk management have been slow to finalize. That is no longer the case with significant progress recently in liquidity risk related regulations – the final Liquidity Coverage Ratio (LCR), the proposed Net Stable Funding Ratio (NSFR), and the FRB's Comprehensive Liquidity Assessment and Review (CLAR). With the underlying infrastructure to report liquidity positions under the 3g and 4g requirements in place, banks continue to make progress on technology, data, risk management and forecasting capabilities. There still remains a significant gap in liquidity risk management maturity relative to capital.

Banks should expect questions to arise related to areas such as alignment of data sources and related data management processes in addition to the level of integration into existing business processes. In addition, regulators will more frequently expect some level of coordination with other large scale initiatives such as CCAR and RRP. Banks should be looking to address these concerns as well as strive to realize potential synergies and cost savings through the alignment of liquidity systems to existing infrastructure that the industry has collectively spent significant amounts on.

Overall, the broad array of regulations tied to liquidity risk are intended to steer large institutions toward more stable robust funding models which are more resilient through periods of market stress. Some observers have noted that these requirements may be having unintended consequences on market place liquidity, making it more fragile and subject to abrupt price swings or dislocations. Regulators seem to be willing to sacrifice some level of market place liquidity for greater financial stability and, at the moment, have not seen evidence of deteriorating market liquidity, but have confirmed that continued monitoring remains key.


On April 13, 2016, the FRB and Federal Deposit Insurance Corporation (FDIC) jointly provided firm-specific feedback on the 2015 resolution plans of eight US GSIBs. The agencies jointly determined that five resolution plans were not credible or would not facilitate an orderly resolution under the US Bankruptcy Code, the statutory standard established in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Each firm must remediate its deficiencies by October 1, 2016. If a firm has not done so, it may be subject to more stringent prudential requirements.

The agencies announced that the deadline for the next full plan submission for all eight US GSIBs is July 1, 2017. The agencies will evaluate all eight of the full plans submitted in 2017 under the statutory standard.

The agencies have more clearly described the criteria for evaluating resolution plans and described in a transparent way the rationale for individual firm resolution plan determinations. For the first time, the agencies disclosed high-level components of their Resolution Plan Assessment Framework used to evaluate and issue joint determinations on the 2015 resolution plans. In addition, they publicly released redacted versions of the feedback letters submitted to individual institutions. This approach underscores the significance the agencies place on resolution planning and their belief in the public's right to know the degree of progress being made at systemically important institutions on ending "too big to fail."

The US GSIBs are in the process of refining their resolution plans and continuing to take numerous steps to become more resolvable in bankruptcy. Given the regulatory emphasis and public nature of the focus on bank size (too big to fail), RRP has now emerged as the most significant program with banks in terms of senior management and Board attention. The ingredients to success, as always, include strong governance, accurate and meaningful data and strong controls over all elements.


The US Department of Labor (DOL) issued its conflict of interest final rule and related exemptions by expanding the "investment advice fiduciary" definition under the Employee Retirement Income Security Act of 1974 (ERISA) on April 6, 2016. The rule will require those who provide investment advice and recommendations to retirement investors to do so under a "fiduciary" standard–putting their clients' best interests before their own profit. Those who provide services to retirement investors will need to adhere to this standard by April 10, 2017, with additional compliance and supervisory requirements needing to be met by January 1, 2018.

Although, anyone who provides investment advice and recommendations will be impacted by the rule, those who currently do not act as fiduciaries will likely need to undergo substantial changes to how they deliver advice as well as to the supporting compliance and supervisory structures to support those advice standards. Even those who do currently act in a fiduciary capacity with respect to investment advice, including Registered Investment Advisers and Banks, will need to evaluate whether they are currently meeting the ERISA fiduciary standards and related exemptions. Although, for these organizations the gap between what the DOL requires and what they are currently doing is likely to be smaller than for non-fiduciaries, there will almost certainly be some amount of change required to be compliant with the rule.


On August 25, 2015, the Financial Crimes Enforcement Network (FinCEN) published a proposed rule that would extend anti-money laundering (AML) requirements to Securities and Exchange Commission (SEC) registered investment advisers, as FinCEN indicated that this proposed rulemaking would address money laundering vulnerabilities in the U.S. financial system.

AML continues to be a hot topic area for US banking institutions and on May 5, 2016, the Obama Administration announced executive branch actions to combat money laundering and enhance financial transparency. This includes the final rule from FinCEN that requires financial institutions–including banks, broker-dealers, mutual funds, futures commission merchants, and introducing brokers–to identify the "beneficial ownership" of their customers for the first time and maintain ongoing customer due diligence information.

The Internal Revenue Service (IRS) released a proposed rule that would require foreign-owned "disregarded entities", entities with one owner that are not recognized for tax purposes including single-member limited liability companies, to obtain an employee identification number from the IRS The IRS believes that this rule will strengthen its ability to prevent the use of these entities for tax purposes.


Going forward, meeting regulatory expectations will require that institutions stay vigilant and transparent in addition to taking a holistic view of regulatory compliance. The broad implications and pervasive reach of the various regulatory regimes, whether it be CCAR or RRP, require top-down discipline and a significant level of connection across technology systems, governance structures and business models. Compliance should not be thought of solely in terms of producing specific plans or reports or functional attestations; it should be viewed as an enterprise-wide, strategic risk management objective that is embedded in the institutional fabric of the firm. Getting to this target state will require significant efforts and a renewed level of management focus at most US institutions.


The authors would like to thank David Wright, Chris Spoth, Alex LePore, Rob Bartolini, Joshua Uhl, Clint Stinger, John Wagner and Christina Tripodo 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. Please see for a detailed description of DTTL and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

About the author

Alok Sinha
Deloitte Advisory Financial Services Industry Leader
Deloitte & Touche LLP

San Francisco, US
Tel: +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 24 years of experience in the financial services industry specializing in bank regulatory capital and capital management, credit risk management and banking infrastructure.

Alok 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 optimization, regulatory strategy, and credit portfolio management. He has assisted several large banks with technology infrastructure initiatives relating to design, architecture and implementation of credit risk rating systems, risk data warehouses, regulatory capital processes, and data management solutions.

Alok 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

Courtney Davis
Deloitte Advisory Principal
Deloitte & Touche LLP

New York, US
Tel: +1 516-918-7322

Courtney is a Principal in Deloitte & Touche LLP focused on providing banking and securities clients advisory services in the risk and regulatory space. He has supported several of the firm's largest clients, leading complex engagements for various functions including Risk, Treasury, Finance and Technology. He has over 15 years of experience in the financial services industry focused on regulatory reform, credit risk management and capital management. Prior to joining Deloitte he spent 6 years in the financial services industry most recently at JPMorgan in the Credit Portfolio Management Group and prior to that Merrill Lynch in a number of roles in the Finance and Treasury functions.

Courtney has led engagements relating to large scale regulatory initiatives, vendor selection and assessments, data validation and management processes, credit and operational risk assessments and various other transformative initiatives. In addition he has advised clients on additional areas such as capital optimization, regulatory strategy, technology design and implementation, operational streamlining and new product/process development.


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