An Excerpt From:
K&L Gates Global Government Solutions ® 2011: Mid-Year Outlook
July 2011
Financial Services
Systemically Important Financial Institutions:
Global Firms and International Financial Regulation
In the wake of the financial crisis, policymakers and regulators in the United States
and abroad have been undertaking substantial efforts to develop new frameworks
for designating and supervising systemically important financial institutions
(“SIFIs”). The global presence of these firms means that, in many cases, large firms
will be regulated by multiple authorities. Further, despite calls to coordinate and
harmonize SIFI regulation on an international basis, jurisdictions are considering
approaches that may result in overlapping and conflicting regulation.
The Dodd-Frank Act
The United States has made the most
progress relating to SIFI regulation.
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (“DoddFrank”), which was enacted on July 21,
2010, establishes the Financial Stability
Oversight Council (“FSOC”). The FSOC
is charged with identifying and monitoring
systemic risk to U.S. financial markets.
Consistent with this mandate, the FSOC
has authority to require that nonbank
financial institutions whose failure would
pose systemic risk to the stability of
financial markets—SIFIs—be placed under
the supervision of the Board of Governors
of the Federal Reserve System (“Federal
Reserve”). Dodd-Frank also extends
Federal Reserve supervision to large bank
holding companies with assets in excess
of $50 billion.
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As part of Federal Reserve supervision,
and pursuant to the FSOC’s
recommendations, SIFIs and large bank
holding companies may be subject to
heightened prudential requirements, such
as more stringent capital, leverage, and
liquidity requirements, in addition to new
reporting and disclosure requirements.
Dodd-Frank also provides the Federal
Deposit Insurance Corporation with
liquidation authority for the winding
down of covered financial institutions,
and its Advisory Committee on Systemic
Resolution is addressing issues surrounding
resolutions of SIFIs particularly in crossborder situations. Additionally, covered
institutions will be required to submit and
maintain “living will” resolution plans
detailing how the institution can be
dismantled in a time of crisis.
Following the enactment of DoddFrank, the United States has progressed
beyond other jurisdictions regarding
K&L Gates Global Government Solutions ® 2011 Mid-Year Outlook
the development and implementation
of these new standards. To date, the
FSOC has issued an Advanced Notice
of Proposed Rulemaking and a Proposed
Rule regarding its process for designation
of nonbank firms. The Proposed Rule’s
comment period closed on February 25,
but the FSOC is expected to issue a
more detailed proposal sometime in
the summer of 2011 to provide greater
clarity regarding the specific metrics it
would use in the designation process.
The FSOC would proceed to finalize
the rule after providing an additional
opportunity to comment on the more
detailed proposal. In the meantime, the
Federal Reserve is expected to release
for public comment this summer proposals
on the enhanced SIFI supervision regime.
The Bank of England and the End
of the Financial Services Authority
In the U.K., Chancellor George Osborne
has announced plans for legislation that
would abolish the Financial Services
Authority (“FSA”) by 2013 and transfer
most of its power relating to systemically
important matters to the Bank of England.
As part of this sweeping change, a
new trio of regulatory authorities will be
created to take the place of the FSA. First,
a Financial Policy Committee (“FPC”) will
Financial Services
New regulators will have
defined roles with respect to how
they will promulgate rules
and share jurisdiction.
be established in the Bank of England and
will be responsible for macro-prudential
regulation, or regulation of the U.K.
financial system as a whole. The FPC will
be charged with identifying, monitoring,
and removing systemic risks. Second, the
Prudential Regulation Authority (“PRA”), a
subsidiary of the Bank of England, will be
focused on prudential regulation of banks,
insurers, and complex investment firms, such
as ensuring sufficient levels of capital to
meet micro- or firm-specific risks. As such,
the PRA will have jurisdiction over certain
financial institutions that pose risks to the
stability of the U.K. market. Finally, the
Financial Conduct Authority (“FCA”) will be
charged with consumer financial protection
functions and with promoting confidence in
financial services and markets.
Each of these new regulators will have
defined roles regarding how they will
promulgate rules and share jurisdiction in
ensuring market stability. That said, the
U.K. is still at an early stage in the reform
process, and many of the details have
yet to be developed. Legislation directing
these changes abolishing and replacing
the FSA is expected to be in place by
2012, followed by a period of regulation
promulgation and implementation.
The European Systemic Risk Board
and the European System of
Financial Supervisors
The European Commission
(“Commission”) has created two new
regulatory bodies charged with ensuring
the stability of European financial
markets as a whole and coordinating
with national regulators of each member
state. Similar to the approach taken by
the U.K., the Commission is separately
tackling the identification of systemic risk
at the macro and micro levels.
A new European Systemic Risk Board
(“ESRB”) was established by the
Commission via legislation on December
16, 2010. The ESRB is tasked with
monitoring and assessing risk to the
stability of financial markets as a whole.
The seat of the ESRB is in Frankfurt; it is
chaired by the European Central Bank;
and it is comprised of the national central
banks of the member states, the national
regulators of the member states, and the
European Supervisory Authorities. As
part of its responsibility, the ESRB has
the power to issue recommendations
and warnings to the member states, their
national regulators, and the European
Supervisory Authorities. Member states
must then comply or provide adequate
explanation as to how the identified risk(s)
will be mitigated. The ESRB also will
coordinate on the macro level with the
Financial Stability Board created by the
Group of 20, as discussed below.
To implement micro-prudential regulations,
the Commission created the European
System of Financial Supervisors (“ESFS”).
The ESFS will supervise individual financial
institutions that would pose a widespread
threat if they were to falter or fail. The
ESFS comprises three EU-level financial
services committees: the European Banking
Authority, located in London; the European
Insurance and Occupation Pensions
Authority, located in Frankfurt; and the
European Securities and Markets Authority,
located in Paris. Each committee will
determine its own set of factors that may
trigger increased supervision.
The G-20 Approach: The Financial
Stability Board
In 2008, the Group of 20 (“G-20”)
replaced the Financial Stability Forum
(which had been founded in 1999 by
the G-7 Finance Ministers and Central
Bank Governors to promote stability
in the international financial system
through enhanced cooperation among
national and international supervising
bodies and financial institutions) with
the Financial Stability Board (“FSB”).
The FSB expanded the membership of
the Financial Stability Forum in order to
enhance the ability of national regulators
to assess the vulnerabilities of financial
institutions and to develop supervisory
policies to advance financial stability.
In November 2010, the FSB made
recommendations to the G-20 leaders
regarding regulation and supervision of
“Global Systemically Important Financial
Institutions,” or G-SIFIs. Recognizing that
G-SIFIs vary in structure, activity, and
K&L Gates Global Government Solutions ® 2011 Mid-Year Outlook
13
Financial Services
degree of risk posed to financial markets,
the FSB will work with national regulators
and utilize both qualitative and quantitative
measures to identify G-SIFIs, as well as the
degree of necessary supervision.
Both U.S. and international regulators
have said they support G-SIFI
requirements to have more stringent
capital requirements, which may exceed
the Basel III minimums (see next article),
and requirements to have higher levels
of contingent capital that can be “called
in.” Each G-SIFI will have to maintain
resolution plans—similar to the “living
wills” mandated by Dodd-Frank. Each of
these requirements will be applied in a
manner commensurate with the level of risk
posed by the institution. The FSB will also
assist in the timely and orderly resolution of
institutions, as necessary.
The FSB hopes to have criteria for
designation and resolution by mid-year
so that national regulators can use
the criteria as they develop their own
resolution frameworks, and a peerreview process can begin to take place
in 2012. Additionally, the FSB hopes to
facilitate the implementation of homehost state agreements regarding the
supervision of G-SIFIs and to report on
institution-specific resolution plans by the
end of 2012.
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Conclusion
The enactment of Dodd-Frank marked
the beginning of SIFI regulation. The
regulatory framework the United
States is now developing will be an
important influence as policymakers and
regulators abroad continue to develop
and implement rules. As these various
approaches take shape, financial firms
will be required to navigate multiple
new regulatory regimes, some of which
may be complementary or conflicting.
Understanding the interplay between
these regimes will be necessary for
success in a new era of sweeping
financial regulation.
Daniel F. C. Crowley (Washington, D.C.)
dan.crowley@klgates.com
Bruce J. Heiman (Washington, D.C.)
bruce.heiman@klgates.com
Philip J. Morgan (London)
philip.morgan@klgates.com
The authors acknowledge the assistance of
summer associate Nickolas G. Milonas for his
contributions to this article.
K&L Gates Global Government Solutions ® 2011 Mid-Year Outlook
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