AIBA
An Update on ABC Regs
Martin Feuer
Deloitte LLP
December 3, 2014
ABC Regs
Reg
A
B
C
D
E
F
G
H
I
J
K
L
M
N
Section
201
202
203
204
205
206
207
208
209
210
211
212
213
214
Topic
Extensions of Credit / Discount Window
Equal Credit Opportunity
Home Mortgage Disclosure
Reserve Requirements
Electronic Funds Transfers
Limitations on Interbank Liabilities
Disclosure of CRA Agreements
Membership of State Banking Institutions
Stock Subscriptions
Check Collections / Fedwire
International Banking Operations
Management Interlocks
Consumer Leasing
Relations with Foreign Banks and Bankers
2
ABC Regs (Continued)
Reg
Section
Topic
O
215
Loans to Officers / Directors / Shareholders
P
216
Privacy
Q
217
Capital Adequacy
R
218
Exception for Banks from Definition of Brokers
S
219
Reimbursements re: Financial Records
T
220
Credit Extensions by Brokers - Margin
U
221
Credit Extensions by Brokers - Non Purpose
V
222
Fair Credit Reporting
W
223
Transactions With Affiliates
X
224
Application of Regs T / U Non U.S. Borrowings
Y
225
Bank Holding Companies
Z
226
Truth In Lending
3
ABC Regs (Continued)
Reg
Section
Topic
AA
227
Unfair / Deceptive Acts
BB
228
Community Reinvestment
CC
229
Check Collection / Availability
DD
230
Truth In Savings
EE
231
Netting Of Amounts Due
FF
232
Using Medical Info in Connection with
Credit
GG
233
Unlawful Internet Gambling
HH *
234
Designated Market Utilities
II *
235
Debit Cards
JJ *
236
Incentive Based Compensation
KK *
237
Margin / Capital for Swap Entities
* Dodd Frank related
CCRP/Global Center for Corporate Governance
4
ABC Regs (Continued)
Reg
Section
Topic
LL *
238
Savings & Loan Companies
MM *
239
Mutual Holding Companies
NN *
240
Retail Foreign Exchange
OO *
241
Securities Holding Companies
PP *
242
Dodd Frank Non-Bank Companies
QQ *
243
Resolution Plans
RR *
244
Credit Risk Retention
TT *
246
Assessment Fees
VV *
248
Prop Trading / Covered Funds
WW *
249
Liquidity Risk Measurement
YY *
250
Enhanced Prudential Standards
* Dodd Frank related
5
ABC Regs - Key Topics
Lending
Deposits
Financials
Dodd Frank
A
E
D
HH to YY
B
J
Q
C
CC
S
G
DD
EE
M
T
U
V
X
Z
AA
BB
FF
6
Regulations K
Regulation K
Provides governance on the international banking front, offering guidelines for bank holding
companies that engage in international trade and also foreign banks located domestically. It limits the
kinds of business and financial practices and transactions in which foreign banks located domestically
can participate. Regulation K allows corporations that qualify under the Edge Act to participate in a
wide variety of global banking practices. It also allows domestic banks to own entire nonfinancial
foreign business entities. Reserve requirements are also imposed on Edge Act corporations under this
statute.
8
Regulation K (continued)
Final rule, effective August 28, 1996.
• Implements a provision regarding the management of shell branches of foreign banks by such
bank's U.S. offices.
• The provision prohibits foreign banks from using their U.S. branches or agencies to manage types
of activities
through offshore offices that could not be managed by a U.S. bank at its foreign branches or
subsidiaries. This
prohibition applies with respect to those offshore offices that are "managed or controlled" by a
foreign bank's U.S.
branches or agencies.
9
Regulation W
Regulation W
Regulation
• Regulation W, which encompasses Section 23A and 23B of the Federal Reserve Act, applies to all member banks of the Federal
Reserve.
• The regulation is a very significant focus for Federal Reserve examiners.
• It has broad implications for a bank and the bank’s holding company (aka Bank Holding Company, or BHC).
Scope
• This regulation governs transactions with affiliates.
• It established quantitative limits.
• It also imposes prudential requirements for extensions of credit, purchases of assets, and certain other transactions between a
Bank and its affiliates.
Purpose
• Originally enacted as part of the Banking Act of 1933, sections 23A and 23B are designed to prevent adverse impacts on a
bank's financial resources through transactions with its affiliates.
11
Regulation W (continued)
Why Reg W?
• From experience, regulators know that executives may “tap into” the bank’s strength and
divert funding into a weak or failing affiliate. This “propping up” of a weakened affiliate
spreads the affiliate’s losses into the bank which has FDIC-insured deposits.
• The regulators want to protect the bank's capital, and the FDIC insurance fund.
• The Federal Reserve operates the Discount Window, which is also known as its “lender of last
resort” function.
• The Fed does not want to “prop up a bank” that is secretly propping-up a nonbank affiliate.
12
Regulations W (continued)
Section 23A primarily focuses on the quantities limits, and defines the types of transactions between the Bank and its affiliates that
must be measured and monitored.
“Covered Transactions” are defined as Loans, investments, asset purchases, guarantees, and letters of credits.
The regulation does not prohibit covered transactions entirely – instead it requires ongoing measurement, monitoring and limits on
covered transactions.
The limits work on two level – per affiliate and aggregated.
• Section 23A prohibits covered transactions to any one affiliate in excess of 10% of the bank’s Tier 1 capital
• Section 23A prohibits covered transactions, when aggregated, in excess of 20% of the bank’s Tier 1 capital
Section 23A requires that covered transactions be “adequately capitalized.”
• Ineligible collateral includes: low-quality assets, securities issued by an affiliate, and intangible assets.
13
Regulation W (continued)
Section 23A prohibits the transfer of low-quality assets from the affiliate to the Bank.
• Low quality assets include classified or non-promising loans, non-accrual loans. Renegotiated
loan and assets acquired through foreclosure.
Section 23B governs the prudential terms and conditions under which covered transactions must be
executed.
• All such transactions must be on market-terms (aka “arms-length transactions”}
• Market terms analysis must be adequately documented.
What is “the attribution rule ,” and what does it require?
• The attribution rule of section 23A states that "any transaction by a member bank with any person
shall be deemed to be a transaction with an affiliate to the extent that the proceeds of the
transaction are used for the benefit of, or transferred to, that affiliate.
14
Regulation W (continued)
What is “Super 23A,” and what does it require?
• “Super 23A” is a part of the Volcker Rule. Super 23A prohibits transactions that would be “covered transactions”
as defined in Section 23A of the Federal Reserve Act. It prohibits a banking entity or its affiliate from engaging in
so-called “covered transactions” with a covered fund for which it serves, directly or indirectly, as the investment
manager, investment adviser, commodity trading advisor, or which it sponsors or organizes and offers or a
covered fund controlled by such fund.
• “Covered transactions” include loans and other extensions of credit from the banking entity to the covered fund,
purchases of assets by the banking entity from the covered fund and certain other specified transactions.
• As noted above, the proposed rule’s implementation of Super 23A would have severely limited many of the
available exemptions provided for permitted covered funds, which were not exempt from Super 23A.
• The Volcker Rule’s new exclusions from the definition of “covered fund” resolve the issue of the application of
Super 23A to many permissible covered funds.
• Super 23A does, however, continue to apply as a blanket prohibition on “covered transactions” with sponsored
and advised entities that are covered funds.
• The Supplementary Information clarifies that Super 23A does not include the “attribution rule” under Section 23A
of the Federal Reserve Act.
15
Regulation Y
Regulation Y
Regulates corporate bank holding company practices as well as certain practices of statemember banks. Practices or issues that fall under Regulation Y governance include
establishment of minimum capital reserves (ratio of reserves to assets) for bank holding
companies, certain bank holding company transactions and the definition of nonbanking
activities for bank holding companies, state member banks and foreign banks operating in
the U.S. Regulation Y outlines several bank holding company transactions which require
Federal Reserve approval:
• The acquisition of, or merger with, another bank holding company
• Directly or indirectly engaging in nonbanking activity
• Individual or group acquisition of a state member bank or bank holding company
• Appointment of a new senior officer or director by a troubled bank holding company or
state member bank
17
Regulation Y (continued)
Regulation
• Anti-tying has broad application to BHCs.
Scope
• Anti-tying regulation prohibit the following scenario: the bank restricts the availability of its products and services
on the condition that another product or service be purchase from the Bank or an affiliate of the Bank.
• These rules do not apply to an affiliate of the bank UNLESS the affiliate's products and services are tied to the
Bank’s products or services.
Why Anti-tying?
• In theory, when a client seeks a loan (or other desirable bank product) the Bank could seek to coerce the client
to purchase a product that the client does not want to obtain from the bank's affiliate.
• For example, if the bank has very favorable lending rates, a client may seek a loan; but what if the bank
insists that the client makes use of the bank's broker-dealer affiliate when the client will next be issuing
stocks and bonds.
• If that happens, the bank is wrongly “tying” its loan product to the broker-dealer’s underwriting activity.
18
Regulation Y (continued)
It’s Complicated
• There are MANY exceptions to anti-tying. This because banks often “bundle” products and services, and banks
often establish affiliates that specialize in certain activates (e.g., custody of assets, loan servicing).
• For example, as a condition of making a loan, banks may generally require that the client maintain
collateral in a designated account controlled by the bank.
• In sum, if the tied service reduces the bank’s risk and it is a “traditional banking service” it is likely to be
permissible.
• Anti-tying does not apply to Non-US customers.
• This is complicated, however, because of complexities in defining this term, and changing definitions of a
“U.S. customer.”
• And, if it is prohibited by law in the US, is it proper to engage in tying outside the US?
• Perhaps, and it depends on local market practices in foreign countries.
19
Regulation Y (continued)
Traditional Bank Products & Services
•
•
•
•
•
•
•
•
Extensions of Credit
Letters of Credit and Financial Guarantees
Lease Transactions
Credit Derivatives
Deposit Accounts
Safe Deposit Box Services
Escrow Services
Payment and Settlement Services
•
•
•
•
•
•
•
•
Payroll Services
Traveler Cheques and Money Orders
Cash Management Services
Trustee, Executor, or Administrative Services
Discretionary Asset Management
Custody Services
Paying and Transfer Agent and Registrar Services
Acquiring, Brokering, Arrange Syndicated Credits (aka SNC’s)
20
Potential Consequences of Violations
Informal Enforcement Actions
•
Board Resolutions
•
Commitment Letters
•
Memorandum Of Understanding (“MOUs”)
Formal Enforcement Actions
•
Written Agreements
•
Cease & Desist Orders (“C&Ds”)
•
Prompt Corrective Action Directives
•
Civil Money Penalties (“CMPs”)
•
Prohibition and Removal Actions
21
Components of an Effective Compliance Program
•
Governance (including “lines of defenses”)
•
Risk Assessment
•
Testing & Monitoring
•
Training
•
Reporting & Communication
•
Technology Enablement
22
Thank You!
***
Questions?
23