12 USC 5365 - Enhanced supervision and prudential standards for nonbank financial companies supervised by the Board of Governors and certain bank holding companies

U.S Code last checked for updates: Nov 22, 2024

§ 5365.

Enhanced supervision and prudential standards for nonbank financial companies supervised by the Board of Governors and certain bank holding companies

(a)

In general

(1)

Purpose

In order to prevent or mitigate risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected financial institutions, the Board of Governors shall, on its own or pursuant to recommendations by the Council under section 5325 of this title, establish prudential standards for nonbank financial companies supervised by the Board of Governors and bank holding companies with total consolidated assets equal to or greater than $250,000,000,000 that—

(A)

are more stringent than the standards and requirements applicable to nonbank financial companies and bank holding companies that do not present similar risks to the financial stability of the United States; and

(B)

increase in stringency, based on the considerations identified in subsection (b)(3).

(2)

Tailored application

(A)

In general

(B)

Adjustment of threshold for application of certain standards

(C)

Risks to financial stability and safety and soundness

The Board of Governors may by order or rule promulgated pursuant to section 553 of title 5 apply any prudential standard established under this section to any bank holding company or bank holding companies with total consolidated assets equal to or greater than $100,000,000,000 to which the prudential standard does not otherwise apply provided that the Board of Governors—

(i)

determines that application of the prudential standard is appropriate—

(I)

to prevent or mitigate risks to the financial stability of the United States, as described in paragraph (1); or

(II)

to promote the safety and soundness of the bank holding company or bank holding companies; and

(ii)

takes into consideration the bank holding company’s or bank holding companies’ capital structure, riskiness, complexity, financial activities (including financial activities of subsidiaries), size, and any other risk-related factors that the Board of Governors deems appropriate.

(b)

Development of prudential standards

(1)

In general

(A)

Required standards

The Board of Governors shall establish prudential standards for nonbank financial companies supervised by the Board of Governors and bank holding companies described in subsection (a), that shall include—

(i)

risk-based capital requirements and leverage limits, unless the Board of Governors, in consultation with the Council, determines that such requirements are not appropriate for a company subject to more stringent prudential standards because of the activities of such company (such as investment company activities or assets under management) or structure, in which case, the Board of Governors shall apply other standards that result in similarly stringent risk controls;

(ii)

liquidity requirements;

(iii)

overall risk management requirements;

(iv)

resolution plan requirements; and

(v)

concentration limits.

(B)

Additional standards authorized

The Board of Governors may establish additional prudential standards for nonbank financial companies supervised by the Board of Governors and bank holding companies described in subsection (a), that include—

(i)

a contingent capital requirement;

(ii)

enhanced public disclosures, including credit exposure reports;

(iii)

short-term debt limits; and

(iv)

such other prudential standards as the Board or Governors, on its own or pursuant to a recommendation made by the Council in accordance with section 5325 of this title, determines are appropriate.

(2)

Standards for foreign financial companies

In applying the standards set forth in paragraph (1) to any foreign nonbank financial company supervised by the Board of Governors or foreign-based bank holding company, the Board of Governors shall—

(A)

give due regard to the principle of national treatment and equality of competitive opportunity; and

(B)

take into account the extent to which the foreign financial company is subject on a consolidated basis to home country standards that are comparable to those applied to financial companies in the United States.

(3)

Considerations

In prescribing prudential standards under paragraph (1), the Board of Governors shall—

(A)

take into account differences among nonbank financial companies supervised by the Board of Governors and bank holding companies described in subsection (a), based on—

(i)

the factors described in subsections (a) and (b) of section 5323 of this title;

(ii)

whether the company owns an insured depository institution;

(iii)

nonfinancial activities and affiliations of the company; and

(iv)

any other risk-related factors that the Board of Governors determines appropriate;

(B)

to the extent possible, ensure that small changes in the factors listed in subsections (a) and (b) of section 5323 of this title would not result in sharp, discontinuous changes in the prudential standards established under paragraph (1) of this subsection;

(C)

take into account any recommendations of the Council under section 5325 of this title; and

(D)

adapt the required standards as appropriate in light of any predominant line of business of such company, including assets under management or other activities for which particular standards may not be appropriate.

(4)

Consultation

(5)

Report

(c)

Contingent capital

(1)

In general

(2)

Factors to consider

In issuing regulations under this subsection, the Board of Governors shall consider—

(A)

the results of the study undertaken by the Council, and any recommendations of the Council, under section 5325(c) of this title;

(B)

an appropriate transition period for implementation of contingent capital under this subsection;

(C)

the factors described in subsection (b)(3)(A);

(D)

capital requirements applicable to the nonbank financial company supervised by the Board of Governors or a bank holding company described in subsection (a), and subsidiaries thereof; and

(E)

any other factor that the Board of Governors deems appropriate.

(d)

Resolution plan and credit exposure reports

(1)

Resolution plan

The Board of Governors shall require each nonbank financial company supervised by the Board of Governors and bank holding companies described in subsection (a) to report periodically to the Board of Governors, the Council, and the Corporation the plan of such company for rapid and orderly resolution in the event of material financial distress or failure, which shall include—

(A)

information regarding the manner and extent to which any insured depository institution affiliated with the company is adequately protected from risks arising from the activities of any nonbank subsidiaries of the company;

(B)

full descriptions of the ownership structure, assets, liabilities, and contractual obligations of the company;

(C)

identification of the cross-guarantees tied to different securities, identification of major counterparties, and a process for determining to whom the collateral of the company is pledged; and

(D)

any other information that the Board of Governors and the Corporation jointly require by rule or order.

(2)

Credit exposure report

The Board of Governors may require each nonbank financial company supervised by the Board of Governors and bank holding companies described in subsection (a) to report periodically to the Board of Governors, the Council, and the Corporation on—

(A)

the nature and extent to which the company has credit exposure to other significant nonbank financial companies and significant bank holding companies; and

(B)

the nature and extent to which other significant nonbank financial companies and significant bank holding companies have credit exposure to that company.

(3)

Review

(4)

Notice of deficiencies

If the Board of Governors and the Corporation jointly determine, based on their review under paragraph (3), that the resolution plan of a nonbank financial company supervised by the Board of Governors or a bank holding company described in subsection (a) is not credible or would not facilitate an orderly resolution of the company under title 11—

(A)

the Board of Governors and the Corporation shall notify the company of the deficiencies in the resolution plan; and

(B)

the company shall resubmit the resolution plan within a timeframe determined by the Board of Governors and the Corporation, with revisions demonstrating that the plan is credible and would result in an orderly resolution under title 11, including any proposed changes in business operations and corporate structure to facilitate implementation of the plan.

(5)

Failure to resubmit credible plan

(A)

In general

(B)

Divestiture

The Board of Governors and the Corporation, in consultation with the Council, may jointly direct a nonbank financial company supervised by the Board of Governors or a bank holding company described in subsection (a), by order, to divest certain assets or operations identified by the Board of Governors and the Corporation, to facilitate an orderly resolution of such company under title 11, in the event of the failure of such company, in any case in which—

(i)

the Board of Governors and the Corporation have jointly imposed more stringent requirements on the company pursuant to subparagraph (A); and

(ii)

the company has failed, within the 2-year period beginning on the date of the imposition of such requirements under subparagraph (A), to resubmit the resolution plan with such revisions as were required under paragraph (4)(B).

(6)

No limiting effect

(7)

No private right of action

(8)

Rules

(e)

Concentration limits

(1)

Standards

(2)

Limitation on credit exposure

(3)

Credit exposure

For purposes of paragraph (2), “credit exposure” to a company means—

(A)

all extensions of credit to the company, including loans, deposits, and lines of credit;

(B)

all repurchase agreements and reverse repurchase agreements with the company, and all securities borrowing and lending transactions with the company, to the extent that such transactions create credit exposure for the nonbank financial company supervised by the Board of Governors or a bank holding company described in subsection (a);

(C)

all guarantees, acceptances, or letters of credit (including endorsement or standby letters of credit) issued on behalf of the company;

(D)

all purchases of or investment in securities issued by the company;

(E)

counterparty credit exposure to the company in connection with a derivative transaction between the nonbank financial company supervised by the Board of Governors or a bank holding company described in subsection (a) and the company; and

(F)

any other similar transactions that the Board of Governors, by regulation, determines to be a credit exposure for purposes of this section.

(4)

Attribution rule

(5)

Rulemaking

(6)

Exemptions

(7)

Transition period

(A)

In general

(B)

Extension authorized

(f)

Enhanced public disclosures

(g)

Short-term debt limits

(1)

In general

(2)

Basis of limit

(3)

Short-term debt defined

(4)

Rulemaking authority

(5)

Authority to issue exemptions and adjustments

(h)

Risk committee

(1)

Nonbank financial companies supervised by the Board of Governors

(2)

Certain bank holding companies

(A)

Mandatory regulations

(B)

Permissive regulations

(3)

Risk committee

A risk committee required by this subsection shall—

(A)

be responsible for the oversight of the enterprise-wide risk management practices of the nonbank financial company supervised by the Board of Governors or bank holding company described in subsection (a), as applicable;

(B)

include such number of independent directors as the Board of Governors may determine appropriate, based on the nature of operations, size of assets, and other appropriate criteria related to the nonbank financial company supervised by the Board of Governors or a bank holding company described in subsection (a), as applicable; and

(C)

include at least 1 risk management expert having experience in identifying, assessing, and managing risk exposures of large, complex firms.

(4)

Rulemaking

(i)

Stress tests

(1)

By the Board of Governors

(A)

Annual tests required

(B)

Test parameters and consequences

The Board of Governors—

(i)

shall provide for at least 2 different sets of conditions under which the evaluation required by this subsection shall be conducted, including baseline and severely adverse;

(ii)

may require the tests described in subparagraph (A) at bank holding companies and nonbank financial companies, in addition to those for which annual tests are required under subparagraph (A);

(iii)

may develop and apply such other analytic techniques as are necessary to identify, measure, and monitor risks to the financial stability of the United States;

(iv)

shall require the companies described in subparagraph (A) to update their resolution plans required under subsection (d)(1), as the Board of Governors determines appropriate, based on the results of the analyses; and

(v)

shall publish a summary of the results of the tests required under subparagraph (A) or clause (ii) of this subparagraph.

(2)

By the company

(A)

Requirement

(B)

Report

(C)

Regulations

Each Federal primary financial regulatory agency, in coordination with the Board of Governors and the Federal Insurance Office, shall issue consistent and comparable regulations to implement this paragraph that shall—

(i)

define the term “stress test” for purposes of this paragraph;

(ii)

establish methodologies for the conduct of stress tests required by this paragraph that shall provide for at least 2 different sets of conditions, including baseline and severely adverse;

(iii)

establish the form and content of the report required by subparagraph (B); and

(iv)

require companies subject to this paragraph to publish a summary of the results of the required stress tests.

(j)

Leverage limitation

(1)

Requirement

(2)

Considerations

(3)

Regulations

(k)

Inclusion of off-balance-sheet activities in computing capital requirements

(1)

In general

(2)

Exemptions

(3)

Off-balance-sheet activities defined

For purposes of this subsection, the term “off-balance-sheet activities” means an existing liability of a company that is not currently a balance sheet liability, but may become one upon the happening of some future event, including the following transactions, to the extent that they may create a liability:

(A)

Direct credit substitutes in which a bank substitutes its own credit for a third party, including standby letters of credit.

(B)

Irrevocable letters of credit that guarantee repayment of commercial paper or tax-exempt securities.

(C)

Risk participations in bankers’ acceptances.

(D)

Sale and repurchase agreements.

(E)

Asset sales with recourse against the seller.

(F)

Interest rate swaps.

(G)

Credit swaps.

(H)

Commodities contracts.

(I)

Forward contracts.

(J)

Securities contracts.

(K)

Such other activities or transactions as the Board of Governors may, by rule, define.

(Pub. L. 111–203, title I, § 165, July 21, 2010, 124 Stat. 1423; Pub. L. 115–174, title IV, § 401(a), May 24, 2018, 132 Stat. 1356.)

cite as: 12 USC 5365

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