## EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS (1usaea2020008) ## Source details **Canonical URL:** [EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS (1usaea2020008)](https://www.imf.org/-/media/files/publications/cr/2020/english/1usaea2020008.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1usaea2020008.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1usaea2020008.pdf.json) --- ### Overview and scope - Leverages the 2015 FSAP finding that the United States (U.S.) had a high degree of compliance with the Basel Core Principles (BCPs). - Reviews progress on previously identified weaknesses and supervisory and regulatory developments as of March 10, 2020. - Key focus areas: - Recalibration and further tailoring of the banking regulatory and supervisory framework. - Evolving role of stress tests (supervisory stress tests and CCAR) in the supervisory process. - Note: The FSAP team did not cover the impact of the COVID-19 outbreak on bank supervision or related policy response. ### Key findings on the supervisory and regulatory framework - Framework strengths and structure: - U.S. dual banking system with multiple Federal Banking Agencies (FBAs) creates complexity requiring effective cooperation. - Clear roles and responsibilities, an appropriate suite of supervisory tools and powers, and a comprehensive risk-based supervisory approach underpin a solid supervisory regime. - Remaining 2015 recommendations and gaps: - Several key 2015 FSAP recommendations remain unimplemented. - Authorities should introduce heightened governance standards for large and complex bank holding companies, enhance related-party frameworks, introduce rules on concentration risk management, and include more quantitative standards on interest rate risk in the banking book. - Emerging regulatory gaps from reliance on guidance: - Many FBA views traditionally expressed as guidance rather than regulation; 2018 interagency statement did not change the legal status of guidance. - Attitudes toward guidance are shifting; authorities should review the framework, streamline and simplify requirements spread across multiple agency documents, and consider rewriting certain prudential guidance as regulation. - Proportionality and Basel application: - Diversity of deposit-taking institutions supports a proportional approach, but all segments should meet rigorous prudential standards. - For U.S. GSIBs, capital and liquidity requirements meet and sometimes exceed Basel standards. - Recent tailoring reforms reduce the number of banks (other than GSIBs) subject to the full set of Basel standards. - In line with the BCPs, non-internationally active banks (Categories III and IV) should be required to comply with capital requirements broadly consistent with the Basel capital framework and appropriate large exposure limits. - Authorities may consider extending the full liquidity coverage ratio requirement to non-internationally active banks. ### Financial sector and banking sector structure — key statistics - Total financial sector assets: US$98 trillion and 480 percent of GDP. - Banking sector assets: about 19 percent of the financial system. - Banking sector growth 2008–2019: average annual rate of 3 percent to US$19.5 trillion (92 percent of GDP). - Number and composition: - About 5,300 banks. - The eight U.S. GSIBs and four foreign bank organizations with complex U.S. operations have US$12.3 trillion of assets, approximately 61 percent of total U.S. depository assets. - Another 32 banks have total assets above US$100 billion and represent 31 percent of system assets. - Vast majority are community banks with total assets below US$10 billion. ### Charter choice, fintech, and supervisory perimeter - Charter-shopping risks persist as institutions can choose charters; evidence suggests banks often receive more favorable ratings after charter changes. - Between June 2014 and June 2019: 364 financial institutions surrendered their national charter (172 conversions to state charters and 192 mergers with state institutions); five institutions converted into a national charter. - Legal disputes (e.g., special purpose national bank charters for fintechs) may increase charter-shopping risks. - Supervisory and regulatory arrangements must remain effective irrespective of charter choice; supervisors must ensure appropriate supervision as fintechs blur lines and can scale quickly. ### Supervisory objectives, powers, independence, and coordination - Primary federal supervisors and responsibilities: - OCC: national banks, federal savings associations, federal branches/agencies of foreign banks. - FDIC: state banks/savings associations not members of the FRB; operates federal deposit insurance. - FRB: state member banks; companies owning/controlling national or state banks (Bank Holding Company) and U.S. operations of foreign banking organizations. - Supervisory overlap: - Many banks have two or more federal supervisors; examples of overlap include supervision by OCC, FRB, and FDIC for some institutions. - Banks with assets above US$10 billion also overseen by the CFPB for certain consumer protection statutes. - Coordination mechanisms: - FFIEC coordinates examination policies among FBAs, the CFPB, and state regulators. - FDIC backup examination authority coordinated with primary federal prudential regulators; FRB required to rely on reports of examination made by other regulatory agencies where applicable. - Increased joint supervisory presence for systemically important banks and joint participation in FRB horizontal reviews. - Areas needing improvement: - Misaligned supervisory planning cycles. - Variable data and document sharing; some documents inaccessible to examiners. - Multiple guidance statements on the same topic with inconsistent content across agencies. - Individual supervisors requesting similar data in different formats despite progress harmonizing call reports. ### Table of main recommendations (excerpt) - Amend the 2009 interagency statement on charter conversions to ensure supervisory arrangement remains effective, independently of charter choice. (¶29) - Priority: High - Timeline: NT - Streamline regulatory requirements, and consider rewriting certain prudential guidance as regulation. (¶30) - Priority: High - Timeline: MT - Streamline and simplify the regulatory framework by reducing the number of guidance statements on the same topic, improving the consistency between all requirements and guidelines, and further developing interagency work. (¶70) - Priority: Medium - Timeline: MT - Review capital requirements for non-internationally active banks (Category III and Category IV firms) and ensure that they are broadly consistent with the Basel standards and appropriate concentration limits. (¶70) - Priority: High - Timeline: NT - Consider extending the full liquidity coverage ratio requirement to non-internationally active banks (Category III and Category IV firms). (¶70) - Priority: High - Timeline: NT - Introduce a capital charge for operational risk for those non-internationally active banks and BHCs using standardized approaches and expand the scope of supervisory reporting of operational risk events and associated losses. (¶70) - Priority: High - Timeline: MT - Introduce heightened standards on the governance of large and complex banking holding companies, enhance the related-party framework, introduce rules on concentration risk management, and include more quantitative standards regarding interest rate risk in the banking book. (¶70–71) - Priority: High - Timeline: MT - Assess the combined impact of all recent reforms including changes to the stress test program and ensure that they do not pose risks to the safety and soundness of banks. (¶80) - Priority: High - Timeline: NT - Continue work on exploring second-round effects, possibly by integrating capital and liquidity stress tests. (¶79) - Priority: Medium - Timeline: MT - Leverage the stress test framework to probe the prudential implications of longer-term structural issues in the banking industry. (¶79) - Priority: Medium - Timeline: MT - Take further actions to tackle aging resolution of matters requiring attention, including: actions to further improve communication; and introducing more explicit rules and processes to escalate supervisory actions in the absence of timely and appropriate responses from banks. (¶98) - Priority: High - Timeline: NT - Enhance the early intervention framework with policy limits for issues such as concentration and interest rate risks. (¶99) - Priority: Medium - Timeline: MT - NT = Near Term (within six months / one year); MT = Medium Term (within 23 years) ### Prudential framework, tailoring, and recent regulatory changes — Box 1 highlights - Post-GFC baseline: - Firms with US$50 billion or more in assets were subject to enhanced standards (supervisory stress tests, capital plans, resolution planning, single counterparty credit limits, reduced LCR requirements). - Firms with at least US$250 billion in assets or US$10 billion in on-balance-sheet foreign assets were subject to a wider set of Basel-consistent prudential standards (including LCR, Supplementary Leverage Ratio, countercyclical capital buffer). - GSIBs subject to a 2 percent leverage buffer under eSLR and higher risk-based capital (GSIB surcharge). - EGRRCPA (May 2018) effects: - Raised enhanced prudential threshold from US$50 billion to US$250 billion. - Directed tailoring for organizations with more than US$100 billion in assets. - Eliminated supervisory stress tests for BHCs with less than US$100 billion in assets; periodic supervisory stress tests for US$100–US$250 billion firms. - Removed company-run stress test requirements for banking organizations with less than US$250 billion in assets. - Introduced simplifications/exemptions (simple leverage ratio option for qualifying community banks; SLR, LCR, Volcker Rule, and other amendments). - FBAs’ October 2019 final rule (four categories for banks with over US$100 billion in assets): - Category IV — generally US$100 billion to US$250 billion: no standardized liquidity requirements (LCR/NSFR) unless weighted short-term wholesale funding > US$50 billion (then calibrated at 70 percent of full LCR); supervisory stress tests every two years; capital standards maintained. - Category III — generally US$250 to US$700 billion: reduced LCR/NSFR (85 percent of full LCR); company-run stress tests on two-year cycle but annual supervisory stress tests; capital standards include risk-based capital, leverage ratio, SLR, countercyclical buffer. - Category I (U.S. GSIBs) and Category II (>US$700 billion or US$75 billion cross-jurisdictional activity): no changes to liquidity and risk-based capital requirements. - Projection and FRB estimates: - Current projection: no Category IV banks would have to meet reduced LCR requirements and one Category III bank would have to comply with the full LCR requirements. - FRB estimate of aggregate effects for all banks with over US$100 billion in assets: 0.6 percent decrease in the required capital and 2.5 percent reduction of the liquid assets. - FRB estimate: recalibration of the eSLR for GSIBs would reduce Tier 1 capital required across IDI subsidiaries of the GSIBs by approximately US$121 billion; industry studies suggest this could lead GSIBs to increase their leverage exposures by about US$4 trillion. - Stress Capital Buffer (SCB) final rule (March 2020): FRB reports impact on CET1 capital requirements from 2013 to 2019 ranges from a decline of US$59 billion to an increase of US$78 billion, with an average increase of US$11 billion, or 1 percent of current requirements. - Deviations from Basel and prudential concerns: - Regulatory adjustments to CET1 for Category III/IV banks (25 percent caps for DTAs, MSRs, investments in unconsolidated entities) diverge from Basel (10 percent). - U.S. standardized approach excludes operational risk and CVA charges for many firms. - Countercyclical Capital Buffer not applying to Category IV banks and firms with less than US$100 billion in assets. ### Liquidity risk and Regulation YY - Liquidity regime robust for large banks: - Category I and Category II banks subject to full LCR and planned NSFR. - Banking organizations with US$100 billion or more in total consolidated assets must meet Regulation YY enhanced liquidity standards (risk management framework, contingency funding plan, internal liquidity stress tests, establishment of limits). - LISCC liquidity program uses horizontal reviews (CLAR), firm-specific examinations, and ongoing monitoring; extensive reporting (FR 2052a) required. - FR 2052a reporting: FBO LISCC firms and U.S. firms with US$700 billion or more in total consolidated assets or US$10 trillion or more in assets under custody must submit a report each business day. - Reductions for other firms: - Final tailoring rule (October 2019) eliminated or weakened LCR/NSFR for a significant part of the banking system (reduced quantitative requirements for Category III; no LCR/NSFR for Category IV). - Liquidity stress testing requirements remain for banks with US$100 billion or more in assets but are less prescriptive and draw on internal models. - Supervisory concern: advances in technology may increase depositor mobility and raise liquidity risk; where quantitative liquidity requirements are removed, FBAs must rely on supervisory tools that may act too late. ### Interest Rate Risk in the Banking Book (IRRBB) - Principles-based approach: IRRBB defined as current or prospective risk to earnings and capital from adverse interest rate movements. - Examination procedures based on 1996 Joint Agency Policy Statement and 2010 Interagency Advisory. - Key gaps since 2015: - Recommendation to revise 1996 guidance to include more quantitative guidelines not implemented. - No standardized methodologies to measure change in economic value of equity and change in net interest income. - No standardized disclosure requirements or base methodology to identify outlier banks. - Banks not required to hold capital against IRRBB under Pillar 2; CCAR requires IRRBB-related capital for 19 firms only. - Recommendation: introduce harmonized approaches for measuring IRR, strengthen disclosure, identify outlier banks, and ensure banks with material exposures hold capital against IRR. ### Related-party framework — identified gaps and recommendations - Gaps: - Definition of “affiliate” excludes nonbank operational subsidiaries. - Definition of “related interest” does not explicitly include family members (though “principal shareholder” treats immediate family shares as held by the individual). - “Covered transactions” omits service and construction contracts, lease agreements. - Insufficient board involvement: no required prior board approval for affiliated-party transactions or write-offs above specified amounts. - Limits and arbitrage: aggregate loans to insiders can reach 100 percent of a bank’s capital and surplus; no regulatory limits on holding company transactions with affiliates or insiders. - Recommendations: - Require board approval for related party transactions and write-offs exceeding specified amounts. - Widen the definition of “related interests” to include those mentioned in CP 20. - Introduce limits for BHC transactions with affiliates or insiders. - Review aggregate limits for lending to insiders. ### Market and operational risk - Market risk: - Market risk rule applies to banks with aggregate trading assets and liabilities of at least US$1 billion or 10 percent of total assets; BCBS January 2019 market risk revisions not yet implemented. - Company-run stress tests and supervisory global market shock apply to banks with significant trading activities (aggregate trading assets and liabilities of US$50 billion or more or 10 percent or more of total consolidated assets). - Operational risk: - Only Category I and Category II banks required to hold capital against operational risk using the Advanced Measurement Approach (AMA). - No general requirement for operational risk capital for non-AMA banks; most qualitative standards provided through guidance rather than enforceable regulation. - No general requirements for reporting operational risk–related incidents to FBAs. - Recommendation: include a capital charge for operational risk for banks and BHCs using standardized approaches and expand supervisory reporting of operational risk events and losses. ### Stress testing, capital planning, and supervisory intensity - Stress testing program: - DFAST: forward-looking quantitative evaluation by the FRB. - CCAR: DFAST quantitative assessment plus a qualitative assessment of capital planning practices. - Stress tests cover credit, market, operational, interest rate, incremental default risk in trading book, and counterparty failures; nine-quarter planning horizon. - Supervisor vs bank loss estimates: - Supervisor and bank estimates compared; the higher loss becomes binding constraint for capital plans. - Supervisory models tend to be more conservative and often decisive in capital plan approvals. - Recent changes and SCB (March 2020): - SCB integrates capital rule and CCAR; GSIB surcharge becomes additive to the SCB. - Banks must prefund four quarters of planned dividends instead of a longer horizon. - Removal of stress leverage buffer requirement; no post-stress leverage buffer. - Assumptions changed: balance sheet assumed constant under stress; removal of 30 percent dividend payout ratio threshold. - Potential impacts and concerns: - Recent changes likely reduce regulatory capital requirements for many large banks; GSIBs partially offset by GSIB surcharge while other banks may face meaningful reductions. - New rules may become more procyclical (prefunding only four quarters reduces countercyclical feature). - Recommendation: assess combined impact of all reforms (tailoring, stress test changes, SLR adjustments) to ensure interactions do not pose undue risks. - Suggested enhancements: - Model second-round effects (macroeconomic contagion, asset fire-sales). - Integrate solvency and liquidity stress testing. - Use stress tests to probe structural issues (climate risks, prolonged low interest rates). ### Supervisory approach, intensity, and early intervention - Supervisory process: - Comprehensive, structured, risk-based with uniform rating processes and PCA as main early intervention framework. - Examination cycles: eligible small banks ( US$75 billion, full LCR requirements would apply. - Required to conduct company-run stress tests on a two-year cycle rather than semi-annually, but remain subject to annual supervisory stress tests. - Capital standards continue to include applicable risk-based capital requirements, the U.S. leverage ratio, the SLR, and the countercyclical capital buffer. - Previously advanced approaches institutions will no longer have to include unrealized gains and losses in regulatory capital. - U.S. GSIBs (Category I) and banks with more than US$700 billion in assets or more than US$75 billion in cross-jurisdictional activity (Category II): - Will not see any changes to their liquidity and risk-based capital requirements. *Source: IMF staff summary of the content unit provided.* ### Box 1. Regulatory Changes (concluded) ### Box 1. Regulatory Changes (concluded) ### Summary of regulatory changes and proposals - Category III and Category IV banks are unlikely to reach the US$50 and US$75 billion thresholds for the weighted short-term wholesale funding indicator that would trigger higher LCR requirements. - Current projection: no Category IV banks would have to meet reduced LCR requirements and one Category III bank would have to comply with the full LCR requirements. - FRB estimate of aggregate effects for all banks with over US$100 billion in assets (given no changes to the largest banks): - 0.6 percent decrease in the required capital. - 2.5 percent reduction of the liquid assets. - Implies significantly larger declines for banks in the US$100 to 700 billion group. - A substantially similar framework introduced for Foreign Banking Organizations (FBOs) with US$100 billion or more in combined U.S. assets (October 2019). - Notable FBA proposals and final rules: - Recalibration of the enhanced SLR for GSIBs and certain depository institution subsidiaries (proposal April 2018): - Replace uniform fixed leverage ratio buffer (2 percent) with a leverage buffer tailored to each GSIB, set at 50 percent of the GSIB risk-based surcharge. - Given existing risk-based capital surcharges, the leverage buffer would be in the 0.75 –1.75 percent range (compared to 2 percent under the existing rule). - Final rule not yet issued (at time of text). - FDIC proposal to ease collateral provisions of the 2015 interagency swap margin rule by removing the requirement that financial institutions post initial margin in derivatives transactions between their own affiliate (September 2019); this proposal is not the final rule. - Simplification to capital rules for non-advanced approaches banking organizations (final rule): - Replace the 10 percent of CET1 capital deduction thresholds for each category (deferred tax assets, mortgage servicing rights, investments in unconsolidated financial institutions) with 25 percent of CET1 capital thresholds. - Eliminate the aggregate 15 percent of CET1 threshold for the combined impact of the three categories. - Allow banking organizations to include minority interest up to 10 percent of the parent banking organization’s CET1 capital. - Category III, Category IV and all other firms allowed to use these less stringent regulatory adjustments to CET1 capital. - Volcker Rule revisions (final rule August 2019): - Establishes a three-tier compliance framework. - Banks with $20 billion or more of trading assets and liabilities subject to many compliance program requirements. - Banks with moderate and limited trading assets and liabilities exempted from a number of requirements (such as reporting, internal control, CEO attestation). - If an instrument is held for longer than 60 days, banks can presume (subject to supervisory rebuttal) that the rule will not apply to such instruments. - Finalized tailoring of certain aspects of stress testing rules; final Stress Capital Buffer (SCB) rule issued in March 2020: - Integrates two approaches (the capital rule and the CCAR process). - GSIB surcharge becomes additive to the SCB (significant change: firms not currently required to have enough capital on a post-stress basis to meet GSIB surcharge). - Firms must “pre-capitalize” four quarters of planned dividends instead of having to pre-fund dividends and share buy-backs over a longer time horizon. - Net impact will vary across banks (including across GSIBs). - Final rule no longer includes a stress leverage buffer requirement. - Methodological note from text: - Based on the methodology for computing the weighted short-term funding (wSTWF), it appears that a bank with US$220 billion in total liabilities would need to raise more than US$200 billion of wholesale funding secured by Level 1 assets to reach a wSTWF indicator of US$50 billion. ### Potential risks and concerns - Fewer banks will have to comply with full Basel standards under the final tailoring rule: - Only Category I banks (the eight U.S. GSIBs) and Category II banks (one U.S. firm) required to comply with standards generally consistent with BCBS. - Category III and Category IV will include fewer standards (reduced or no LCR and NSFR requirements; less stringent deductions to CET1 capital; reduced scope of the large exposure framework). - Specific deviations from Basel and prudential concerns: - Regulatory adjustments to CET1 capital for Category III and Category IV banks are not broadly consistent with the Basel framework. - Examples of deviations: limited recognition in capital for DTAs, MSRs and investments in unconsolidated financial entities capped at 25 percent of CET1 for each category (instead of 10 percent in the Basel standard); option to exclude gains and losses from regulatory capital (unrealized losses not deducted). - Existing differences include absence of operational risk and CVA charges for firms not in Category I or II, limited scope of the market risk rule, and Countercyclical Capital Buffer not applying to Category IV banks and firms with less than US$100 billion in assets. - Systemic and resilience concerns: - Category III and Category IV banks are large institutions that, despite being less systemically important than Category I and II, pose risks owing to size and complexity. - Non-LISCC banking organizations (U.S. firms and FBOs) with more than US$100 billion in consolidated assets hold combined US$6.2 trillion in assets as of December 2018 (compared to US$12.1 trillion for the LISCC firms). - Reduced capital and/or liquidity requirements raise the probability and cost of distress or failure for these banks and reduce resilience in systemic crises. - Tailoring driven largely by size: - While intent is to account for size, complexity, risk profile, and systemic importance, tailoring in practice is largely driven by size-related indicators. - Several large FBOs will fall into Category III while being supervised under the LISCC program designed for firms posing greatest risk to U.S. financial stability. ### Aggregate impacts and specific prudential effects - Liquidity requirements: - Modified LCR and proposed NSFR represent a material reduction in the liquidity regulatory framework for U.S. banks with US$100–700 billion in consolidated assets. - Leverage requirements: - FRB estimate: recalibration of the eSLR for GSIBs would reduce the amount of Tier 1 capital required across IDI subsidiaries of the GSIBs by approximately US$121 billion. - Industry studies suggest this could lead GSIBs to increase their leverage exposures by about US$4 trillion. - Removal of the stress leverage buffer requirement may also contribute to increased leverage. - Leverage ratio requirements would still be more stringent than international standards. - Capital requirements: - Simplification for non-advanced approaches entails less stringent regulatory adjustments to regulatory common equity Tier 1. - FBAs expect these changes will not have a significant impact on capital ratios of most non-advanced approach banks; quantitative impact not publicly released. - Stress Capital Buffer (SCB) impacts: - Prefunding four quarters of dividends instead of nine will reduce the capital buffer when planned dividends are high. - According to the FRB, for the period 2013 to 2019 the impact of the final rule on CET1 capital requirements ranges from a decline of US$59 billion to an increase of US$78 billion, with an average increase of US$11 billion, or 1 percent of current requirements. - The SCB will substantially reduce capital requirements in the current stage of the cycle, when dividends are relatively high. - Impact assessment limitations: - Proposals are detailed and include impact analyses, but certain important details are missing (e.g., potential reduction of high-quality liquid assets for each category). - Combined effect of reforms not fully analyzed (e.g., revised eSLR combined with removal of stress leverage buffer). - Some effects are difficult to quantify (e.g., reduced scope of single-counterparty credit limits for Category IV banks); quantitative impact studies should be carefully interpreted. ### Supervisory implications and governance - The new rules increase reliance on supervisory judgment and tools: - FBAs indicate they can address safety and soundness concerns arising from more flexible capital treatments through supervisory processes. - Supervisory toolkit cited: internal liquidity stress testing requirements, extensive supervisory reports, qualitative requirements, enforcement measures. - Caution: supervision should not be used to compensate for reduced regulatory requirements; maintaining supervisory intensity and intrusion may be challenging given increased pressure from banks. - Corporate governance and risk management framework: - Safety and soundness provisions of the Federal Deposit Insurance Act (FDIA) (section 39) require each FBA to prescribe standards relating to internal controls, information systems, internal audits, among other topics; Interagency Guidelines Establishing Standards for Safety and Soundness implement these provisions. - OCC Heightened Standards Guidelines place corporate governance requirements on banks with total consolidated assets of US$50 billion or more (while reserving right to impose on others). - FBAs issued guidance promoting independent risk management functions covering all material risks and provided detailed guidance on risk management practices for specific products. - Board risk committees required only for banks covered under Heightened Standards Guidelines or publicly traded BHCs with total consolidated assets of US$50 billion or more. - Supervisory practices and assessment: - Governance and risk management are emphasized throughout supervisory processes via onsite inspections, horizontal examinations, and off-site monitoring. - Supervision is tailored to size, complexity, and risk profile, with continual supervision for larger and more complex institutions. - FRB Governance and Controls Program and the LFI rating system (implemented in 2019) evaluate governance and controls as one of three core areas for LFI strength and resilience. - To be “well managed,” each LFI rating component must be rated either “Broadly Meets Expectations” or “Conditionally Meets Expectations.” - FBAs employ informal and formal actions, including enforcement, to correct corporate governance deficiencies. *Box 1. Regulatory Changes (concluded), UNITED STATES, INTERNATIONAL MONETARY FUND* ### 49. Further action is warranted in a number of areas: ### 49. Further action is warranted in a number of areas: ### Supervisory expectations, governance, and risk management guidance - Apart from the OCC’s Heightened Standards and the Safety and Soundness Provisions which are enforceable, the supervisory expectations on risk governance framework and risk management are almost entirely included in statements of guidance. - The OCC’s Heightened Standards guidelines strengthen governance and risk management practices of large national banks (with total consolidated assets of US$50 billion or more) and are described as comprehensive and thorough. - The Interagency Guidelines Establishing Standards for Safety and Soundness applicable to all firms provide very broad objectives and are not detailed in a number of areas (examples: model risk management, concentration risk). - The FRB’s guidance (SR 16–11) clarifies risk management expectations for institutions with total consolidated assets of less than US$50 billion; enhanced standards have not yet been defined for larger firms (with assets of US$50 billion or more) supervised by the FRB. - A corporate governance proposal was issued by the FRB in August 2017, but supervisory expectations have not been finalized. - Consequence: large and complex BHCs remain solely subject to the safety and soundness provisions and older guidance. - Several 2015 FSAP recommendations have not been implemented (examples below). - No detailed guidelines have been issued on risk data aggregation and risk monitoring; FBAs are preparing a rule related to Pillar 3 compensation disclosure. - In some cases standards are not specified systematically across FBAs (example: OCC guidance on new products exists but the FRB has not issued similar guidance). ### Credit and concentration risk - The regulatory framework for credit risk is described as well developed; banks and BHCs are subject to detailed credit risk management requirements. - Interagency Guidelines require systems commensurate with institution size and nature to maintain prudent underwriting, identify problem assets and prevent deterioration while considering size and potential risks of material asset concentrations. - FBAs supplement U.S. GAAPs with policies and guidance; examination manuals contain criteria for identifying an asset as “impaired” consistent with U.S. GAAPs. - Large exposure regime limitations: - Under the FRB SCCL rule (June 2018), the aggregate net credit exposure of a U.S. GSIB and any BHC or SLHC subject to Category II or III standards to a single counterparty is subject to a limit of 25 percent of CET1 capital (reduced to 15 percent when a GSIB has a credit exposure to another GSIB). - OCC’s Heightened Standards require policies/processes to identify, measure, monitor and control concentration risk (monitoring single and related borrowers, product type, geographic, industry and collateral type), but except for CRE Lending these expectations are solely included in publicly available supervision manuals. - Interagency Statement on Prudent Risk Management for CRE Lending requires identification, measurement, monitoring, and management of concentration risk in CRE lending activities. - Unclear whether FBAs can still refer to 300 percent threshold of total risk-based capital used in non-binding 2006 guidance for identifying significant CRE concentration risk. - Supervision on credit risk: - FBAs use offsite surveillance and onsite examinations to ensure accuracy of loan classification and adequacy of allowance for loan and lease loss provisions. - CAMELS includes a specific asset quality component. - FBAs can review all books and records under statutory examination authority. - Semi-annual Shared National Credit (SNC) onsite examinations assess largest and most complex credit facilities; FBAs issue a public report based on SNC findings annually. - CECL expected to require earlier provisioning; impact on CET1 capital not precisely quantified by FBAs. - Further enhancements needed (selected points): - SCCL large exposure limits do not apply to U.S. BHCs not subject to Category I, II, or III standards or FBOs not subject to Category II or III standards or with less than US$250 billion in total global consolidated assets — total absence of regulatory limits for other BHCs raises concerns. - OCC lending limits regime applies only to national banks and savings associations; loans to corporate groups can be as much as 50 percent of a bank’s capital and surplus (comprising Tier 1 and Tier 2 capital), despite generally limiting borrowers to 15 percent of a bank’s capital and surplus; definition of these groups is narrower than that of connected borrowers. - Company-run stress test requirements no longer apply to banks with less than US$250 billion in assets and less than $75 billion in cross-jurisdictional activity, nonbank assets, weighted short-term wholesale funding and off-balance sheet exposures. - Existing concentration risk report collects exposures by broad categories but does not provide a comprehensive bank-wide view of all significant sources of concentration risk (example: cannot measure direct and indirect exposures to leveraged corporates). - No requirements that credit risk exposure exceeding a certain amount or percentage be decided by the bank’s board or senior management. - Banking organizations not subject to advanced approach capital requirements do not have to calculate capital charges for CVA risk for exposures to OTC derivatives. ### Market and operational risk - Market risk: - Market risk rule applies to banks with aggregate trading assets and liabilities of at least US$1 billion or 10 percent of their total assets; consistent with BCBS’ February 2011 revisions to Basel II. - BCBS January 2019 market risk revisions have not yet been implemented. - Category I, II, or III banks must conduct company-run stress tests using FBAs’ scenarios that may include market shocks. - CCAR uses a “global market shock” for banks with aggregate trading assets and liabilities of US$50 billion or more (or 10 percent or more of total consolidated assets). - FBAs rely on supervisory monitoring, targeted inspections and horizontal examinations to assess market risk management; additional examinations and guidance on model risk management exist. - For largest banks with significant trading activities, examiners conduct in-depth reviews of independent price verification and sample testing of valuation adjustments; FSAP team not provided documentation to demonstrate effectiveness in practice. - Operational risk: - FBAs have intensified focus due to operational failures, fraud, non-compliance losses, and heightened cyber risk. - General risk management requirements complemented with tailored guidelines; safety and soundness provisions include information security standards; OCC Heightened Standards emphasize risk data aggregation. - Detailed supervisory guidance exists on outsourcing, technology service providers, payment systems, internal audit, and business continuity planning; internal practices expected to be commensurate with size, complexity, and risk profile. - Only Category I and Category II banks must hold capital against operational risk using the Advanced Measurement Approach (AMA) (previous regime required operational risk capital for banks with total consolidated assets of US$250 billion or more, or at least US$10 billion in foreign exposure). - FBAs are considering moving away from advanced approaches in line with Basel III. - FBAs assess operational risk via on-site reviews, horizontal reviews for larger institutions, and intensified scrutiny of third-party service providers; OCC created a dedicated examination team for service provider risks. - Industry communication and best-practice sharing: FFIEC Cybersecurity Assessment Tool, supervisory statements, OCC supervisory letters and horizontal examination findings. - Remaining gaps in operational risk framework: - No capital explicitly required by regulation for operational risk other than banks that have adopted the advanced approach under Basel. - Most applicable qualitative standards provided through guidance rather than enforceable regulation. - No general requirements for reporting operational risk–related incidents to the FBAs. - A single overarching guidance document setting out principles for managing operational risk (board role, management, internal monitoring/reporting, control environment, loss data collection/analysis) is missing; existing guidance is detailed but disparate and scope differs across documents and bank coverage. ### Liquidity risk - Qualitative framework augmented with quantitative standards: - Historical supervision of liquidity risk was qualitative; adoption of the LCR rule in 2014 introduced a standardized quantitative requirement. - Under the LCR Rule, covered banking organizations must implement and maintain policies, procedures and systems to exercise operational control over high-quality liquid assets to ensure availability to withstand a 30-day stress period. - LCR complements cash flow projections, contingency funding planning and liquidity stress testing requirements under the FRB’s Regulation YY. - FBAs proposed in June 2016 to implement the NSFR; to date FBAs have not adopted a final NSFR and timing is uncertain. *Source: 1usaea2020008 - Chapter excerpt on supervisory framework and risk management (UNITED STATES, INTERNATIONAL MONETARY FUND).* ### 59. The liquidity risk regime is robust for large banks. Category I and Category II banks are ### 59. The liquidity risk regime is robust for large banks. Category I and Category II banks are ### Liquidity regime for large banks (paras 59–61) - Category I and Category II banks are subject to full liquidity requirements (LCR and planned NSFR). - Banking organizations with US$100 billion or more in total consolidated assets must meet enhanced liquidity standards in Regulation YY, which require: - a robust risk management framework, - a contingency funding plan, - internal liquidity stress tests, - establishment of limits. - The LISCC liquidity program assesses firms’ liquidity position and liquidity risk-management practices through: - horizontal reviews under the Comprehensive Liquidity Analysis and Review (CLAR), - firm-specific examinations, - ongoing monitoring. - Extensive reporting (including FR 2052a) supports the regime and has improved FBAs’ monitoring of firms’ liquidity risk profiles. - FR 2052a: FBO LISCC firms and U.S. firms with US$700 billion or more in total consolidated assets or US$10 trillion or more in assets under custody must submit a report on each business day. - Reductions in liquidity requirements for other firms: - The final tailoring rule issued in October 2019 eliminated or weakened the application of the LCR and planned NSFR for a significant part of the banking system (reduced quantitative requirements for Category III banks and no LCR and NSFR requirements for Category IV banks). - FBAs adjusted the frequency of internal liquidity stress tests (now on a quarterly basis for Category IV banking organizations) while maintaining liquidity reports on a monthly basis. - Liquidity stress testing requirements remain for banks with US$100 billion or more in assets but draw on internal models and are not substitutes for the simplicity and transparency of the LCR or NSFR. - According to the FRB, liquidity risk in the Regional Banking Organization Portfolio is considered low or moderate, but examiners have observed some deterioration in liquidity positions (November 2018 Supervision and Regulation Report). - The requirements in Regulation YY are not very prescriptive; banks can choose scenario assumptions with minimal regulatory constraints. - Sample supervisory files reviewed by the FSAP team show supervisors periodically review banks’ liquidity stress tests and assumptions, but examinations were not comprehensive and covered a limited set of LFBO portfolio activities (e.g., broker dealer and securities firms’ businesses in 2018, FBO branches in 2019). The sample also included the 2015 “Coordinated Liquidity review” for LBOs but related documents did not include any assessment of internal liquidity stress test practices at LBOs. - Liquidity risk management requirements under Regulation YY have been significantly reduced for Category IV banking organizations. Firms with less than US$100 billion in assets are expected only to follow the 2010 Interagency Policy Statement on Funding and Liquidity Risk Management (high-level guidance). - Box note: Given their size, Category IV and Category III banks are unlikely to reach the US$50 and US$75 billion thresholds for the weighted short-term wholesale funding indicator that would trigger higher LCR requirements. - Supervisory concern: - Advances in technology may increase depositor mobility and cause rapid shifts in liability mix or increased costs, raising liquidity risk or impacting earnings. - Where liquidity requirements are no longer applied, FBAs must rely on supervisory tools such as enforcement measures, which may be taken too late. - Lack of standardized approaches makes identifying outlier banks more difficult when supervisors must rely on banks’ internal measures. ### Interest Rate Risk in the Banking Book (IRRBB) (paras 62–65) - The FBAs’ approach is principles-based. IRRBB is defined as the current or prospective risk to both earnings and capital from adverse interest rate movements affecting the banking book. - Examination procedures follow: - 1996 Joint Agency Policy Statement on Interest Rate Risk, - 2010 Interagency Advisory on Interest Rate Risk Management. - Responsibilities: - Board of directors: set tolerance for interest rate risk, monitor overall IRR profile, ensure levels are prudent. - Senior management: ensure IRR is managed appropriately. - Internal stress testing (scenario and sensitivity analysis) is integral; reasonableness of assumptions (asset prepayments, non-maturity deposit price sensitivity) should be regularly reassessed. - Since the 2015 FSAP: - No material changes. Recommendation to revise 1996 guidance to include more quantitative guidelines was not implemented. - No standardized methodologies to measure change in economic value of equity and change in net interest income. - Base methodology to identify outlier banks and standardized disclosure requirements have not been adopted. - Banks are not required to hold capital against changes in interest rates under a Pillar 2 approach. - CCAR requires capital for IRRBB through projected revenues and expenses over nine quarters for participating banks, but CCAR is limited to 19 firms. - BCBS recommended considering capital adequacy for IRRBB in relation to risks to economic value (BCBS standards on IRRBB, April 2016). - Supervisory process: - Off-site and onsite examinations rely on ad hoc, non-standard information from firms. - Strong focus on IRR management; deficiencies prompt formal corrective action. - For large and complex banks, IRR assessment uses firm-specific and horizontal onsite/offsite work with detailed information requests (management reports, model risk assessments, committees’ minutes). - For smaller firms, IRR information is obtained through onsite examinations. - Routine regulatory data for offsite IRR assessment is limited; supervisors can request any IRR information at any time. - Limits of current approach: - Increased competition for deposits and technology-enabled deposit mobility can reduce deposit stability and increase costs. - Relying on banks to define scenarios and assumptions may produce inconsistencies across banks and hinder timely detection of excessive IRR. - Limited bank expertise in stress testing and sensitivity analysis compounds the risk. - Introducing standardized approaches for measuring IRR and standardized disclosure would help identify outlier banks. ### Related parties (paras 66–67) - Framework: - Regulatory framework covers transactions with affiliates and insiders. - Legislative and regulatory provisions (Federal Reserve Act, Regulation O and W) aim to prevent misuse through preferential transactions and impose restrictions on credit extensions between a bank and its insiders and insiders of affiliates. - “Affiliate” includes entities that directly or indirectly control, or are under common control with, the bank, but does not include nonbank operational subsidiaries. Insiders include executive officers, directors, principal shareholders, and their related interests. - Identified gaps with international standards: - Limited scope of related parties and transactions: - Definition of “affiliate” excludes nonbank operational subsidiaries. - Definition of “related interest” of insiders does not explicitly include family members (though “principal shareholder” definition treats shares owned or controlled by a member of an individual’s immediate family as held by the individual). - “Covered transactions” does not include all claims and dealings (service and construction contracts, lease agreements). - Insufficient board involvement: - Regulation requires board review and approval of an extension of credit to an insider if aggregate exposure would exceed the higher of US$25,000 or 5 percent of the bank’s capital and surplus, or if aggregate exposure would exceed US$500,000 upon consummation of the new credit facility. - Regulation does not require prior board approval of transactions with affiliated parties or of write-off of related party exposures exceeding specified amounts. - Regulation does not require board oversight of related party transactions and exceptions to policies, processes and limits. - Limited regulatory powers to mitigate risks: - Limits applied to affiliates are generally stricter than for other counterparties: a general limit of 10 percent of the bank’s capital and surplus to the aggregate amount of covered transactions with any one affiliate; 20 percent for all affiliates. - Insider transactions are subject to single-borrower limits; aggregate loans to insiders can reach 100 percent of a bank’s capital and surplus. - For banks with deposits of less than US$100 million, the limit is two times a bank’s capital and surplus if the bank is in satisfactory condition. - No regulatory limits apply to holding company transactions with their affiliates or insiders, allowing potential arbitrage by booking exposures in the BHC. ### Recommendations (paras 68–69) - Prudential framework enhancements: - Streamline and simplify the regulatory framework by reducing the number of individual statements of guidance on the same topic, improve consistency between requirements and guidelines, and further develop interagency work to enable common guidance adoption by all FBAs where appropriate. - Ensure Category III and Category IV banks have capital requirements broadly consistent with Basel standards. - Introduce rules on concentration risk management for BHCs and banking organizations, explicit requirements for board approval of loans exceeding a certain amount or percentage, and require banks to comply with appropriate large exposure limits. - Introduce harmonized approaches for measuring IRR, strengthen disclosure requirements, identify outlier banks, and ensure all banks with material exposures hold capital against IRR. - Enhance the related-party framework: - Require board approval for related party transactions and write-offs exceeding specified amounts, - Widen the definition of “related interests” to include those mentioned in CP 20, - Introduce limits for BHC transactions with affiliates or insiders, - Review aggregate limits for lending to insiders. - Include a capital charge for operational risk for banks and BHCs using standardized approaches. - Consider expanding supervisory reporting of operational risk events and associated losses. - Consolidate and develop comprehensive guidance on operational risk management in line with international standards to clarify FBAs’ supervisory expectations and minimum standards. - Consider extending the scope of the LCR and the proposed NSFR to other large banks. - Corporate governance and risk management: - Introduce enhanced governance standards for large and complex BHCs, clarify supervisory expectations for boards and senior management, and strengthen risk management requirements for smaller firms not subject to OCC Heightened standards. - Require banks to inform supervisors promptly about material developments affecting fitness and propriety of board directors, introduce requirements for removal of CROs, and strengthen regulations and supervisory processes to fully implement compensation principles in accordance with the BCPs (CP 15, EC 7). ### Stress tests and capital planning (paras 70–71) - The U.S. regulatory capital stress test program (DFAST and CCAR) is a key tool for assessing banks’ capital plans. - Authorities are encouraged to: - Continue exploring second-round effects, possibly by integrating capital and liquidity stress tests. - Consider leveraging the stress test framework to probe prudential implications of longer-term structural issues in the banking industry. - Caution: - Most banks subject to supervisory stress testing view it as the main driver of their capital requirements; be mindful of cumulative effects of program changes. - Recent changes will likely result in lower regulatory capital requirements for several large banks, and possibly also for the GSIBs in the current stage of the economic cycle. - Program components: - DFAST: forward-looking quantitative evaluation of bank capital under hypothetical stress scenarios developed by the FRB. - CCAR: includes the DFAST quantitative assessment plus a qualitative assessment of certain banks’ capital planning practices. - Under the capital plan rule (12 CFR 225.8), a subject bank must include in its annual capital plan: an assessment of expected sources and uses of capital over the planning horizon under expected and stressful conditions; a detailed description of processes for assessing capital adequacy; the bank’s capital policy; and a discussion of any expected business plan changes likely to have a material impact on capital adequacy or liquidity. - DFAST and CCAR trace back to the FRB’s 2009 Supervisory Capital Assessment Program and have become established components of FRB supervision for large banks. - The OCC and FDIC have implemented DFAST requirements for covered institutions at the company (non-holding company) level. *UNITED STATES — INTERNATIONAL MONETARY FUND* ### 72. As part of the CCAR assessment, the FRB has the opportunity each year to publicly ### As part of the CCAR assessment, the FRB has the opportunity each year to publicly ### Stress test design, purpose, and independence - The FRB runs DFAST and CCAR stress tests using detailed portfolio data provided by banks and its own models and estimates to formulate an independent perspective on risk exposures and potential losses. - Stress tests cover credit risk, market risk, operational risk, interest rate risk, incremental default risk in the trading book, and losses from failure of principal trading counterparties. - Projections span a nine-quarter planning horizon given each bank’s loan and securities portfolios; trading, private equity, and counterparty exposures from derivatives and securities financing transactions (SFTs); business activities; and other relevant factors. - Projected net income, adjusted for the effect of taxes, is combined with capital action assumptions and other components of regulatory capital to produce post-stress capital ratios. - The FRB’s approach to modeling post-stress capital ratios generally follows U.S. generally accepted accounting principles (GAAP) and the regulatory capital framework. - OCC and FDIC implementations of DFAST do not include a public object/non-object component; any concerns are discussed as part of the on-going supervisory process. ### Data sources and reporting - Stress tests use regulatory reports and proprietary third-party industry data. - Projections rely on aggregate information from the Financial Accounts of the United States (Z.1) statistical release and additional FRB-collected data, including the Consolidated Financial Statements for Holding Companies (FR Y-9C). - Most data used in FRB stress test projections are collected through the Capital Assessments and Stress Testing (FR Y-14) information collection, which include FR Y-14A/Q/M annual, quarterly, and monthly schedules. - FR Y-14 reports collect detailed data on pre-provision net revenue (PPNR), loans, securities, trading and counterparty risk, operational-risk event losses, and business plan changes. Banks must submit detailed loan and securities information for all material portfolios. ### Supervisor vs. bank loss estimates and capital plan implications - Potential losses under stress are calculated independently by supervisors and banks. Banks must estimate potential losses under the FRB-determined stress scenario. - The highest loss between the supervisor’s estimate and the bank’s estimate becomes the binding constraint for the capital plan. - Supervisory models tend to be more conservative and often play the decisive role in capital plan approval decisions. - The maximum amount of capital that can be distributed is driven by the higher amount of stressed losses estimated either (i) by the firm or (ii) by the supervisor; a firm that does not have enough capital to make planned distributions and absorb supervisory-model losses must revise its capital plan. ### Recent changes to stress testing and tailoring - Authorities have simplified the regulatory framework and tailored the stress test exercise to systemic importance, aiming to reduce administrative burden and enhance transparency without compromising safety and soundness. - Removal of the Qualitative Objection: - February 2017: FRB amended the capital plan rule to no longer subject banks considered large and noncomplex to the "qualitative objection." - April 2019: FRB amended the rule to remove the qualitative objection for any bank subject to the qualitative objection for four consecutive years and that does not receive a qualitative objection in the fourth year. - Heightened supervisory expectations and supervisory review of capital planning practices continue despite removal. - Scope and frequency changes under the EGRRCP Act: - Eliminates supervisory stress tests for BHCs with less than US$100 billion in assets. - Requires periodic (rather than annual) supervisory stress tests for firms in the US$100 to US$250 billion range. - Removes company-run stress test requirements for banking organizations with less than US$250 billion in assets and other financial companies with US$250 billion in assets or less. - Transparency enhancements: - February 2019 amendments increased transparency of the stress testing program, including enhanced disclosures on key models and estimated loss rates for loan groups. - FRB committed to publishing disclosures about two additional models in 2020 and each year thereafter until more transparency is provided for each stress test model. ### Stress Capital Buffer (SCB) final rule (March 2020) and key changes - Objective: simplify the large bank capital framework by integrating forward-looking stress test capital rules with the capital conservation buffer. - Under the SCB, a bank whose capital buffers are below its minimum capital requirement plus its stress losses and any applicable GSIB surcharge and countercyclical capital buffer would face automatic restrictions on capital distributions. - GSIB surcharge will be added to the Stress Capital Buffer, making the approach more conservative for GSIBs relative to the prior CCAR approach. - Rule relaxations and assumption changes: - Banks will no longer be assumed to carry out all nine quarters of planned capital actions in the stress test; instead, banks must prefund only four quarters of planned common stock dividends. - The assumption that a bank’s balance sheet grows under stress is replaced with an assumption that the bank’s balance sheet size remains constant under stress. - Removal of the 30 percent dividend payout ratio that had been used as a threshold for heightened supervisory scrutiny. - Removal of the stress leverage buffer requirement; banks will no longer have to comply with any leverage buffer under stress conditions (i.e., the SLR and the U.S. leverage ratio will no longer be considered as post-stress capital requirements). - Allowing firms to increase planned capital distributions in excess of the amount included in their capital plans without prior FRB approval. ### Impact assessment and systemic considerations - Recent changes will likely reduce regulatory capital requirements for many large banks; GSIBs are partly offset by inclusion of the GSIB surcharge, while other participating banks face a meaningful reduction from a strong starting point. - New rules may become more procyclical: - Prefunding only four quarters of dividends (instead of nine) reduces a countercyclical feature that helps banks strengthen capital in good times. - Removal of post-stress leverage requirements substantially reduces Tier 1 capital requirements. - Credit risk-weight densities are assumed stable in stress tests due to use of the U.S. standardized framework for credit risk rather than rising as credit conditions deteriorate; standardized risk weights are typically more conservative than implicit risk weights from bank internal models in normal times. ### Recommendations and suggested enhancements - Consider explicit recognition and modeling of second-round effects, including: - Macroeconomic disruptions from associated disruptions to bank funding markets. - Contagion effects spreading from one bank to another. - Potential asset fire-sales when multiple institutions sell assets simultaneously. - Stress tests should explore mechanisms to understand bank capital behavior under stress absent policy authority interventions; modeling second-round effects remains work-in-progress. - Consider integrating solvency and liquidity stress testing to better capture interactive dynamics. - Leverage stress tests to probe structural and longer-term issues, for example: - Prudential implications of climate risks. - “Low-for-long” interest rate scenarios and prolonged low interest rates’ impacts on the banking sector. - Carefully assess the combined impact of recent reforms (including regulatory tailoring and SLR adjustments) to ensure their interaction does not pose undue risks to the safety and soundness of regulated firms; detailed impact assessments are usually prepared by the FBAs for each reform. *Source: UNITED STATES — International Monetary Fund (text unit provided).* ### 79. Removing the CCAR qualitative objection places added pressure on bank supervision. ### Removing the CCAR qualitative objection places added pressure on bank supervision. ### Impact of removing the CCAR qualitative objection - The qualitative objection was included in the stress test program to address shortcomings in bank capital planning practices and supervision that existed prior to the crisis. - The FRB has set aside the qualitative objection process on the basis that banks have achieved significant progress in correcting past weaknesses. - Going forward, banks will be given an opportunity to privately address supervisory concerns expressed as Matters Requiring Attention (MRAs) before issues are more formally escalated to public tools like enforcement actions. - The main outstanding question: whether supervisors will be willing to escalate issues and deploy more public tools on a timely basis in the absence of the CCAR qualitative objection process. ### Supervisory approach and practices - Stress tests play a key role in supervisory assessments of banking sector resilience; supervisors conduct on-site and off-site analysis to develop a thorough understanding of each bank’s risk profile. - Easing of regulatory constraints for some categories of banks increases the importance of high quality and independent banking supervision. - As memory of the GFC recedes, the challenge is to maintain supervisory intensity and intrusion amid stronger pressure and challenges by banks. A. Methods of ongoing supervision - The supervisory process is comprehensive, highly structured and risk-based; risk assessments are updated regularly through off-site monitoring programs and on-site examinations. - Supervisors use a uniform rating process and have a framework for early intervention and plans to resolve banks in an orderly manner if non-viable. - Under U.S. law, FBAs conduct full-scope on-site examinations of banks at least and holding companies. - Examination cycle details: - Banks with assets of less than US$3 billion, with a composite CAMELS rating of outstanding or good, considered well-managed and well-capitalized, and meeting certain other criteria may be eligible for an eighteen months cycle. - All other banks have a 12-month examination cycle. - Full-scope examinations address capital adequacy, asset quality, management strength and board oversight, earnings quality and sustainability, adequacy of liquidity sources, and sensitivity to market risk. - For many larger banks and holding companies, full-scope examinations consist of targeted reviews culminating in a roll-up process where ratings are assigned. - For many of the largest banks and holding companies, one or more banking agencies maintain a full-time examination staff on-site. Prompt Corrective Action (PCA) - PCA is the main plank of the early intervention framework with clear triggers. - PCA provides FBAs authority to promptly resolve capital deficiencies and imposes mandatory and discretionary restrictions; absence of appropriate capital requires the chartering agency to close or seize the bank. - FBAs also use informal and formal supervisory actions linked with supervisory ratings; corrective actions are presumed when ratings are poor. Tailoring of the oversight framework - FBAs take a proportional approach to supervision; size and complexity divide banks for examination purposes (categories not aligned with regulatory categories). - US$10 billion is used as a key dividing point in intensity of supervision; continuous assessment typically begins at this point. - Resident examination teams usually support assessments for firms with more than US$100 billion. - Supervision intensity grows with systemic importance; most intensive supervision reserved for U.S. GSIBs and a small group of FBOs with large, complex U.S. operations. - LISCC firms (a group of 12 banks considered systemically important) are subject to the most rigorous supervision with the most supervisory resources per firm—over 55,000 hours on average. Tailoring to reduce burden on small banks - EGRRCPA directed FBAs to tailor oversight; FBAs increased emphasis on risk-focused examinations for regional and community banks. - Recent supervisory actions to tailor approach: - The FBAs, under FFIEC, implemented a new streamlined regulatory reporting for eligible small institutions. This streamlined report resulted in 24 fewer pages and reduced data items required to be reported by small banks by 40 percent. - The FRB increased the reporting asset threshold for holding companies from US$1 billion to US$3 billion. As a result, nearly 55 percent of holding companies are eligible to file a substantially shorter parent-company-only form semiannually (instead of quarterly). - The FRB is conducting more supervisory activities off-site and simplifying pre-examination requests; the BETR program relies upon regulatory reporting data and examiner judgement to classify risk areas and direct resources. - In 2018, the FDIC began piloting technology to facilitate off-site loan file review to enhance efficiency and reduce burden. Communication of supervisory concerns and enforcement action - Problems or deficiencies are generally identified during on-site examinations; many minor issues are resolved informally during the examination. - At the end of an examination supervisors send a written “Report of Examination” assessing CAMELS and identifying MRAs and MRIAs/MRBAs. - Regulators employ progressive enforcement regimes; informal enforcement includes memoranda of understanding commitments; formal enforcement includes cease-and-desist orders or monetary penalties. - In practice, MRAs can take a long time to be closed; old MRAs/MRIAs are not uncommon. - Quality of correspondence with banks varies within and across agencies; strategic-level communication can be improved. - Issues include excessive formulaic and compartmentalized formats, key actions hidden in long texts, nuanced/vague language that does not make clear expected actions, and lack of harmonized procedures and terminology across FBAs leading to potential confusion. - FBAs are aware and have taken steps to improve communication; continuing efforts are important to provide clearer prioritization for boards and more timely corrective actions. ### Potential future challenges - Regulatory tailoring and doubts as to enforceability of guidance increase the importance of high-quality bank supervision. - As supervisory stress tests become less frequent and capital and liquidity requirements less stringent for some banks, supervision needs sharper tools and procedures to ensure appropriate governance, controls and financial resilience. - Supervisors may face additional push back from the banking industry as financial resilience moves away from a near and present threat; some institutions intend to challenge requirements they consider “excessive” or ungrounded. - FBAs have stated that a bank cannot “buy their way out of control weaknesses with high levels of capital and liquidity,” but acknowledge potential for push back. - FBAs’ statement on the role of guidance may impact supervisory corrective action where supervisors either have not made a sufficient link between guidance and a rule or sought to “enforce” guidance line by line instead of looking at the totality. Guidance and ratings - Guidance articulates FBAs’ view of how rules should be applied; SR 13-13 / CA 13-10: Supervisory Considerations for the Communication of Supervisory Findings sets expectations for MRIA language—“The board of directors (or executive-level committee of the board), or banking organization is required to immediately...”. - SR criteria remain valid: (1) matters with potential to pose significant risk to safety and soundness; (2) matters representing significant noncompliance with laws/regulations; (3) in consumer compliance exams, matters with potential to cause significant consumer harm. - For repeat criticisms that escalated due to insufficient attention, supervisors must make a clear and strong link between inaction and rules such as safety and soundness. Rating system challenges - Different rating methodologies used by FBAs for banks and by FRB for BHCs. - FRB changes for rating large holding companies (SR 19-3 / CA 19-2: Large Financial Institution (LFI) Rating System) create a transitional challenge: - LFI is in very earliest days of implementation; ratings models take time to bed down. - Three challenges identified: - Preventing the “Conditionally Meets Expectations” rating being a default rather than transitory (requires clear articulation of risk appetite between “broadly meets expectations” and “Deficient-1”). - Guidance on ratings written at a broad level of aggregation may obscure links between granular supervisory work and ratings (communication challenge). - Loss of a composite rating is a significant operating shift and risks one of the three LFI ratings being perceived as the natural successor to the composite. Emerging risks and agility - Rapid technological progress, cyber risks and transition risks to a low carbon economy are gaining prominence for potential systemic implications. - FBAs have an approach effective on traditional risks and have taken steps to include some new challenges; developing agile processes is key. - FBAs committed to developing a common supervisory approach to cyber; initiative is in early stages. Supervisory intensity trends - Number of on-site examinations has declined for both large and small banks: - FRB’s examinations of the 12 most systemic banks fell from 468 in 2015 to 301 in 2018. - FDIC total on-site examinations decreased about 29 percent between 2014 and 2018. - OCC examinations decreased 13 percent between 2014 and 2018. - Number of MRAs and MRIAs declined even more: above 30 percent in most portfolios and above 50 percent for the large bank holding companies (LISCC and LBO). - These indicators can be partly explained by increased resilience and sector consolidation, but supervisors should not back-off from scrutiny during a buoyant market and continued buildup of market vulnerabilities. ### Recommendations - FBAs are encouraged to consider further actions to tackle aging resolution of MRAs; long periods to resolve supervisory concerns represent unnecessary risk to financial stability and may undermine supervisory authority. - Suggested actions: - Further improve communication: - Harmonize procedures and terminology for notifications. - Provide streamlined letters to banks using more candid and clear language. - Enhance prioritization of supervisory concerns. - Introduce more explicit rules and processes to escalate supervisory actions in the absence of timely and appropriate responses from banks to aging MRAs/MRIAs. - Lack of specific and measurable guidelines for escalation can lead to excessive reliance on examiner judgment and inconsistent escalation practices. *Source: 1usaea2020008 - Removing the CCAR qualitative objection places added pressure on bank supervision.* ### 97. The FBAs could consider further developing the framework for promoting early action ### 1usaea2020008 - 97. The FBAs could consider further developing the framework for promoting early action ### Enhancing the early intervention framework - Recommendation: The FBAs could consider further developing the framework for promoting early action for other issues than bank capital and liquidity. - Current main plank: The PCA framework is the main plank of the early intervention framework and has clear triggers. - Proposed enhancements: - Develop policy limits for other issues such as concentration and interest rate risks. - Use such limits as red-flags for further examinations and potential, but not always necessary, corrective actions. - Provide a signal of what authorities regard as acceptable, with a preventative effect. - Provide a useful reference point for offsite and continuous monitoring and indicate when a bank might need to be reviewed by on-site supervision. - Help shorten the time gap between breaking a threshold and action. ### Supervisory intensity and adaptation to new risks - Finding: The FBAs have been very successful fulfilling their mandate and enhancing the resilience of the banking sector since the GFC. - Recommendation: Maintain supervisory intensity and intrusiveness and continue adapting the supervisory approach to new challenges and risks. - Rationale: - Need agility to respond to regulatory changes, renewed industry pressure against supervisory actions, shifts in the balance of risks, and vulnerabilities building in a maturing credit cycle. - Effective supervision requires sustained scrutiny to face new threats to financial stability. ### Tailoring rule and indicator-based approach — overview - Context: Consistent with the EGRRCP Act, the FBAs introduced a new round of changes to applicability thresholds for the more stringent regulatory requirements. - Principal effect: Fewer banking organizations will have to comply with all full Basel standards, accentuating differences between the U.S. regime and the Basel framework. - Notable design features: - The Collins Amendment to the DFA imposes a prudent permanent capital floor on banks based on the standardized approach risk-based capital rules. - The U.S. standardized approach excludes capital charges for operational risk and for Credit Value Adjustment (CVA) risk. - While the GSIB surcharge is more conservative than international standards, no D-SIBs has been identified in the United States. ### Potential impacts of tailoring on large banks and financial stability - Scope and size: - Banking organizations with assets of at least US$100 billion are considered as “large financial institutions” by the Federal Reserve. - Fourteen of 20 largest banks in the United States are in the US$100 to US$700 billion range. - Risk-taking implications: - Reduced prudential standards could facilitate increased risk taking by large but not GSIB firms without countervailing regulatory constraints that were provided by the previous regime. - Quantitative liquidity rules such as the LCR reduce the probability of runs and help avoid destabilizing bank failures or high liquidation cost of assets. - Simulation exercises show liquidity requirements such as the LCR can be as effective as capital requirements in mitigating contagion risk from fire sales. - Empirical evidence suggests that the LCR is associated with a lower individual bank’s marginal contribution to systemic risk and is a useful indicator in predicting ex ante which banks are most exposed to a crisis. - Financial stability concerns: - Large banks, including regional banks, differ from small community banks in risk profile, scope of activities, complexity, and information systems. - Distress of large institutions that would not qualify today as GSIBs (examples cited historically include Countrywide, Indymac, Wachovia, Washington Mutual) may pose a significant risk to financial stability under certain conditions. - Under the new four-tier framework, the full LCR requirements and the most stringent regulatory adjustments to CET1 capital would not have applied to Washington Mutual, which held US$307 billion in assets when resolved in 2008. - Regional banks “pose very significant resolution challenges to the FDIC distinct from those posed by GSIBs and by smaller banks. Their size, complexity, and reliance on market funding and uninsured deposits would present very substantial risks in resolution, with potential systemic consequences.” (as noted by the former chairman of the FDIC, M. Gruenberg). ### Complexity, size, and the indicator-based classification - Key critique: The tailoring approach is somewhat complex and largely driven by the size of the banks. - Features and contradictions: - The indicator-based approach relies on different metrics, thresholds, and ways to combine them, making it relatively complex and potentially contradicting the primary objective of simplifying the regulatory framework and reducing compliance costs. - Only one domestic bank would be placed in a different category than what would result simply from its size. - The approach is subject to cliff or threshold effects: banks may face more or less stringent requirements when they move categories, even temporarily. - A banking organization that keeps cross-jurisdictional activity, short-term wholesale funding, nonbank assets, and off-balance sheet exposures indicators below thresholds could grow up to US$700 billion in assets without having to meet full Basel-consistent prudential requirements or hold additional capital reflecting systemic importance (and no D-SIBs have been identified). - Size as the main driver: - Apart from GSIB designation, classification is essentially driven by size (total assets) and size-related indicators (off-balance sheet exposures, size of the portfolio of investment in nonbanking assets) rather than by risk profile or complexity. - Other measures of systemic importance such as interconnectedness, complexity, and substitutability are not captured by the indicators-based approach. - The cross-jurisdictional activity indicator excludes assets and liabilities from derivatives exposures. - The use of nonbank assets defined as assets held by nonbank subsidiaries does not capture risk characteristics. - Short-term wholesale funding is used only to classify banks with less than US$700 billion in assets between Category III and Category IV and to potentially impose higher LCR requirements. - Conclusion: Size remains a crude measure of complexity and does not reflect the risk profile. “Complexity cannot be equated with institution size.” (FRBNY Staff Report, 2019). ### Limited translation of categories into supervisory practice - Observation: There appears to be a slight disconnect between broad categories used for regulatory applicability and supervisory practices, suggesting the categories might be “artificial” or insufficiently risk-based. - Supervisory distinction: - For banks with more than US$100 billion in assets, there is a clear distinction between banks supervised under the LISCC program and other Large Bank Organizations (banks with more than US$100 billion in assets that are not GSIBs). - The distinction between Category II, Category III, and Category IV has not yet been translated into distinct supervisory practices. ### Tabulated comparators and standards (selected highlights preserved from source) - Permanent capital floor: 100 percent floor for firms using internal model approaches in the U.S., compared with 72.50 percent in the Basel framework. - Examples of asset thresholds and categorizations: - Category I (U.S. G-SIBs): $250b + (and GSIB designation). - Category II: >$700b. - Category III: >$250b. - Category IV: >$100b. - “Large financial institutions” designation threshold: at least US$100 billion in assets. - Liquidity and capital rules by category (schematic in source): - LCR: Full LCR requirements for higher categories; reduced LCR for some intermediate categories; No LCR for smaller firms. - NSFR: Full NSFR requirements if implemented for higher categories; reduced NSFR if implemented for mid categories; No NSFR for smaller firms. - Capital adjustments and recognition: - U.S. rules: Limited recognition capped at 25% of CET1 for each category (with other specific caps and recognition differences noted). - U.S. standardized approach excludes capital charges for operational risk and for CVA risk. *Source: IMF staff summary of content in "1usaea2020008 - 97. The FBAs could consider further developing the framework for promoting early action".* ### Appendix II. Federal Reserve Stress Test Models Updates ### Appendix II. Federal Reserve Stress Test Models Updates ### Overview - The FRB maintains an ongoing program of model changes to keep stress test models aligned with best practices. The most significant changes from 2015 through 2019 are summarized below. ### 2015 - Modest changes to accrual loan loss models. - Refinement of risk factors used in selected securities models. - Simpler approach to reduce volatility in noninterest income and expenses. - Interest expense on subordinated debt now based on more granular instrument-level information. - Model used to project regulatory capital and capital ratios enhanced to incorporate more detailed data from regulatory reports so that it better aligns with revised regulatory framework and related accounting guidance. ### 2016 - An average of the historical simulation and panel regression models introduced to project operational risk losses. - Operational risk projections for each bank holding company (BHC) incorporated large historical losses (in terms of severity and frequency) observed across all BHCs, scaled to bank size, rather than an individual bank’s own historical data. Additionally, projections of losses from the historical simulation model were set at percentiles of the loss distribution that correspond to the severity of the supervisory scenarios. - Models used to estimate several components of MRWA were modified in order to better differentiate the sensitivity of each component to scenario variables and to align the estimation more closely to the market risk rule in the Board’s Regulation Q. - Several changes to the supervisory capital calculation were introduced to improve precision. The main model enhancements include: Incorporating greater precision in the adjustments to the regulatory capital ratio denominators; and modifying assumptions regarding the relationship between mortgage servicing assets (MSAs) and associated deferred tax liabilities (DTLs). ### 2017 - Operational risk model enhanced to capture losses from operational risk events and mortgage repurchase expenses, and the use of the mortgage repurchase model used in prior years was discontinued. - An enhanced regression-based model was introduced that forecasts total losses for operational risk at the industry level and then distributes those losses to each bank based on its asset size. - Models that estimate certain components of Pre-Provision Net Revenue (PPNR)—such as net interest income, noninterest income, and noninterest expense—were enhanced to better account for differences in post-crisis performance across banks. - Estimation process for commercial real estate loan loss models was streamlined by combining two datasets before model estimation. In addition, in the process of re-estimating the model, the model’s macroeconomic variables were updated to better capture loan losses under stress. - Supplementary leverage ratio added to the calculation of projected capital. ### 2018 - Models that project other-than-temporary impairments (OTTI) for debt securities and losses on auto loans, first-lien mortgages, home equity loans, and credit cards were enhanced. - Phase-in of material enhancements to the model that estimates certain components of pre-provision net revenue (PPNR) was completed; the PPNR model was updated to include a more granular model of deposit expenses; and changes were made to the calculation of projected post-stress capital to account for the passage of the Tax Cuts and Jobs Act. ### 2019 - The probability of default (PD) and loss given default (LGD) components of the auto loan model were enhanced. These refinements include changes to the way certain risk drivers are captured in the model, which reduces volatility from historical macroeconomic movements, and an adjustment to newly originated accounts to better reflect their higher credit risk compared to otherwise similar accounts. - The way in which the credit card model treats uncollected interest and fees in the exposure at default (EAD) component of the model was refined. Data from more recent periods that include a larger set of banks supported a slight reduction in the assumed percentage of uncollected interest and fee income. - Treatment of missing data in the corporate loan portfolio was refined to align with that of other portfolios. Under the refined treatment, the FRB assigns a conservative loss rate for an entire portfolio when a certain proportion of the loans are missing required model inputs. Analysis suggests the refined treatment remains appropriately conservative. - Certain models used to project fair value for debt securities were enhanced to increase modeling flexibility and better align with historical trends. The risk drivers for agency mortgage-backed securities (MBS), such as option-adjusted spread (OAS), now flexibly vary over the planning horizon. A new model was also adopted to project the OAS for sovereign bonds. In DFAST 2018, the OAS was projected using a scenario-based regression model. The new model projects the OAS based on high-percentile historical movements in sovereign bond spreads. - Commercial real estate (CRE) Loss-Given-Default (LGD) model was refined and a number of other minor changes to the CRE loan-loss model were introduced. The previous LGD model relied on reported charge-off and loan reserve data, which led to idiosyncratic reporting differences across banks. The change improves consistency by using a common data source and framework for the projection of LGD. Additionally, the process for calculating auxiliary risk drivers was simplified. A single conceptual framework is now used to project auxiliary risk drivers, which increases consistency and decreases complexity. - PPNR models were re-estimated with more data to better reflect recent performance in PPNR while keeping the structure of the model unchanged. Additionally, longer time-series data for new intermediate holding companies (IHCs) and historical data revisions changed the estimation data. *Source: Dodd-Frank Act Stress Test: Supervisory Stress Test Methodology and Results* ### Appendix V. Status of the Recommendations of the 2015 ### Appendix V. Status of the Recommendations of the 2015 ### CP Recommendations for Banking Supervision — Status Summary - The appendix provides the status of multiple CP Recommendations from the U.S. FSAP 2015 for banking supervision, listing recommendation text and the reported status or action taken since 2015. - Several items are reported as "No change since 2015." Others are reported as "Ongoing," "Ongoing. Coordination efforts with significant improvements," or describe specific regulatory actions taken by FBAs (Federal banking agencies) and the FRB. ### Interagency Coordination and Governance - Recommendation: FBAs revisit their “mission and vision” statements to give primacy to safety and soundness and clarify subordinate objectives. - Status: No change since 2015. Ongoing. Coordination efforts with significant improvements. Division of responsibilities remain the same. - Recommendation: The Federal Reserve further assure independence of its supervisory role by making governance rules for Federal Reserve district bank boards consistent with global good practice. - Status: The FRB has adopted bright-line restrictions on the roles of directors of the Federal Reserve district banks to address potential appearance of conflicts of interest. - Recommendation: FBAs ensure preparation of supervisory plans is on the same cycle and pursue collaboration. - Status: Coordination between agencies with signs of clear improvements. Supervisory plans not fully aligned. - Multiple Recommendation items under CP 8 related to interagency communication, prioritization, requirements to report developments, and distinguishing board vs management responsibilities: - Status: Ongoing. The FBAs are making efforts to improve communication, but further improvements are needed. - Specifics: - FBAs employ guidance that differentiate between levels of severity for supervisory concerns and specify when to communicate them to boards of directors. Approach not fully aligned across agencies. - Aging MRAs remain an issue despite efforts done by the agencies. - Planning cycles are still not aligned. ### Supervisory Actions, Escalation, and Remediation - Recommendation: Incorporate handover “protocols” to discourage inappropriate regime shopping in the FFIEC Statement on Regulatory Conversions. - Status: No change since 2015. - Recommendation: Introduce explicit requirement for banks to immediately report if they find that a major shareholder is no longer suitable. - Status: No change since 2015. - Recommendation: Implement rules/policies promoting early action also for other issues than bank capital and liquidity. - Status: Ongoing. The FBAs have developed presumed corrective actions associated with ratings, but the PCA framework remains the main plank for supervisory corrective actions. - Recommendation: Implement more explicit rules for supervisory action, such as setting timelines for remedial action and requiring regular reporting of progress. - Status: No change since 2015. Explicit rules and processes to escalate supervisory actions in the absence of timely and appropriate responses from banks to aging MRAs have not been introduced. - Recommendation: Implement interagency guidance with more clarity regarding aging of MRAs. - Status: Aging MRAs remain an issue despite efforts. ### Supervision of SLHCs, Holding Companies, and Stress Testing - Recommendation: Develop and implement regulatory and supervisory rules, guidance, and a formal rating system for SLHCs. - Status: (1) Guidance documents applicable to SHLCs have been precisely identified; (2) The FRB issued an advance notice of proposed rulemaking inviting comment on conceptual frameworks for capital standards that could apply to insurance company SLHCs in June 2016; and (3) The FRB adopted a final rule to apply the RFI rating system on a fully implemented basis to non-insurance and non-commercial SLHCs with total consolidated assets less than US$100 billion, and the LFI rating system for non-insurance or non-commercial SLHCs with total consolidated assets of US$100 billion or more in November 2018. The FRB will continue to assign an indicative RFI rating to SLHCs engaged in significant insurance or commercial activities, regardless of asset size. - Recommendation: The FRB introduce a comprehensive capital framework for savings and loan holding companies with substantial insurance or commercial activities. - Status: Ongoing. The FRB has issued a proposal but has not finalized capital standards that would apply to insurance company SLHCs. - Recommendation: Introduce clearer supervisory guidance on the severity of scenarios for stress tests run by the firms. - Status: The FRB publishes on a yearly basis the supervisory scenarios that firms have to use when conducting company-run stress tests. - Recommendation: Introduce clearer feedback mechanisms to firms on components of supervisory run stress tests. - Status: Ongoing. Significant achievements, but improvements needed. ### Corporate Governance, Board and Senior Management Responsibilities - Recommendation: Introduce clearer expectations and requirements for corporate governance for banks not subject to heightened standards. - Status: FRB guidance (SR 16-11) clarifies risk management expectations for institutions with total consolidated assets of less than US$50 billion, but enhanced standards have not yet been defined for larger firms (with assets of US$50 billion or more) supervised by the FRB. - Recommendation: Clarify supervisory expectations on the role and responsibilities of the bank board versus bank management. - Status: The FRB’s guidance (SR 16-11) that distinguishes supervisory expectations for the roles and responsibilities of the board of directors and senior management applies only to institutions with total consolidated assets of less than US$50 billion. - Recommendation: Introduce explicit requirement that banks inform supervisors promptly about material developments that affect the fitness and propriety of Board directors or senior management. - Status: No change since 2015. - Recommendation: Introduce clear guidance on responsibilities of the Board with regards to risk management. - Status: The OCC issued Heightened Standards prescribing operational and managerial standards for national banks and updated guidance relating to responsibilities of boards and senior management. FRB SR 16-11 applies to institutions with assets less than US$50 billion; enhanced standards for larger firms not yet defined. - Recommendation: Introduce clear requirements on arrangements for the removal of CROs. - Status: Clear requirements have not been introduced by all FBAs. Only the OCC through its Heightened Standards prescribes that a bank’s board or its risk committee have to approve the removal of the CRO. ### Capital, Interest Rate, and Operational Risk - Recommendation: Clarify requirements for capital to be held against operational risk by non-AMA banks. - Status: No change since 2015. - Recommendation: Clarify supervisory expectations for capital to be held against interest rate risk in the banking book. - Status: No change since 2015. - Recommendation: Introduce specific requirements that major credit risk exposures exceeding a certain amount or percentage of the bank’s capital are to be decided by the bank’s Board or senior management. - Status: No change since 2015. - Recommendation: Introduce specific requirements that credit risk exposures that are especially risky or not in line with mainstream activities must be decided by the bank’s board or senior management. - Status: No change since 2015. - Recommendation: Introduce clear expectations and requirements regarding risk management standards applicable to banks with less than US$10 billion of assets. - Status: No requirements have been introduced since 2015 regarding risk management standards applicable to banks with less than US$10 billion of assets. ### Concentration Risk, Large Exposures, and Related-Party Transactions - Recommendation: Reassess supervisory force of thresholds for commercial real estate exposures. - Status: No change since 2015. - Recommendation: Develop a robust supervisory framework and guidance for other risk concentrations comparable to that for credit concentration risk. - Status: No change since 2015. - Recommendation: Review separate/additional limits for money market investments and security holdings to include them within the 15 plus 10 limits. - Status: No change since 2015. - Recommendation: Review the 50 percent limit on exposures to a corporate group. - Status: No change since 2015. - Recommendation: The Federal Reserve complete development of its large exposures framework, with limits, for large bank holding companies and foreign banking organizations. - Status: Only applies to U.S. GSIBs, BHCs subject to Category II or III standards, and FBOs subject to Category II or III standards or that otherwise have total global consolidated assets of US$250 billion or more. Limits those firms to a single counterparty to 25 percent of CET1 capital. - Recommendations on related-party transactions, board approval, limits and aggregate lending to insiders: - Prior board approval of transactions with affiliated parties and write-offs exceeding specified amounts: No change since 2015. - Formal requirements for board oversight of related party transactions and exceptions to policies: No change since 2015. - Amend the coverage and details of the “related party” regime to align with CP: No change since 2015. - Introduce limits for holding company transactions with their affiliates or insiders: No change since 2015. - Review the aggregate limit for lending to insiders of 100 percent of a bank’s capital and surplus (and 200 percent for smaller banks): No change since 2015. ### Operational Risk, Reporting, Audit, and AML/CFT (selected CPs not reviewed) - Recommendation: Introduce guidance on operational risk management and supervisory expectations applicable to non-AMA banks; introduce appropriate reporting regime regarding operational risk. - Status: Several statements of guidance have been issued, but an overarching guidance document for managing operational risk is missing. There are no general requirements for reporting operational risk related incidents to the FBAs. - CP 21 and CP 27 items: - The FSAP team did not review CP 21 and CP 27 items listed (including de minimis regime, explicit reference to country risk in stress test guidance, full financial statements for all banks, external auditor immediate reporting to supervisor, supervisor setting audit scope, and rotation of external auditors). - CP 29 (AML/CFT customer due diligence and beneficial ownership): - The FSAP team did not review CP 29 items. However, the text notes: "Current legal and regulatory framework does not require the identification of the ultimate beneficiary owner of legal entity clients. Proposed amendments open for public consultation will introduce requirements to address this deficiency. Assessors welcome the proposed rule and understand its approval and implementation will improve compliance with this CP." *Source: Appendix V. Status of the Recommendations of the 2015 FSAP — CP Recommendations of the U.S. FSAP 2015 for Banking Supervision; status statements as provided in the source document.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1usaea2020008.pdf_