What do banking regulations prohibit

Generally, banks are chartered by the applicable regulatory agency see Questions 1 and 3. They are typically corporations, although credit unions are generally member-owned cooperatives and some savings and loans can be depositor-owned. Corporate governance. What are the legislative and non-legislative corporate governance rules for banks? Public companies must adopt rules allowing certain shareholders to nominate directors and must explain the reason for having the same person or different people serve as CEO and board chair see Question What are the organisational requirements for banks?

The articles of association or organisation certificate of a bank generally cover the:. Scope of its powers. Information about qualifying shares and board vacancies.

Shareholder special and annual meetings. Chief executive's role as a member of the board. Board's powers including its ability to appoint and dismiss management. What are the rules concerning appointment of auditors and other experts? Banks are generally required by the banking laws and securities laws to comply with certain requirements about internal and external audit functions and the role of outside experts.

Through the filed reports, banks must demonstrate that they operate in a safe and sound manner, accurately prepare their financial statements, and comply with other banking laws and regulations. Bank regulators can also require banks to use outside consultants to deal with severe compliance or risk problems.

These consultants must be qualified, independent, and remain subject to the regulators' oversight and possible termination. Regulators have criticised the independence, slowness, work quality and costs of some of these consultants. In some cases, the consultants have been fined and suspended from dealing with regulated institutions. For public companies, certain independence and conflict of interest standards and disclosures apply to the selection of compensation consultants, legal counsel and other advisers.

What is the supervisory regime for management of banks? The board is responsible for the bank's safe and sound operation, selection and termination of senior executives, and the adequacy of its procedures.

The board is expected to have the proper infrastructure, reporting lines and resources to execute its duties. Examiners give banks ratings based on capital adequacy, assets, management capability, earnings, liquidity and sensitivity. The assessment of management includes a review of the bank's safe and sound operations, its compliance and risk management framework, any noted deficiencies and legal and regulatory compliance. Management is expected to address most risks, including transaction, compliance, reputation, credit, interest rate, liquidity and strategic risks, and others.

Heightened standards exist for systemically important financial institutions SIFI risk committees, resolution plans, and so on. Do any remuneration policies apply? The board of a banking organisation is required to approve employment contracts, with special attention to compensation arrangements that can pose a safety and soundness risk to the bank because of their size and the possible incentives to engage in risky behaviour.

The regulators oversee this function and also routinely review the awarding of "golden parachutes" and whether highly compensated employees as a proxy for powerful employees are overturning established governance and other procedures. Banks may need to reconsider and change their compensation committees, adopt new governance and pay policies and even may be subject to an advisory vote on executive compensation.

Remuneration clawback is also feasible under certain circumstances. SIFIs and larger banking organisations are required to demonstrate more sophisticated procedures and greater independence, while smaller banks are encouraged to do so.

Public companies must include a resolution in their proxy statements asking shareholders to approve, in a non-binding vote, the compensation of their named executive officers, the required frequency of such a vote, and certain golden parachute arrangements in the event of a significant transaction. Disclosure of the following is required:. Relationship of CEO compensation to company performance. Comparison of median employee compensation to CEO compensation.

Incentive-based compensation arrangements. Hedging by certain employees or directors of their company stock positions. Policy for recoupment of compensation in the event of an accounting restatement.

What are the risk management rules for banks? Something comparable is expected of similarly sized non-US banks. Smaller banking organisations and publicly traded ones are required at least to have a risk committee. In some cases, banks that are subject to heightened prudential standards because of their size, risks or issues are required to have the CRO report to the CEO, with access to the board and the relevant committees.

Larger organisations are expected to have greater expertise and more enhanced and formal procedures. Liquidity and capital adequacy Role of international standards. What international standards apply? Capital floor. Minimum risk-weighted and leverage capital ratios and capital buffers. Standardised and advanced approaches for calculating risk-weighted assets RWA. Transition periods with exemptions, some parallel runs and so on.

US non-bank systemically important financial institutions non-bank SIFIs , subject to case-by-case tailoring. Any of the above that are subsidiaries of foreign banks. Certain small bank holding companies and savings and loan holding companies are not covered, depending on size, activities and investments there is also a distinction for market risk banking organisations that have large trading assets and trading liabilities.

What liquidity requirements apply? US Basel III adopts a new system of risk weighting and relies much less on the ratings of various assets issued by external credit rating agencies. Banking organisations are subject to capital plan reviews, stress tests, and summary publication requirements. Under the Supervisory Capital Assessment Program, banking organisations cannot pay a dividend or make other capital distributions without regulatory approval under specified circumstances.

Capital Floor known as the Collins Amendment. A permanent capital floor requires capital be no less than the:. Capital required by risk-based capital rules generally applicable to US depository institutions. Capital required of depository institutions at the time of enactment the US adopted versions of Basel I- and Basel II-based requirements. Moreover, an advanced approaches banking organisation must use the lower of the risk-based capital ratios calculated under both the:.

Generally applicable risk-based capital rules the standardised approach based on Basel I. US regulators can set higher requirements. The capital floor effectively excludes trust preferred securities from the definition of Tier 1 capital.

Smaller banking organisations are exempt from certain aspects of the capital floor. Definition of Capital. Certain hybrid instruments are being phased out.

Tier 1 capital must consist predominantly of common equity and retained earnings. Accumulated other comprehensive income gains or losses not yet realised on assets available for sale because they capture the bank's loss absorption capacity if assets had to be sold must generally be included in Tier 1 regulatory capital, except for smaller organisations. Credit and Default Risk Ratio Requirements. Under the Simplified Supervisory Formula Approach, the risk weight is determined by the applicable credit risk as well as the hierarchy position of the securitisation exposure in the payment structure, not by an external credit rating.

Under PCA, regulators examine whether banks meet the requirements to be considered well capitalised, adequately capitalised or less. Primary regulators increase the level of scrutiny, restrictions including on bonuses and dividends and penalties as the financial health of a firm that has received a PCA notice deteriorates.

The US bank regulators established a minimum The components are as follows:. A common equity Tier 1 CET1 capital requirement of 4. Additional CET1 capital instruments such as mortgage servicing rights and deferred tax assets at 1. Capital conservation buffer mostly of tangible equity of 2. A falling capital conservation buffer will subject the banking organisation to increasingly stringent limits on distributions and bonuses.

There is a minimum capital requirement for well capitalised banking organisations of 6. The other risk-based ratios above remain the same. Additional Requirements for Advanced Approaches Organisations. For these organisations, there is a minimum countercyclical buffer of 2. Loss absorbing capacity in the event of its failure.

Ability to recapitalise a successor parent company without government assistance and protect financially healthy subsidiaries of the insolvent parent company.

TLAC requirements consist of Tier 1 equity and long-term debt LTD issuances with a one-year minimum maturity and no acceleration features sold to unaffiliated third-party investors who would absorb the losses. In the insolvency of a parent company, the LTD converts into equity holdings in the clean holding company. The failure of an existing G-SIB parent company to comply with TLAC requirements restricts its ability to pay certain dividends and discretionary bonuses.

These enhanced prudential capital standards apply to:. The liquidity requirements:. The numerator of the LCR consists of the total amount of a bank's stock of high-quality liquid assets HQLA, generally government securities and cash , and the denominator measures net cash outflows over a day time period.

HQLA must equal the banking organisation's net cash outflow over a day period. Qualifying liquid assets are distributed over three ranges based on the asset's relative liquidity. The regulators also proposed the NSFR to encourage the use of medium and longer-term funding instead of short-term funding of longer-term loans. The NSFR will help manage liquidity so that sequences of short-term borrowings would need to be rolled over, reducing the need to acquire large amounts of short-term funding all at once.

Is a leverage ratio applicable? The US leverage ratio is defined as Tier 1 capital divided by the total leverage exposure average total of on balance sheet non-risk-weighted assets in case financial risks suddenly rise beyond what the risk weightings can capture. The total leverage exposure is comprised of on balance sheet exposures, OTC derivatives exposure, repurchase agreement exposures and the credit equivalent amount of off balance sheet exposures as determined using the US Basel III standardised credit conversion factor.

What is the capital adequacy framework that applies for banks? See Question Consolidated supervision Role and requirements. What is the role of consolidated supervision of a bank in your jurisdiction and what are the requirements? While the Federal Reserve is viewed as having jurisdiction over all affiliates, the regulators of individual affiliates also play an important role in the process.

The framework incorporates micro-prudential safety and soundness supervision and macro-prudential procedures to reduce financial stability risk and to provide insights into financial markets. In a Comprehensive Consolidated Supervision CCS determination for a non-US bank to establish a US office, the Federal Reserve requires the home country supervisor to have or to be planning to have adequate procedures for:. Monitoring and controlling the organisation's activities.

Obtaining regular examination and audit reports. Obtaining information on the relationships and transactions between the non-US bank and its affiliates. Regulation GPO Recent amendments.

To amend the emergency lending authority of the Federal Reserve Banks comments due March 7, Press release and notice. To establish criteria for the Federal Reserve Bank of New York to determine the eligibility of credit rating agencies and the ratings they issue for use in the Term Asset-Backed Securities Loan Facility comments due November 9, Press release and notice.

Prohibits lenders from discriminating against credit applicants, establishes guidelines for gathering and evaluating credit information, and requires written notification when credit is denied. Proposed Amendments To clarify that motor vehicle dealers are not required to comply with certain data collection requirements in the Dodd—Frank Act until final regulations are issued to implement the statutory requirements comments due July 29, Press release and notice.

To revise certain model notices to incorporate the new credit score disclosure requirements comments due April 14, Press release and notice. Press release and notice effective January 22, Sets uniform requirements for all depository institutions to maintain reserve balances either with their Federal Reserve Bank or as cash.

To lower the rate of interest paid on excess balances maintained at Reserve Banks by eligible institutions comments due May 13, Press release and notice. Technical changes to the calculation of interest payments on certain balances maintained by depository institutions at Federal Reserve Banks comments due May 18, Press release and notice. To simplify the administration of reserve requirements Press release and notice.

To remove references to Regulation Q Press release and notice. To enable the establishment of a term deposit facility through which Federal Reserve Banks would offer interest-bearing term deposits to eligible institutions comments due February 1, To authorize the establishment of limited-purpose accounts, called excess balance accounts EBAs , at Federal Reserve Banks for the maintenance of excess balances of eligible institutions comments due March 2, Press release and notice.

To authorize member banks of the Federal Reserve System to enter into pass-through arrangements and eliminating the provision in the savings deposit definition limiting certain kinds of transfers from savings deposits comments due March 28, Establishes the rights, liabilities, and responsibilities of parties in electronic funds transfers and protects consumers when they use such systems.

Proposed Amendments To create new protections for consumers who send remittance transfers to recipients in a foreign country Press release and notice.

To clarify certain aspects of the final rule limiting the ability of financial institutions to assess overdraft fees for paying ATM and one-time debit card transactions that overdraw a consumer's account comments due March 31, Press release and notice. To restrict the fees and expiration dates that may apply to certain prepaid products, primarily gift cards comments due December 21, Press release and notice. Limits the ability of a financial institution to assess an overdraft fee for paying automated teller machine ATM withdrawals and one-time debit card transactions that overdraw a consumer's account Press release and notice.

Prescribes standards to limit the risks that the failure of a depository institution would pose to an insured depository institution. Regulation GPO Compliance guide. Proposed Amendments To simplify regulatory capital requirements for qualifying community banking organizations by giving them an option to calculate a simple leverage ratio comments due April 9, Press release and notice.

Implements provisions of the Gramm-Leach-Bliley Act that require reporting and public disclosure of written agreements between 1 insured depository institutions or their affiliates and 2 nongovernmental entities or persons, made in connection with fulfillment of Community Reinvestment Act requirements.

Regulation GPO. Proposed Amendments Request for comment on ways to reduce regulatory burden comments due April 4, Notice. Defines the requirements for membership of state-chartered banks in the Federal Reserve System; sets limitations on certain investments and requirements for certain types of loans; describes rules pertaining to securities-related activities; establishes the minimum ratios of capital to assets that banks must maintain and procedures for prompt corrective action when banks are not adequately capitalized; prescribes real estate lending and appraisal standards; sets out requirements concerning bank security procedures, suspicious-activity reports, and compliance with the Bank Secrecy Act; and establishes rules governing banks' ownership or control of financial subsidiaries.

Proposed Amendments To update and codify existing guidance on income tax allocation agreements involving depository institutions and their affiliates comments due July 9, Press release and notice Submit Comments.

To modify the requirements to file Suspicious Activity Reports for certain institutions Notice. To simplify regulatory capital requirements for qualifying community banking organizations by giving them an option to calculate a simple leverage ratio comments due April 9, Press release and notice. To reduce regulatory reporting burden on small institutions by expanding the number of regulated institutions eligible for streamlined reporting comments due January 18, Press release and notice.

To repeal provisions that incorporate the S. Act comments due November 26, Press release and notice. To require regulated lending institutions to accept certain private flood insurance policies in addition to policies made available by the Federal Emergency Management Agency comments due January 6, Press release and notice. To establish requirements with respect to the escrow of flood insurance payments and to incorporate an exemption for certain detached structures from the mandatory flood insurance purchase requirement comments due December 29, Press release and notice.

To implement minimum requirements for state registration and supervision of appraisal management companies comments due June 9, Press release and notice. To establish requirements with respect to the escrow of flood insurance payments, the acceptance of private flood insurance coverage, and the force-placement of flood insurance comments due December 10, Press release and notice. To strengthen the leverage ratio standards for large, interconnected U.

To address changes to the country risk classifications, clarify the treatment of certain traded securitization positions, make a technical amendment to the definition of covered position, and clarify the timing of required market risk disclosures comments due September 3, Notice PDF.

To revise the minimum risk-based capital requirements and criteria for regulatory capital, as well as establish a capital conservation buffer framework, consistent with Basel III comments due September 7, Press release and notice Extension of comment period comments due October 22, To amend an earlier notice of proposed rulemaking by providing alternatives for calculating specific risk capital requirements for debt and securitization positions that do not rely on credit ratings comments due February 3, Press release and notice.

To revise the market risk capital rules to modify their scope, reduce procyclicality, enhance the sensitivity to certain risks, and increase transparency Press release and notice. To revise the advanced risk-based capital adequacy standards and revise the general risk-based capital rules Press release and notice.

Interagency notice regarding alternatives to the use of credit ratings in the risk-based capital guidelines Press release and notice. Interagency notice of a proposed regulatory capital rule related to the Financial Accounting Standards Board's adoption of Statements of Financial Accounting Standards Nos.

Interagency notice of proposed amendments to implement the Secure and Fair Enforcement for Mortgage Licensing Act Press release and notice. Interagency notice of proposed risk-based capital rule amendments to permit banks, bank holding companies, and savings associations to assign a percent risk weight to claims on, or guaranteed by, Fannie Mae or Freddie Mac comments due November 26, Notice.

Interagency notice of proposed amendments to permit banks, bank holding companies, and savings associations to reduce the amount of goodwill that a banking organization must deduct from tier 1 capital comments due October 30, Notice. Interagency notice of a proposed new risk-based capital framework, based on the standardized approach for credit risk and the basic indicator approach for operational risk described in the Basel Committee on Banking Supervision's "International Convergence of Capital Measurement and Capital Standards: A Revised Framework.

Draft interagency notice of proposed rulemaking to revise the existing risk-based capital framework by giving the vast majority of banks, bank holding companies, and savings associations the option of either continuing to use the existing Basel I-based capital rule or adopting a more risk-sensitive rule, known as Basel IA. To revise the market-risk capital rule to enhance its risk sensitivity and introduce requirements for public disclosure of certain qualitative and quantitative information about the market risk of a bank or bank holding company comments due January 23, Press release Notice KB PDF.

Request for comment on ways to reduce burden of rules regarding prompt corrective action comments due April 4, Notice. To revise the existing risk-based capital framework to enhance its risk sensitivity comments due January 18, To establish a simplified regulatory capital framework for noncomplex institutions comments due February 1, Press Release and notice.

Proposed Amendments To automate non-merger-related adjustments to member banks' subscriptions to Federal Reserve Bank capital stock comments due June 14, Press release and notice Submit Comments. Request for comment on an amendment conforming Regulation I to proposed section Establishes procedures, duties, and responsibilities among 1 Federal Reserve Banks, 2 the senders and payors of checks and other items, and 3 the senders and recipients of Fedwire funds transfers.

To simplify the regulation and to make it conform more closely with Regulation CC comments due May 14, Press release and notice. To permit the Reserve Banks to require paying banks that receive presentment of checks from the Reserve Banks to make the proceeds of settlement for those checks available to the Reserve Banks as soon as one half-hour after receipt of the checks comments due February 10, Press release and notice.

To eliminate references to "as-of adjustments" and provide other clarifications Press release and notice. Governs the international banking operations of U. Generally prohibits a management official from serving two nonaffiliated depository institutions, depository institution holding companies, or any combination thereof, in situations where the management interlock would likely have an anticompetitive effect.

Proposed Amendments To increase the major assets prohibition thresholds that restrict the ability of a director or other management official to serve at more than one depository institution or depository holding company Press release and notice. Implements the consumer leasing provisions of the Truth in Lending Act by requiring meaningful disclosure of leasing terms.

To reflect changes in the coverage of the rule under the Dodd-Frank Act comments due March 5, Press release and notice. To detail the method that will be used to adjust the thresholds for exempting certain consumer credit and lease transactions comments due September 6, Press release and notices. To increase the threshold for exempt consumer leases and to adjust annually to reflect any increase in the Consumer Price Index Press release and notice.

Governs relationships and transactions between Federal Reserve Banks and foreign banks, bankers, or governments. Restricts credit that a member bank may extend to its executive officers, directors, and principal shareholders and their related interests. Press release and notice effective June 30, Establishes minimum capital requirements and overall capital adequacy standards for Board-regulated institutions Press release and notice Correction PDF.

Proposed Amendments To establish risk-based capital requirements for depository institution holding companies that are significantly engaged in insurance activities comments due January 22, Press release and notice Extension of comment period.

AI is most prominently used by banks and fintech companies in: i underwriting loans; and ii monitoring for and detecting suspicious activity related to money laundering or otherwise fraudulent activity.

Cybersecurity has also been an area of increasing focus, and the U. The concept of control is of significant importance under the BHC Act because it determines among other things whether a company controls a bank and thus becomes a BHC subject to the limitations and requirements of the BHC Act and to Federal Reserve prudential supervision.

The key feature of the final rule is a series of rebuttable presumptions of control based on tiered levels of ownership of voting securities and other relationships e. As a result, their parent companies are not subject to the limitations of the BHC Act or prudential supervision by the Federal Reserve. For several years, there had been a moratorium on transferring control of existing ILCs or obtaining deposit insurance for new ILCs.

In late , the FDIC adopted a final rule that imposes certain conditions and requirements on newly chartered or acquired ILCs and their parent companies. Improving bank governance and increasing the role and responsibilities of boards of directors and the risk-management function of banking organisations have been key areas of focus for U. Generally, U. Boards of directors of banking organisations must perform these duties, with a focus on preserving the safety and soundness of the bank.

State and federal law also impose various citizenship, residency, independence, and expertise requirements on bank boards of directors. In August , the Federal Reserve Board requested public comment on a proposed new rule aimed at clarifying and narrowing the respective responsibilities of boards of directors and management, with the purpose of allowing boards of directors to focus their time and energy on their core responsibilities.

The proposal remains pending. Boards of directors themselves have also recently become subject to additional prescriptive requirements regarding their structure and composition. Risk management is a critical function within banking organisations, and the function has been subject to increasingly prescriptive regulation because risk-management failures were perceived to be a significant cause of the financial crisis. FBOs also must maintain a U. The tailoring rules eliminated the U.

More recently, Federal Reserve and OCC enforcement actions have emphasised a renewed focus on risk management and expectations around board oversight over risk management. The internal audit function within banking organisations generally is responsible for ensuring that the bank complies with its own policies and procedures and those required by law and regulation.

In the United States, internal audit must be positioned within the institution in a way that ensures impartiality and sufficient independence.

Internal audit must maintain a detailed risk assessment methodology, an audit plan, audit programme, and audit report. The audit committee is responsible for overseeing the internal audit function. The composition of the audit committee has similar requirements to that of the risk committee, depending on the size of the institution and supervising federal regulator.

The OCC heightened standards guidelines additionally require that the audit function of banks subject to the guidelines be led by a Chief Audit Executive who must be one level below the CEO, have unfettered access to the board, and report regularly to the audit committee of the board. In the mids, the U.

After the financial crisis, new legislation introduced significant restrictions on compensation for senior executive officers of firms that received certain forms of government assistance, including limits on bonuses, clawback requirements, and various governance requirements. The U. Implementing a major change in the U. BHC and bank subsidiaries and substantially all other U.

The IHC is subject to, with limited exceptions, the enhanced prudential standards applicable to U. Bankruptcy Code. Firms that do not submit credible plans are subject to the imposition of stricter regulatory requirements. Since the enactment of Dodd-Frank, firms have been through several rounds of resolution plans.

EGRRCPA and subsequent rulemaking raised the thresholds at which the resolution plan requirement applies and generally aligned the precise requirements with the categories used for the application of other enhanced prudential standards. As of February , no proposed amendments have been issued. Under the tailoring rules adopted by the three U. Other banking organisations are generally subject only to the standardised approach. The Basel Framework and the U.

Capital Framework sets forth the minimum risk-based capital ratios for CET1 4. In addition, banks must hold a capital conservation buffer in the form of CET1 of at least 2. For larger BHCs and IHCs, beginning in , the Federal Reserve uses the results of stress tests to set the capital conservation buffer, which may result in a requirement larger than 2.

An institution that fails to maintain capital in excess of the buffer will be restricted in its ability to make capital distributions or pay discretionary executive bonuses. No such buffer has been imposed. The eight largest U.

Although the U. Capital Framework is largely consistent with the Basel Framework, one important difference arises from the absence of the use of external credit ratings for the risk-weighting of assets in the U. More generally, comparability of risk-weighting of assets across institutions and jurisdictions has become a matter of significant regulatory attention.

In addition, in , the U. The rule has a mandatory compliance date of January 1, Capital Framework also includes a market risk capital charge implementing the Basel II. Unlike the Basel II. The Basel Committee adopted a revised capital requirement for market risk framework in January to ensure standardisation and promote consistent implementation globally. Key features include a revised boundary between the trading and banking book, a revised standardised and internal models approach for market risk, and incorporation of the risk of market illiquidity.

In January , the Basel Committee issued revised standards, which will come into effect in January Capital Framework includes two separate leverage requirements. In addition, the largest U.

In October , the U. For example, in order for a U. Capital levels also form the basis for the level of deposit insurance premiums payable to the FDIC by depository institutions, the ability of depository institutions to accept brokered deposits, qualification of banking organisations for streamlined processing of applications to make acquisitions or engage in new businesses, as well as other filings with bank supervisors under various laws and regulations.

Capital levels also form the basis for the prompt corrective action framework applicable to depository institutions which provides for early supervisory intervention in a depository institution as its capital levels decline.

Stress testing is a key supervisory technique used by U. The tailoring rules revised the stress testing and CCAR requirements so as to reduce the compliance burden on firms in lower-risk categories. Under this revised regime, U. BHCs and IHCs are required to run company-run stress tests and supervisory stress tests either annually or biannually, depending on the applicable category of standards under the tailoring rules. There were 34 firms subject to the CCAR process in , with 19 of them subject to the qualitative assessment.

In , the Federal Reserve conducted additional stress tests to assess the resilience of firms under a range of plausible downside scenarios stemming from the economic conditions caused by the COVID pandemic. The results of that additional stress test were released in December and showed that firms would experience substantial losses and lower revenues under two separate hypothetical recessions, but could continue lending to creditworthy businesses and households.

GSIBs and certain U. IHCs of non-U. These requirements are aimed at improving the prospects for the orderly resolution of such an institution. LTD issued on or prior to December 31, was grandfathered from provisions of the rule that prohibit certain contractual provisions.

Liquidity has become a key focus of U. In , the U. The Federal Reserve has stated that it may develop and propose a quantitative LCR-based liquidity requirement applicable to the U. Institutions subject to the U. Generally, the NSFR requires covered firms to hold a specified ratio of high-quality liquid assets sufficient to cover the outflows of a one-year stress scenario.

The final rule will be effective on July 1, Holding companies and any covered non-bank companies regulated by the Federal Reserve will be required to publicly disclose their NSFR levels semi-annually beginning in Regulators have also addressed liquidity in the U.

As a general matter under U.