The Banking Regulation Review: USA

Introduction

Financial regulatory reform in the United States was shaped in 2021 primarily by the transition between presidential administrations, and an increased focus on digital assets and calls for their regulation.

Following the inauguration of President Joseph Biden in January 2021 and the Democratic Party taking control of both houses of Congress, the new administration entered office with an ambitious programme for regulatory reforms.2 As part of this programme, the new administration has focused on environmental, social and governance (ESG) issues, the digital transformation of the financial industry and the emergence of nascent financial technology companies, as well as consumer financial protection in the United States. The administration's reform goals are supported by President Biden's appointees to many key posts at the regulatory agencies, including for example Gary Gensler as the new Chair of the US Securities and Exchange Commission (SEC) who, together with fellow regulators and Congress, has increased the scrutiny of digital assets.3 Although some items on the Biden administration's agenda were slowed by delays in appointing key officials,4 the implementation of the Administration's agenda is expected to unfold more substantively over 2022.

This chapter summarises the principal elements of banking regulation in the United States.

The regulatory regime applicable to banks

i Dual banking system

The United States has a dual banking system, whereby banks, or depository institutions, may be chartered by either federal or state authorities. To accept deposits, an institution must apply for and obtain a bank or thrift charter from either a federal or state regulator. The Office of the Comptroller of the Currency (OCC) is the federal bank regulator with the power to charter national banks5 and, since 2011, thrifts or federal savings associations.6 The OCC is part of the US Treasury Department. Separately, each state also has a regulatory agency that may charter either banks or thrifts. The Federal Reserve is the primary federal supervisor of state-chartered banks that choose to become members of the Federal Reserve System.

The Federal Deposit Insurance Corporation (FDIC) is the primary federal supervisor of state-chartered banks that are not members of the Federal Reserve System.7 The FDIC also administers the federal deposit insurance programme that insures certain bank deposits, including supervising any bank failures, and regulates certain bank activities and operations to protect the federal deposit insurance fund.

All nationally chartered banks are required to hold stock in one of the 12 Federal Reserve Banks, while state-chartered banks may choose to be members of and hold stock in a regional Federal Reserve Bank, upon meeting certain standards. Benefits of Federal Reserve membership include eligibility to vote in the election of their regional Federal Reserve Bank's board of directors, which affords member banks the opportunity to participate in monetary policy formulation.8

ii Bank holding companies

Any legal entity with a controlling ownership interest in a bank or thrift is regulated as a bank holding company (BHC) or savings and loan holding company (SLHC) by the Federal Reserve.9

iii Foreign banks

Foreign bank activities in the United States are supervised by the Federal Reserve, or any other regulator implicated by the type of charter or entity that a foreign bank uses to conduct its banking business in the United States.

iv Relationship with the prudential regulator

Most banks are first regulated by their chartering entities, or their primary regulators. Primary regulators are generally responsible for conducting bank examinations, initiating supervisory and enforcement actions, and approving branch, change of control, merger and other applications. State-chartered institutions are regulated at the federal level by the Federal Reserve in the case of state member banks, or by the FDIC in the case of state non-member banks. The following table summarises these relationships.

Institution typeChartering agencyPrimary federal regulatorSecondary federal regulator
Federal charter
National bankOCCOCCFederal Reserve, FDIC
Federal savings associationOCCOCCFDIC
Federal savings bankOCCOCCFDIC
State charter
State non-member bankState agencyFDICN/A
State member bankState agencyFederal ReserveFDIC
State savings bankState agencyFDICN/A
State savings associationState agencyFDICN/A
Foreign banks
Foreign bank uninsured state branches and agenciesState agencyFederal ReserveN/A
Foreign bank uninsured federal branches and agenciesOCCOCCFederal Reserve
Foreign bank commercial state chartered lending companiesState agencyFederal ReserveN/A
Foreign bank representative officesState agencyFederal ReserveN/A

Banks and BHCs may also be subject to functional regulation by other regulatory agencies, depending on the types of activities in which they engage. For instance, a BHC's securities underwriting and dealing activities are also regulated by the US Securities and Exchange Commission (SEC), the functional regulator of any SEC-registered broker-dealer.

Prudential regulation

i Regulatory reporting requirements and bank examinations

Regulators have two primary tools to supervise BHCs and banks: regulatory reporting requirements and on-site examinations. BHCs and banks are subject to extensive financial, structural and other periodic reporting requirements. Financial reporting requirements for banks include capital, asset and liability data reported quarterly on call reports, and requirements for BHCs include financial statements for the BHC and certain non-bank subsidiaries. BHCs must also provide annual reports to the Federal Reserve that detail their shareholders and organisational structure. Banking institutions that are experiencing financial difficulties or that are not in compliance with regulatory requirements face more frequent and additional reporting obligations.

Bank regulators also conduct on-site examinations of BHCs and banks. Regulators generally conduct three principal types of formal examinations: safety and soundness, or full scope, which determine the bank's fundamental financial health and generally occur every 12 or 18 months;10 compliance examinations covering consumer compliance and fair lending issues; and speciality examinations covering areas such as trust activities and information technology infrastructure.

Congress expanded bank regulators' authority to examine entities beyond BHCs and banks in the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd–Frank Act).11 For instance, the Federal Reserve was granted the authority to examine functionally regulated subsidiaries (i.e., subsidiaries whose activities are regulated by another US regulatory authority, such as the SEC) and all insured depository institutions (IDIs) (including those for which the Federal Reserve is not currently the primary federal banking regulator).12

The Dodd–Frank Act also requires the Federal Reserve to examine the permissible activities of BHCs' non-depository institution subsidiaries that are not functionally regulated or subsidiaries of a depository institution.13 The Federal Reserve must examine these entities subject to the same standards and with the same frequency as would be required if the activities were conducted in the lead IDI. With respect to federal consumer financial law, these expanded examination authorities are shared with the Consumer Financial Protection Bureau (CFPB), as described in more detail in Section IV.iv.

Aside from transactions such as mergers and acquisitions or other matters that require formal approvals,14 bank regulators are also routinely informed or involved on a more informal basis with certain key decisions contemplated by a bank or BHC, including capital-raising activities, dividend policies, and changes in business plans or strategies.

ii Deposit insurance requirements

The Dodd–Frank Act permanently increased the Standard Maximum Deposit Insurance Amount (SMDIA) to US$250,000.15 Uninsured foreign branches, whether state or federal, may not engage in domestic deposit-taking activities requiring insurance protection,16 subject to certain exemptions. For example, under the FDIC's rules a foreign bank may establish or operate a state branch without federal deposit insurance if such branch, in addition to meeting other requirements, accepts initial deposits only in an amount equal to the SMDIA or greater.17 The OCC's rules for federal branches of foreign banks only permit the acceptance of initial deposits of less than the SMDIA's standard maximum deposit insurance amount under certain circumstances.18

In addition, the Dodd–Frank Act changed how the FDIC assesses deposit insurance premiums against IDIs. An IDI's quarterly deposit insurance assessment is determined by multiplying its assessment rate by its assessment base.19 An IDI's assessment base was historically its domestic deposits, with some adjustments.20 The Dodd–Frank Act, however, requires the FDIC to redefine the assessment base as average consolidated total assets minus average tangible equity during the assessment period.21 As a result, the distribution of assessments and the cost of federal deposit insurance has been shifted to larger banks, which fund a greater percentage of their balance sheet through non-deposit liabilities.22 The FDIC uses an assessment system for large IDIs and highly complex IDIs23 that combines supervisory ratings and certain financial measures into two scorecards, one for most large IDIs and another for highly complex IDIs, and modifies and introduces new assessment rate adjustments.24

iii Management of banks

The two traditional areas of regulatory focus on the management of banks have been the responsibilities and duties of BHCs and bank boards, directors and senior management, and the regulation of insider loans.

Bank and BHC boards of directors are different from corporate boards in that they normally have more competing interests to balance, such as shareholder, depositor, parent holding company (in the case of a bank), creditor and regulatory interests. Bank and BHC boards are generally responsible for overseeing management plans and ensuring that adequate controls and systems are in place to identify and manage risk, while management is responsible for the implementation, integrity and maintenance of risk-management systems. Bank examiners normally review bank and BHC board performance and make recommendations for improvement if they find weaknesses.25 In recent years, the Federal Reserve has devoted additional attention to these issues. Specifically, in early 2021 the Federal Reserve finalised guidance for large financial institutions on board effectiveness.26 It also proposed supervisory expectations for management,27 although the management proposal had not yet been finalised as at 31 December 2021.

The Federal Reserve Act of 1913 (FRA) and implementing regulations also govern extensions of credit by a bank to an executive officer, director or principal shareholder of that bank, of a BHC of which the member bank is a subsidiary or of any other subsidiary of that BHC. In general, a bank may not extend credit to any such insider unless the extension of credit is made on substantially all the same terms, and subject to no less stringent credit underwriting procedures, as those for comparable transactions by the bank with persons who are not insiders and not employed by the bank, and the transaction does not involve more than the normal repayment risk or present other unfavourable features. The Dodd–Frank Act expanded the types of transactions subject to insider lending limits to include derivative transactions, repurchase agreements, and securities lending or borrowing transactions. It also imposed limitations on the sale of assets to, or the purchase of assets from, insiders by requiring that such transactions be on market terms and, in the case of significant transactions, have the approval of the majority of disinterested board members.28

iv Enhanced prudential standards

Section 165 of the Dodd–Frank Act, as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), subjects BHCs with total consolidated assets of US$250 billion or more and systemically important non-bank financial companies to enhanced prudential standards (EPS), including increased capital and liquidity requirements, leverage limits, contingent capital, resolution plans, credit exposure reporting, concentration limits, public disclosures and short-term debt limits, as well as enhanced reporting and disclosure requirements and other requirements. The EGRRCPA also amended Section 165 of the Dodd–Frank Act to (1) provide the Federal Reserve with the authority to apply EPS to any BHC with total consolidated assets of US$100 billion or more29 and (2) require the Federal Reserve to tailor its regulations by 'differentiat[ing] among companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities (including the financial activities of their subsidiaries), size, and any other risk-related factors that [it] deems appropriate'.30 In October 2019, the Federal Reserve finalised the tailoring rules (the Tailoring Rules),31 which implement the EGRRCPA and establish risk-based categories for determining prudential standards for large US banking organisations and foreign banking organisations (FBOs), and apply prudential standards to certain large SLHCs using the same categories.32

Under the Tailoring Rules, BHCs are placed into Category I, II, III or IV, with the most stringent category, Category I, reserved for US global systemically important banks (G-SIBs). Because Category I includes only US G-SIBs, FBOs are placed into Category II, III or IV.33 This section provides a general overview of the EPS implemented, or still to be implemented, by the Federal Reserve under Section 165 of the Dodd-Frank Act. Additional detail on the Tailoring Rules is provided in Section III.v and vi.

BHCs covered by the relevant rules finalised by the Federal Reserve under Section 165 of the Dodd–Frank Act, including the Tailoring Rules, must comply with, and hold capital commensurate with, the requirements of any regulations adopted by the Federal Reserve related to capital plans and stress tests, including the Federal Reserve's capital planning rule, described in greater detail below.

The liquidity provisions of the Tailoring Rules require certain BHCs to maintain a sufficient quantity of highly liquid assets to survive a projected 30-day liquidity stress event, conduct regular liquidity stress tests and implement liquidity risk-management requirements, including periodic reviews of business lines for liquidity risks. A BHC's board of directors is ultimately responsible for liquidity risk management, including periodic review, and a risk committee is responsible for approving a contingency funding plan to address potential liquidity stress events.

BHCs with total consolidated assets of US$50 billion or more must also comply with a range of corporate governance requirements, such as establishing a risk committee of the board of directors, and appointing a chief risk officer with defined responsibilities.

The EPS requirements also include the Federal Reserve's supervisory stress test and company-run stress test requirements for covered companies. The stress tests, which are designed to assess firms' capital adequacy, involve nine-quarter planning horizons under both supervisory and company-designed scenarios. The Federal Reserve publishes public summaries of companies' stress test results, with more detailed information remaining confidential. The stress tests are designed to work in tandem with the capital planning rule, which requires large BHCs34 to submit annual capital plans to the Federal Reserve for supervisory review while demonstrating capital adequacy under baseline and severely adverse scenarios.

The EPS requirements also implement a provision of Section 165 of the Dodd-Frank Act that imposes a 15:1 debt-to-equity limit on any BHC that is determined by the Financial Stability Oversight Council (FSOC) to represent a grave threat to US financial stability.

The EPS requirements also include single-counterparty credit limits (SCCL), which the Federal Reserve implemented by issuing a final rule in 2018 and amended with the Tailoring Rules.35 This requirement limits net credit exposure to any single counterparty to 25 per cent of Tier 1 capital for BHCs with US$250 billion or more in total consolidated assets. A more stringent net credit exposure limit of 15 per cent of Tier 1 capital applies to the US G-SIBs with respect to certain large counterparties, including other G-SIBs and non-bank systemically important financial institutions (SIFIs). The final SCCL rule also requires BHCs to measure net credit exposures on an aggregate basis, aggregating exposures to counterparties that are economically interdependent or in the presence of certain control relationships.

v Regulation of FBOs

Application of the US IHC Requirement

An FBO with US$50 billion or more in non-branch assets must create a separately capitalised, top-tier US intermediate holding company (US IHC) to hold substantially all of its ownership interests in its US bank and non-bank subsidiaries.36 For the purposes of identifying subsidiaries, the Tailoring Rules rely on the Bank Holding Company Act of 1956 (the BHC Act) definition of control, including the facts and circumstances-based controlling influence test. With very limited exceptions, an IHC FBO may not retain any ownership interest in a US subsidiary (other than its US IHC) directly or through non-US affiliates. However, the Tailoring Rules do not require an IHC FBO to be the 100 per cent owner of any US subsidiary. In other words, an IHC FBO is not required to buy out other, unaffiliated third-party investors in a US subsidiary. The Federal Reserve has the authority to examine any US IHC and any US IHC subsidiary. Note that US branches and agencies of an IHC FBO's foreign bank are not required to be held beneath the US IHC.

Regardless of whether a US IHC controls a US bank, a US IHC will be subject to US Basel III (subject to limited adjustments),37 capital planning and Dodd–Frank company-run and supervisory stress-testing requirements, qualitative and quantitative liquidity standards, risk-management standards and other EPS, depending on its risk-based categorisation under the Tailoring Rules.

Application of the Tailoring Rules to FBOs and their US IHCs

As discussed in Section III.iv, the Tailoring Rules reserve Category I for US G-SIBs and place FBOs into Categories II, III and IV. Under the Tailoring Rules, the thresholds for Categories II, III and IV are the same as the thresholds that apply to domestic BHCs, except that some standards apply based on the size and risk profile of the FBO's combined US operations (CUSO) while others are determined by the size and risk profile of the FBO's US IHC. This necessitates that an FBO determine both its category and the category of its US IHC, if any.

This section discusses the application of SCCL and certain EPS to FBOs with respect to their CUSO and US IHCs under the Tailoring Rules. Additional EPS applicable to these entities related to capital and liquidity are discussed in Section III.vi.

The EPS requirements applicable to FBOs and US IHCs include SCCL, under a rule originally finalised in June 2018,38 and amended by the Tailoring Rules. The final SCCL rule limits net credit exposure to any single counterparty to 25 per cent of Tier 1 capital for the US operations of Category II and III FBOs and FBOs with assets of US$250 billion or more and for all operations of Category II and III US IHCs.39 A more stringent net credit exposure limit of 15 per cent of Tier 1 capital applies to FBOs with the characteristics of G-SIBs (G-SIB FBOs) with respect to certain large counterparties, including other G-SIBs and non-bank SIFIs. The SCCL final rule also requires covered FBOs and US IHCs – those FBOs with total consolidated assets of at least US$250 billion and FBOs and US IHCs identified as Category II or III – to measure net credit exposures on an aggregate basis, aggregating exposures to counterparties that are economically interdependent or in the presence of certain control relationships. Category II and III US IHCs of FBOs were generally required to comply with the SCCL requirements from 1 July 2020, although such US IHCs with less than US$250 billion in assets were afforded an additional transition period, until 1 January 2021, to come into compliance with certain more stringent requirements that were amended by the Tailoring Rules. The SCCL final rule allows an FBO to comply with the SCCL applicable to its CUSO by certifying to the Federal Reserve that the FBO meets, on a consolidated basis, SCCL standards established by the FBO's home-country supervisor that are consistent with Basel Committee standards and providing the home-country report, with an English-language translation to the Federal Reserve.

EPS of more general applicability to FBOs include risk management requirements. FBOs with US$50 billion or more but less than US$100 billion in total consolidated assets, as well as FBOs with total consolidated assets of US$100 billion or more but less than US$50 billion in combined US assets, are required to maintain a US risk committee and make an annual certification to that effect. An FBO subject to this requirement may maintain its US risk committee either as a committee of its global board of directors, on a stand-alone basis or as part of its enterprise-wide risk committee. The US risk committee must oversee the risk management policies of the CUSO of the FBO and must include at least one member with experience in identifying, assessing and managing risk exposures of large, complex firms. Additionally, FBOs with total consolidated assets of US$100 billion or more and combined US assets of US$50 billion or more are required to comply with more detailed risk-committee and risk-management requirements under the EPS rule, including a requirement to employ a US chief risk officer with specified risk management expertise and responsibilities.

vi Regulatory capital

Federal Reserve policy and regulations traditionally required a BHC to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to their support. This policy became a statutory requirement pursuant to the Dodd–Frank Act. Section 616(d) of the Dodd–Frank Act, which requires all companies that directly or indirectly control an IDI to serve as a source of strength for the institution.40 US banking agencies were required to issue regulations implementing this requirement not later than 21 July 2012, but had not proposed such regulations as at 31 December 2021.

Under the Dodd–Frank Act, as amended by the EGRRCPA and implemented with the Tailoring Rules, BHCs with consolidated assets of US$100 billion or more (large BHCs) and non-bank SIFIs are subject to biennial or annual (depending on their categorisation under the Tailoring Rules) supervisory and company-run stress tests.41 Supervisory stress tests, along with related capital plans required by Federal Reserve rules, are part of the supervisory process for large BHCs.42 Companies subject to stress test requirements must publish summaries of their company-run stress test results, and the Federal Reserve must publish summaries of its supervisory stress test results. The supervisory stress tests are also used to determine large BHCs' stress capital buffers (SCBs), discussed in further detail below. The Federal Reserve must provide notice of each large BHC's SCB by 30 June of the year of the applicable stress testing cycle.43

The Federal Reserve has integrated capital planning and Dodd–Frank Act stress test requirements into its comprehensive capital analysis and review (CCAR), an annual exercise designed to ensure that large BHCs have robust, forward-looking capital planning processes and sufficient capital to continue operations throughout times of economic and financial stress. Capital plans incorporate projected capital distributions over a planning horizon of at least nine quarters and are submitted to the Federal Reserve. As of the 2021 capital planning and stress testing cycle, the Federal Reserve does not issue objections or non-objections to large BHCs' capital plans, either on qualitative or quantitative grounds.44 Large BHCs must submit their capital plans by 5 April of the year of the applicable capital planning cycle.

In light of the coronavirus shock, the Federal Reserve used its authority under the capital planning rule to take several actions intended to ensure that large BHCs remained resilient in the face of significant economic uncertainty. First, the Federal Reserve supplemented the ordinary course CCAR 2020 exercise, the parameters of which were finalised just before the full onset in the United States of the coronavirus pandemic, with additional sensitivity analyses. The hypothetical scenarios used in the sensitivity analysis included a v-shaped recession and recovery; a slower, u-shaped recession and recovery; and a w-shaped, double-dip recession.45 Second, in June 2020, the Federal Reserve announced that it would require each large BHC to update and resubmit its capital plan in December 2020, effectively conducting a second CCAR exercise.46 Third, by requiring capital plan resubmissions, the Federal Reserve triggered a provision of the capital planning rule that prohibits a BHC that is required to resubmit its capital plan from making any capital distributions unless otherwise approved by the Federal Reserve.47 The Federal Reserve then provided prior approval for only a limited set of capital distributions up to June 2021. Most notably, in the third and fourth quarters of 2020, large BHCs were prohibited from making most share repurchases, and could pay dividends only up to a cap.48 In December 2020, the Federal Reserve announced the results of the second round of stress tests and extended into 2021, with modifications, its limitations on large BHCs' capital distributions. As a result, in the first quarter of 2021 large BHCs were allowed to make share repurchases and pay dividends, subject to limitations based on income over the past year.49

US Basel III

US Basel III applies to all national banks, state member and non-member banks, and state and federal savings associations regardless of size. The regulation also applies to all BHCs and covered SLHCs other than certain BHCs and SLHCs with less than US$3 billion in total assets that meet certain requirements.50 However, the bank and thrift subsidiaries of these small BHCs and SLHCs are still subject to US Basel III.

US Basel III implements many aspects of the Basel Committee's Basel III capital standards, including higher minimum risk-based capital ratios, capital buffers, revised eligibility criteria for Common Equity Tier 1, Additional Tier 1 and Tier 2 capital instruments, certain deductions from and adjustments to regulatory capital, and the recognition of minority interests. US Basel III introduces a revised and expanded standardised approach for calculating risk-weighted assets (RWAs), the denominator of the risk-based capital ratios, which replaced the previously applicable Basel I-based rules. In addition to the standardised approach, large and internationally active US banking organisations (redefined by the Tailoring Rules to include only Category I and II banking organisations) must calculate RWAs using the advanced internal ratings-based approach for credit risk and advanced measurement approaches for operational risk (together, advanced approaches). A key difference between the standardised approach and advanced approaches is that the former mandates the use of standardised risk weights and methodologies for calculating RWAs, whereas the latter permit the use of supervisor-approved internal models and methodologies that meet specified qualitative and quantitative requirements, which generally give rise to more risk-sensitive measurements.

US Basel III implements the capital floor requirement of Section 171 of the Dodd–Frank Act (known as the Collins Amendment) by requiring advanced approaches banking organisations to calculate their risk-based capital ratios using both the standardised approach and the advanced approaches. An advanced approaches banking organisation's risk-based capital ratios for regulatory purposes, including for calculating capital buffers, are the lower of each ratio calculated under the standardised approach and advanced approaches.

As of January 2018, advanced approaches banking organisations and Category III banking organisations must also maintain a minimum supplementary leverage ratio of 3 per cent.51 The supplementary leverage ratio is based on the Basel Committee's Basel III leverage ratio. The US banking agencies have established enhanced supplementary leverage ratio standards for the eight BHCs identified by the Financial Stability Board as G-SIBs as well as their IDI subsidiaries.52 Under the enhanced supplementary leverage ratio standards, a US G-SIB's IDI subsidiaries must maintain a supplementary leverage ratio of at least 6 per cent to be considered well-capitalised for regulatory purposes. A US G-SIB, on a global consolidated basis, must maintain a leverage capital buffer that functions in a similar way to US Basel III's risk-based capital buffers – the SCB, the countercyclical buffer and the G-SIB capital surcharge. Specifically, a US G-SIB that does not maintain a supplementary leverage ratio of greater than 5 per cent (i.e., a buffer of more than 2 per cent on top of the 3 per cent minimum) will be subject to increasingly stringent restrictions on its ability to make capital distributions and discretionary bonus payments. The Federal Reserve and OCC have proposed to recalibrate the enhanced supplementary leverage ratio requirement for US G-SIBs and their US IDI subsidiaries,53 but this proposal had not been finalised as at 31 December 2021.

The coronavirus pandemic and actions taken in response to it by the Federal Reserve and other US government actors, resulted in a significant expansion of the balance sheets of many large US banking organisations, including as a result of the acquisition of significant amounts of US Treasury securities. Among other things, this led to a substantial increase in deposits by these large US banking organisations at Federal Reserve Banks. To ease the potential strain caused by this balance sheet expansion and to support market functioning, the Federal Reserve in April 2020 adopted an interim final rule excluding US Treasuries and deposits at Federal Reserve Banks from the denominator of the supplementary leverage ratio (SLR).54 This interim final rule, which applied only to BHCs subject to SLR requirements,55 expired at the end of the first quarter of 2021.56

In addition to the enhanced supplementary leverage ratio requirements, US G-SIBs are also subject to a risk-based capital surcharge buffer under US Basel III, which implements the Basel Committee's G-SIB capital surcharge standard with certain modifications. The G-SIB capital surcharge functions as an extension of the Basel III capital conservation buffer, requiring each G-SIB to hold an additional buffer of Common Equity Tier 1 capital, on top of the capital conservation and countercyclical buffers, to avoid limitations on making capital distributions and discretionary bonus payments. Under the US implementation of the G-SIB capital surcharge, the resulting buffers for the eight US G-SIBs currently range from 1 per cent to 3.5 per cent of RWAs, depending on the size of the G-SIB's systemic footprint.57 The US implementation modifies the measure of each US G-SIB's systemic footprint to include a component linked to the G-SIB's reliance on short-term wholesale funding.58

In July 2019, the US banking agencies released a final rule intended to simplify certain elements of the US Basel III capital rules.59 These simplifications, which apply only to the rules applicable to non-advanced approaches banking organisations, modify the capital treatment of capital deductions and recognition of minority interests and became effective on 1 April 2020. In 2019, the US banking agencies also finalised a rule to implement the standardised approach for measuring counterparty credit risk (known as SA-CCR).60 Pursuant to this rule, advanced approaches banking organisations are required to use SA-CCR to calculate total RWAs under the standardised approach and to determine the exposure amount of derivative contracts when calculating total leverage exposure for purposes of the denominator of the SLR.

In early March 2020, the Federal Reserve finalised a rule changing how stress testing is used to impose capital requirements for large BHCs by incorporating a firm's modelled stress losses directly into the firm's point-in-time capital requirements. The final rule replaces the 2.5 per cent fixed portion of the standardised approach capital conservation buffer with a new SCB (on top of the G-SIB surcharge and any applicable countercyclical capital buffer) based on a firm's peak-to-trough stress losses and four quarters of planned dividends.61 The results of the 2021 supervisory stress tests were used by the Federal Reserve to calculate the SCB applicable to each firm subject to the supervisory stress tests in 2021, with SCBs ranging in size from 2.5 per cent (the floor for the SCB) to 7.8 per cent.62 Unless modified by the Federal Reserve,63 these SCBs will remain in effect until 1 October 2022, at which point firms will become subject to SCBs calculated based on the results of the 2022 supervisory stress tests.

In December 2017, the Basel Committee finalised revisions to the international Basel III standards, marking the finalisation and completion by the Basel Committee of all remaining components of the Basel III framework.64 The primary purpose of this final set of revisions was to reduce excessive variability in RWAs and to restore credibility in the calculation of RWAs by enhancing the robustness and risk sensitivity of the standardised approaches for credit risk and operational risk, constraining the use of internally modelled approaches and complementing the risk-weighted capital ratio with a finalised leverage ratio and a revised capital floor. In January 2019, following its fundamental review of the trading book, the Basel Committee finalised updated minimum capital requirements for market risk. As at 31 December 2021, the US banking agencies had not proposed rules to implement the revisions to the international Basel III standards, including the market risk requirements, in the United States.

vii Resolution planning

Section 165(d) under Title I of the Dodd–Frank Act, as revised by the EGRRCPA, and its implementing regulations require the submission of a resolution plan. The scope of the resolution plan and the frequency of its submission depends on the size and complexity of the financial institution required to submit the plan.65 In general, (1) US G-SIBs must file biennially, alternating between full and targeted plans; (2) US firms with total assets, and FBOs with combined US assets, of at least US$250 billion (or exceeding certain other quantitative proxies for complexity under the Tailoring Rules) must file triennially, alternating between full and targeted plans; and (3) FBOs with total global consolidated assets of at least US$250 billion not subject to the previous requirement must file reduced plans triennially.66 The resolution plan is submitted to and evaluated jointly by the Federal Reserve and the FDIC. If the resolution plan were deficient, or deemed not credible, the Federal Reserve and the FDIC could jointly agree to impose increasingly onerous restrictions on the company until the plan is determined to be credible. The Federal Reserve and FDIC issued guidance for resolution plan submissions for US G-SIBs in 2019 and for the largest FBO filers in 2020.67

The FDIC separately requires all US IDIs with assets of US$50 billion or more to also submit and regularly update a resolution plan.68 The FDIC has published an advance notice of proposed rule-making that, although not required by the EGRRCPA, would raise this asset threshold to US$250 billion and would tailor the content and frequency of IDI resolution plan submissions based on institution size, complexity, funding structure and other factors.69 As at 31 December 2021, the FDIC had not adopted a final rule. In November 2018, chairman McWilliams announced that the FDIC was imposing a moratorium on IDI resolution plan submissions;70 on 19 January 2021, the FDIC lifted this moratorium for IDIs with US$100 billion or more in total assets.71 On 25 June 2021, the FDIC provided further details regarding the resumption of resolution plans under a modified approach for IDIs with US$100 billion or more in total assets.72 The modified approach divides filers into two groups (the first consisting of IDIs whose top-tier parent company is not a US G-SIB or a Category II banking organisation and the second consisting of all other IDIs with US$100 billion or more in total assets). The FDIC also extends the submission frequency to a three-year cycle, allows filers to incorporate information by reference from, among other sources, resolution plans submitted pursuant to Section 165(d) under Title I of the Dodd–Frank Act, streamlines content requirements and places enhanced emphasis on engagement with firms.

viii Orderly liquidation authority

Title II of the Dodd–Frank Act includes an orderly liquidation authority (OLA), modelled on the US bank resolution authority in the Federal Deposit Insurance Act, which would allow the government, under certain circumstances, to resolve a US financial company outside the bankruptcy process. Specifically, if a determination to place a financial company under this resolution regime were made, the FDIC would step in as receiver of the company, with the authority to sell all or any assets and liabilities to a third party, or establish one or more bridge financial companies to hold the part of the business worth preserving until it could be recapitalised, sold or liquidated in an orderly fashion.

The Dodd-Frank Act provides for an orderly liquidation fund to be used to provide liquidity to the covered financial company or bridge financial company. That fund would not be pre-funded, but rather would be funded initially through borrowing from the US Treasury. Any loss in the fund would be paid back over time, either through a clawback from creditors who received additional benefits or through assessments on eligible financial companies.

On 15 July 2011, the FDIC issued a final rule implementing certain provisions of OLA, including:

  1. how the preferential transfer and fraudulent transfer provisions of OLA will be harmonised with the Bankruptcy Code;
  2. the priorities of administrative expenses and unsecured claims;
  3. the obligations of bridge financial companies with respect to assumed claims and the use of any proceeds realised from the sale or other disposition of the bridge;
  4. certain details of the FDIC's administrative claims process;
  5. special rules for secured claims;
  6. proposals for determining whether senior executives or directors of a covered financial company were substantially responsible for its failure and may therefore be ordered to return up to two years of their remuneration; and
  7. the treatment of claimants whose set-off rights are destroyed by the FDIC.73

After public statements by the FDIC chair indicating that the FDIC's preferred method for resolving the largest and most complex banking groups under Title II is the single-point-of-entry (SPOE) recapitalisation model,74 the FDIC released a notice providing information about how the FDIC would carry out an SPOE recapitalisation in resolving a US G-SIB under Title II.75 Under the SPOE model, only the parent BHC of a banking group would be put into a resolution proceeding. All the parent's assets, including its ownership interests in operating subsidiaries, would be transferred to a bridge financial company. The transferred business would be recapitalised by leaving behind the failed company's equity capital and a sufficient amount of its unsecured long-term debt in a receivership. The operating subsidiaries would be recapitalised and kept out of insolvency proceedings by converting loans or other extensions of credit from the parent into new equity in the operating subsidiaries or otherwise downstreaming available parent assets to the subsidiaries. If the bridge financial holding company (FHC) or any of its operating subsidiaries were unable to obtain sufficient liquidity from the market, the Federal Reserve's discount window76 or Section 13(3) of the FRA,77 the FDIC could provide such liquidity with an orderly liquidation fund by borrowing from the US Treasury, subject to certain limits.78

ix Total loss-absorbing capacity

To facilitate an SPOE recapitalisation, the parent BHC of a banking group must have a sufficient amount of eligible long-term debt or other resources capable of absorbing losses to be left behind in a receivership or bankruptcy proceeding. To that end, the application of a minimum requirement of total loss-absorbing capacity (TLAC) for G-SIBs was discussed by the international regulatory community for several years, resulting in the publication by the Financial Stability Board of a statement of principles and a term sheet for an international TLAC standard.79 On 15 December 2016, the Federal Reserve released a final rule implementing the international TLAC standard for the parent BHCs of US G-SIBs and the US IHCs created pursuant to EPS that are controlled by foreign G-SIBs.80 Under the rule, on 1 January 2019, parent BHCs of US G-SIBs and US IHCs that are controlled by foreign G-SIBs became subject to minimum TLAC requirements, separate minimum long-term debt requirements and clean holding company requirements intended to simplify holding company balance sheets. In addition, the rule requires parent BHCs of US G-SIBs and US IHCs that are controlled by foreign G-SIBs to maintain TLAC buffers above the minimum TLAC requirements to avoid being subject to increasingly stringent restrictions on the ability to make capital distributions and discretionary bonus payments. The BHCs and US IHCs subject to the rule are generally able to satisfy TLAC requirements with a combination of Tier 1 capital instruments and unsecured long-term debt that, unlike short-term debt, would not run off as a G-SIB experiences financial distress. On 23 March 2020, in response to the coronavirus pandemic, the Federal Reserve adopted a technical change to the TLAC buffer requirements, making the imposition of restrictions on firms' ability to make capital distributions and discretionary bonus payments more gradual, to facilitate firms' use of their TLAC buffers to promote lending. Separately, the rule requires parent BHCs of US G-SIBs and US IHCs that are controlled by foreign G-SIBs to hold certain minimum amounts of unsecured long-term debt. The clean holding company requirements prohibit parent BHCs of US G-SIBs and US IHCs that are controlled by foreign G-SIBs from entering into certain transactions that might impede an orderly resolution, such as issuing short-term debt to, or entering into certain types of financial contracts with, third parties, and limit the amount of operational liabilities and liabilities such as structured notes that rank pari passu or junior to TLAC in part to limit the risk of successful legal challenge to losses being imposed on holders of TLAC instruments.

x Qualified financial contracts

One potential impediment to an SPOE recapitalisation is the inclusion of cross-default provisions in qualified financial contracts (QFCs) that would not be automatically stayed in a resolution of the parent BHC under ordinary insolvency proceedings. This would mean that a counterparty could terminate a QFC against a subsidiary based on the entry of its parent into resolution proceedings, even if the subsidiary otherwise remains operational and able to perform on its obligations, which could impair the continued viability of the subsidiary. This would defeat the purpose of an SPOE resolution, which is meant to enable subsidiaries of the parent BHC to continue operating without entering into their own bankruptcy or resolution proceedings.

The US banking agencies have issued final rules that require US G-SIBs and the US operations of non-US G-SIBs to remediate certain QFCs to eliminate the ability of a counterparty to exercise any cross-default right against a G-SIB entity based on the top-tier parent's or any other affiliate's entry into insolvency, resolution, or similar proceedings, subject to certain creditor protections, and to eliminate the right of counterparties to object to the transfer of any related credit enhancements provided by an affiliate following the entry into any such proceedings. In addition, US G-SIBs and the US operations of non-US G-SIBs must amend certain QFCs to expressly recognise the FDIC's authority under the Federal Deposit Insurance Act and Title II of the Dodd–Frank Act (the OLA provisions described in Section III.viii) to impose a temporary stay on the ability of counterparties to exercise certain default rights, and to transfer the contracts of the failed institution to a third party or bridge institution. The requirements apply to new and existing QFCs.81

These rules complement the international protocol developed by the International Swaps and Derivatives Association (ISDA) at the request of various financial regulators around the world, including the Federal Reserve and the FDIC (the ISDA Protocol). The ISDA Protocol provides for the contractual recognition of statutory stays under certain special resolution regimes and contractual limitations on early termination rights based on cross-defaults under ISDA master agreements and certain other types of financial contracts. The rules would enable relevant G-SIBs to comply with the requirements through adherence to the ISDA Protocol and its annexes or through a new US Protocol that is substantively similar to the ISDA Protocol, which was published by ISDA on 31 July 2018.82

xi Enhanced cyber risk management standards

As a result of recent high-profile cyberattacks on banks and other financial institutions, state and federal regulators83 have proposed cybersecurity regulations to protect financial institutions and consumers to supplement the already expansive web of regulator-issued cybersecurity rules and guidance to which BHCs and banks are subject.84 In late 2021, the US federal banking agencies also issued a final rule that would apply to national banks, savings associations, state-chartered banks and any holding company of these institutions, as well as foreign branches of US organisations and the US operations of foreign banks. The rule will, among other things, require such banking organisations to notify their primary federal regulators within 36 hours of identifying a 'computer-security incident' that rises to the level of a 'notification incident'.85 In addition, the New York Department of Financial Services (NYDFS) issued cybersecurity regulations that apply to banks (including New York branches and agencies of foreign banks) and certain other financial institutions chartered or licensed in New York State.86 The rules require covered entities to, among other things, establish and maintain a cybersecurity programme with a written cybersecurity policy, appoint a chief information security officer, conduct regular penetration testing and vulnerability assessments, create a written incident response plan, encrypt non-public information in transit and at rest, and certify compliance with the rules annually.87

xii Fintech charters

On 31 July 2018, the OCC issued a policy statement announcing that it would consider applications from fintech companies to become special purpose national banks.88 In contrast to the regulatory sandbox initiatives by some non-US regulators, the OCC's special-purpose charter, like all national bank charters, comes with a host of regulatory obligations and activity limitations. The special purpose national bank charter is available to qualifying companies engaged in a limited range of banking activities, including paying cheques or lending money, but that do not take deposits. Concurrent with the announcement, the OCC issued a supplement to its licensing manual to provide guidance for evaluating special purpose national bank charters for fintech companies.89 Following the announcement, the NYDFS and the Conference of State Bank Supervisors (CSBS) separately filed suit against the OCC to stop it from granting applications for the special purpose national bank charter, arguing that the agency lacks the legal authority to charter non-depository institutions. The District Court for the Southern District of New York ruled in favour of the NYDFS, finding that the OCC exceeded its statutory authority in granting the charter; however, the district court was reversed on appeal to the Second Circuit Court of Appeals, which ordered that the case be dismissed on procedural grounds, for lack of ripeness and standing. The Second Circuit Court of Appeal's decision did not address the legal issue of whether the OCC has legal authority to charter non-depository institutions, leaving the ultimate issue unresolved. The CSBS lawsuit faced similar procedural obstacles, and the CSBS filed a motion to stay the suit in June 2021, after acting Comptroller Michael Hsu indicated that the OCC would review its chartering framework. As at 31 December 2021, the OCC had not received any applications for the special purpose national bank charter. Nonetheless, fintech companies continue entering the financial market by applying for national bank charters, either in the form of regular national bank charters despite non-traditional business plans or in the form of other national bank charters, such as national trust bank charters.

xiii Virtual currencies

As digital assets continue to grow in both popularity and market size, the US Congress and a number of US federal and state agencies, including the SEC, the US Commodity Futures Trading Commission (CFTC) and the CFPB, have examined the operations of digital asset networks, with particular focus on questions of safety and soundness arising from banks engaging in cryptocurrency activities, the classification of digital assets under federal securities laws, regulatory challenges connected to the growth of decentralised finance (DeFi),90 and the use and regulation of stablecoins.91 Many of these state and federal agencies have issued consumer advisories regarding the risks posed to investors in digital assets. In addition, federal and state agencies have issued rules or guidance about the treatment of digital asset transactions or requirements for businesses engaged in digital asset activity.92 As financial institutions have expanded into the digital assets sector, banking regulators continue to evaluate potential prudential concerns; the OCC, for example, issued an interpretive letter confirming that national banks may engage in certain cryptocurrency, distributed ledger, and stablecoin activities, provided the bank can demonstrate 'that it has controls in place to conduct the activity in a safe and sound manner'.93 Regulators' concerns are animated by certain gaps in prudential oversight of the digital assets sector. In 2021, for example, the President's Working Group on Financial Markets, together with the FDIC and OCC, issued an extensive report on the risks associated with stablecoins, which recommended that Congress establish a comprehensive legislative framework governing the issuance and use of stablecoins and that Congress limit the entities permitted to issue stablecoins to IDIs.94

In the absence of new legislation tailored to digital assets, regulators have attempted to fit these new technologies into existing regulatory schemes. The CFTC and SEC have concluded, for example, that DeFi markets for derivatives, and certain individuals issuing and trading assets in the DeFi marketplace, are subject to the registration and other requirements of the Commodities Exchange Act and the Securities Act of 1933, respectively.95 Nevertheless, federal regulators and some lawmakers have acknowledged the opportunities offered by digital assets. The Federal Reserve, for example, is exploring the possibility of issuing central bank money on a blockchain or other digital ledger, echoing discussions among other central banks around the world.96

xiv ESG initiatives

ESG issues, particularly those regarding climate-related financial risk, have been receiving increasing attention from US banking regulators and the Biden Administration more broadly. Pursuant to an Executive Order issued in October 2021, the Biden Administration published a report outlining its 'whole-of-government' approach to addressing climate-related financial risk.97 Shortly after, also in October 2021, the FSOC published a report stating that '[c]limate change is an emerging threat to the financial stability of the United States' and proposing 35 recommendations for FSOC's member agencies.98 The report serves as a framework for next steps and a call to action, and includes references to numerous committees and working groups across the FSOC member agencies working on climate-related financial risk.99

US banking regulators have since reiterated their position that they have a role to playing protecting financial institutions from risks, including climate risks, but that they should not engage in dictating banks' lending decisions such as by mandating lending decisions based on the ESG profile of borrowers.100 Instead of dictating lending decisions, US banking regulators have focused on risk management supervisory guidance. In December 2021, the OCC released draft guidance that would establish principles for climate-related financial risk management for large banks.101 The proposed principles would provide 'a high-level framework for the safe and sound management of exposures to climate-related financial risks, consistent with the existing risk management framework [in] OCC rules and guidance'.102 Acting Comptroller Hsu has stated that the principles will be finalised in 2022, followed by the OCC issuing more detailed interagency guidance with the Federal Reserve and FDIC.103 The principles and statements from US banking regulators also indicate that climate scenario analysis – exercises to explore the potential impact of climate-related risks on banks, distinct from capital stress testing – will play an increasingly important role over the medium term.

Conduct of business

The activities of banks, BHCs and FHCs are subject to a number of overlapping legal requirements. While chartered banks and their subsidiaries are restricted to engaging in the business of banking, BHCs and their subsidiaries are permitted to engage in a broader range of financial activities 'so closely related to banking as to be a proper incident thereto'. BHCs that elect to become FHCs are permitted to engage in an even broader range of activities that are financial in nature or incidental to such financial activity or complementary to a financial activity. Some of the most important legal requirements defining the relationship between banks, BHCs and FHCs are summarised below.

i Permissible activities

Banks

The types of activities that are permissible for banks in the United States depend on banks' charter type. The baseline is the activities permissible for nationally chartered banks, which are set forth in the National Banking Act and pursuant to which national banks may engage in the business of banking and any activities that are incidental to banking.104 State law, which generally governs the permissibility of activities in which state-chartered banks may engage, varies from state to state, but tends to be consistent with or slightly broader in scope in terms of permissible activities for banks chartered in the relevant state.

Pursuant to the National Banking Act, a national bank's permitted activities expressly include securities brokerage105 and investments in certain debt securities.106 In addition to the activities expressly permitted under the National Banking Act, the OCC has the power to authorise activities beyond those that are specifically enumerated.107 The OCC has exercised this authority by issuing numerous interpretations concluding that specific activities are permissible for national banks, and has summarised many of these interpretations in a publication entitled 'Activities Permissible for National Banks and Federal Savings Associations, Cumulative'.108

Bank holding companies

The BHC Act generally prohibits a BHC from owning or controlling any company other than a US bank, or from engaging in, or directly or indirectly owning or controlling any company engaged in, any activities that are not 'so closely related to banking as to be a proper incident thereto'.109 The BHC Act's general prohibition is subject to a series of exemptions, which are principally contained in Sections 4(c) and 4(k) of the BHC Act.

The activities permitted to BHCs pursuant to the exemptions in Section 4(c) of the BHC Act are divided into several categories, the most important of which was enacted in 1999 through the Gramm–Leach–Bliley Act (the GLB Act), when Congress amended the BHC Act to codify a list of non-banking activities that the Federal Reserve approved by regulation prior to 12 November 1999 as being 'so closely related to banking as to be a proper incident thereto'.110 BHCs and their subsidiaries may thus engage in activities contained in the Federal Reserve's Regulation Y (informally known as the laundry list),111 subject to any applicable notice or other procedures. This list is now frozen in the sense that, pursuant to the GLB Act, no new non-banking activities may be determined to be so closely related to banking as to be a proper incident thereto and thus permissible for BHCs. There are some additional activities that were approved by specific orders issued by the Federal Reserve,112 and staff of the Federal Reserve have issued interpretations that particular activities fall within one or more existing laundry list activities.113 Activities that are considered so closely related to banking as to be a proper incident thereto include:114

  1. extending credit and servicing loans, and activities related to extending credit;
  2. leasing personal or real property;
  3. operating non-bank depository institutions and performing trust company functions;
  4. financial and investment advisory activities, and management consulting and counselling activities;
  5. agency transactional services for customer investments, and investment transactions as principal;
  6. insurance agency; and
  7. data processing.

Financial holding companies

The BHC Act was further amended in 1999 by the GLB Act to permit BHCs to exercise certain expanded powers if they qualify for and elect to be treated as FHCs.115 In contrast to ordinary BHCs, FHCs are not limited to owning and controlling banks and engaging in, or owning or controlling companies engaged in, activities that are closely related to banking. FHCs may also engage in, or own or control companies engaged in, any activity that is financial in nature, incidental to a financial activity or complementary to a financial activity.116 This category of financial and financial-related activities includes everything deemed to be closely related to banking and much more.117 In particular, FHCs may make controlling and non-controlling investments in companies engaged exclusively in financial activities or activities that are incidental or complementary to financial activities, including securities underwriting and dealing beyond that permitted for banks, insurance underwriting, merchant banking, insurance company portfolio investments and certain commodities trading.118 Under the merchant banking authority, FHCs may make controlling and non-controlling investments in non-financial and mixed financial or non-financial companies, including companies engaged in owning and managing real estate, subject to certain conditions.119

The GLB Act also permits FHCs to engage within or outside the United States in activities determined to be usual in connection with the transaction of banking abroad.120 FHCs may engage in any activity permissible for BHCs outside the United States under the Federal Reserve's Regulation K,121 including management consulting services, travel agency services, and organising, sponsoring and managing mutual funds, subject to certain limitations.122

ii Changes in permissible activities

Volcker Rule

Section 13 of the BHC Act, popularly known as the Volcker Rule,123 prohibits any banking entity124 from engaging in proprietary trading, or sponsoring, investing in or having a certain relationship with a covered fund, the definition of which is intended to cover hedge funds and private equity funds, subject to certain exceptions for permitted activities.125 The five US federal financial regulatory agencies with rule-making authority under the Volcker Rule (the Volcker Agencies) first implemented the Volcker Rule through final regulations issued in 2013 and subsequently amended these regulations, including in 2019 and 2020 (the Implementing Regulations).126 The prohibitions and other restrictions imposed by the Volcker Rule and the Implementing Regulations affect not only the worldwide activities of US banking organisations but also the US activities of FBOs that engage in the prohibited or restricted activities as well as certain of their non-US activities.

Prohibition on proprietary trading

Under the Implementing Regulations, proprietary trading is defined broadly to include, with limited exceptions, the purchase or sale as principal of any securities, derivatives, futures contracts or options on futures contracts, for the trading account of the banking entity.127 The Volcker Rule trading account does not refer to an account in the normal business or accounting sense, but rather to a set of transactions that are subject to the Volcker Rule's restrictions on proprietary trading. The definition of trading account includes certain purchases or sales of financial instruments by banking entities that are subject to the US market risk capital rule (market risk capital rule test). Under the 2019 amendments to the Implementing Regulations, a banking entity that is not subject to the US market risk capital rule may either elect to assess its trading account as if it were subject to the US market risk capital rule or assess its trading account under the short-term intent test, under which a purchase or sale of a financial instrument is for the trading account if it is principally for the purpose of short-term resale, benefiting from short-term price movements, realising short-term arbitrage profits or hedging one of those positions.128 The short-term intent test does not apply to banking entities subject to the US market risk capital rule test under the 2019 amendments to the Implementing Regulations, however.129 The Implementing Regulations also include within the definition of trading account purchases or sales of financial instruments by banking entities that are registered or licensed (or required to be registered or licensed) to conduct certain dealing activities, provided that the purchases or sales occur in connection with activities that require such registration or licensing (dealer test).130

Certain definitions, exclusions and exemptions limit the scope of the proprietary trading prohibition. First, the prohibition applies only to financial instruments, including securities, derivatives, futures and options on futures,131 and a number of instruments are explicitly excluded from the definition of financial instrument.132 Second, certain activities in financial instruments are excluded from the definition of proprietary trading, including, subject to certain conditions, purchases or sales of financial instruments.133 Lastly, there are also conditional permitted activity exemptions, which include:134

  1. trading in US government obligations and, in the case of non-US banking entities, trading in certain foreign government obligations;
  2. trading in connection with underwriting or market-making-related activities;
  3. risk-mitigating hedging activities;
  4. trading on behalf of customers;
  5. certain trading activities outside the United States by non-US banking entities;
  6. trading by a regulated insurance company or its affiliate solely for the general account of the regulated insurance company in compliance with applicable insurance company investment laws; and
  7. such other activity as the agencies determine would promote and protect the safety and soundness of the banking entity and the financial stability of the United States.

Prohibition on certain relationships with hedge funds and private equity funds

The Volcker Rule and the Implementing Regulations prohibit a banking entity from, as principal, acquiring or retaining any ownership interest in or sponsoring a covered fund, subject to certain exclusions and permitted activities.135 Covered fund is defined broadly in the Implementing Regulations as an issuer that would be an investment company, as defined in the Investment Company Act of 1940 (the 1940 Act),136 but for Section 3(c)(1) or 3(c)(7) of the 1940 Act;137 certain funds organised or established outside the United States in which a US banking entity invests or which a US banking entity sponsors;138 and certain commodity pools.139 The Implementing Regulations, however, expressly exclude certain categories of entities from the definition of covered fund, provided they meet certain conditions.140 The 2020 amendments to the Implementing Regulations modified existing categories of entities excluded from the definition of covered fund and added new categories of such entities.141 An ownership interest is defined in the Implementing Regulations as any equity, partnership or other similar interest.142 Another similar interest is any interest, other than certain restricted profit interests,143 that has or exhibits certain characteristics, such as the right to participate in the selection or removal of a covered fund's general partner, investment manager or similar party (excluding certain circumstances),144 certain economic rights commonly present in equity145 or synthetic rights to these rights.146 Subject to certain conditions, the prohibition on acquiring or retaining an ownership interest in a covered fund does not apply to an interest acquired by a banking entity not acting as principal.147

A banking entity is a sponsor of a covered fund if, generally, it serves as a covered fund's general partner, managing member, trustee with investment discretion over the covered fund148 or commodity pool operator;149 selects or controls a majority of a covered fund's directors, trustees or management; or shares the same name or a variation thereof with a covered fund, except as otherwise permitted.150 Subject to the same backstop provisions limiting permitted activities as described in the discussion of proprietary trading above, the Volcker Rule and the Implementing Regulations provide conditional permitted activity exemptions from the prohibition on acquiring or retaining ownership interests in or sponsoring a covered fund.151

Limitations on certain transactions with sponsored, advised, managed or organised and offered covered funds

Subject to certain exemptions, the Volcker Rule and the Implementing Regulations prohibit any banking entity that serves as the investment manager or adviser, commodity trading adviser or sponsor of a covered fund, or that organises and offers a covered fund pursuant to the permitted activity exemptions for asset management and similar customer services or for issuers of asset-backed securities (ABS) (or that holds an interest under the exemption for ABS issuers), and any affiliate of that banking entity, from entering into a covered transaction as defined in Section 23A of the FRA with any such fund, or any covered fund controlled by that fund, as if the banking entity were a member bank and the fund were its affiliate. In addition, any transactions between any such banking entity and any such fund are subject to Section 23B of the FRA as if the banking entity were a member bank and the fund were its affiliate.152

This prohibition is commonly referred to as Super 23A to distinguish it from the regular provisions of Section 23A of the FRA. Regular Section 23A applies only to covered transactions between an IDI and its affiliates, whereas Super 23A applies to covered transactions between any banking entity (including a BHC, an FBO and any of their subsidiaries or affiliates) and any sponsored or advised covered fund.153

Subject to certain conditions, the Volcker Rule and the Implementing Regulations grant an exemption from the Super 23A prohibition for the purposes of permitting a banking entity to enter into any prime brokerage transaction with any covered fund in which a covered fund managed, sponsored or advised by the banking entity has taken an ownership interest.154 In addition, the 2020 amendments to the Implementing Regulations included exemptions for transactions that would be exempt under Section 23A of the FRA and Regulation W, riskless principal transactions and extensions of credit to, or purchase of assets from, a covered fund that meet certain requirements.155

Application to FBOs and extraterritorial application

The Volcker Rule and the Implementing Regulations generally apply to FBOs in the same manner as banking entities organised under US law. Nevertheless, the statutory text of the Volcker Rule specifically permits FBOs to engage in proprietary trading pursuant to Section 4(c)(9)156 or (13)157 of the BHC Act, provided that the trading occurs solely outside the United States (known as TOTUS).158 Under the 2019 amendments to the Implementing Regulations, the TOTUS exemption was streamlined by removing certain conditions that the Volcker Agencies believed to have proven burdensome and inefficient. Likewise, the statutory text specifically permits sponsorship of and investments in covered funds conducted by a banking entity pursuant to the Section 4(c)(9) or (13) exemptions solely outside the United States (known as SOTUS) provided that 'no ownership interest in such hedge fund or private equity fund is offered for sale or sold' to a US resident.159 In both cases, the banking entity must also not be directly or indirectly controlled by a banking entity organised under US federal or state law.160 The Implementing Regulations state that the SOTUS exemption applies to interests and activities related to both US- and non-US-based funds and, critically, no ownership interest in the covered fund may be sold to a US person in an offering that targets US persons in which the banking entity participates.161 In addition to the TOTUS and SOTUS exemptions, the 2020 amendments to the Implementing Regulations, consistent with existing regulatory guidance, include new exemptions for the activities and investments of qualifying foreign excluded funds under which a non-US fund that is not a covered fund but is a banking entity for the purposes of the Volcker Rule is not subject to the Volcker Rule's restrictions on proprietary trading and sponsoring or investing in covered funds if it meets certain requirements.162

Derivatives

Title VII of the Dodd–Frank Act created a new, comprehensive regulatory system for the previously mostly unregulated over-the-counter derivatives market. While a full treatment of this topic is beyond the scope of this chapter, the most significant aspects of Title VII for BHCs and banks are provisions that:

  1. require standardised swaps163 and security-based swaps (SBS)164 (collectively referred to here as swaps) to be cleared through regulated central clearing houses and executed on regulated trade execution platforms;
  2. provide for the registration and comprehensive regulation (including capital, margin, business conduct, documentation, risk management, corporate governance and record-keeping requirements) of swap dealers, SBS dealers, major swap participants and major SBS participants (collectively referred to as swaps entities) by the CFTC and the SEC;
  3. require data concerning all swaps to be reported to trade repositories or regulators and require certain of that data, including price and volume, to be publicly disseminated in an anonymous manner as soon as technologically practicable after a swap transaction is executed; and
  4. require IDIs and US branches and agencies of non-US banks to push certain limited swap dealing activities out of their banking institutions and into separately capitalised affiliates, subject to important exceptions (referred to as the Swaps Pushout Rule).

The Dodd–Frank Act contains very little about the extraterritorial reach of its swap provisions.165 In July 2013, the CFTC issued final guidance regarding the cross-border application of its Title VII rules and, in May 2016, it issued a rule-making regarding the cross-border application of its margin requirements for uncleared swaps.166 In September 2020, the CFTC issued a rule-making regarding the cross-border application of certain Title VII rules that supersedes its 2013 guidance regarding the cross-border application of some, but not all, of its Title VII rules.167 Very generally, the CFTC's cross-border application of the Title VII swap rules is based on the status of counterparties to the swap transaction, including whether either counterparty is a US person, or is guaranteed by a US person, and has the effect of minimising the application of the CFTC's Title VII regulations to swaps entered into between a non-US person counterparty (such as a non-US swap dealer) and another non-US person counterparty that does not present potential significant risks to the US financial system. The SEC has finalised its rules on the cross-border application of its Title VII rules.168 Very generally, the SEC applies its Title VII rules based on the status of counterparties to SBS transactions, and on whether SBS transactions are arranged, negotiated or executed by personnel located in the United States on behalf of personnel located outside the United States.

Clearing and exchange trading

Title VII of the Dodd–Frank Act requires swaps that the CFTC or SEC determines are required to be cleared to be submitted for central clearing to a regulated clearing house or one that is explicitly exempt from registration.169 This requirement is meant to reduce systemic risk posed by swaps. The mandatory clearing requirement applies to all persons engaging in such swaps that meet the territorial nexus described in the Commissions' cross-border guidance and rule-makings, except for certain end users that use these swaps to hedge or mitigate commercial risk.170 Procedures relating to these requirements, and further exceptions to them, have been adopted through rule-making by the CFTC.171 Title VII sets forth comprehensive requirements with which clearing houses must comply to obtain and maintain regulation. As at 31 December 2021, swap clearing is mandatory under these rules for certain liquid and standardised interest rate swaps and index credit default swaps subject to the CFTC's jurisdiction.172 As at that date, the SEC had not yet designated any SBS as subject to mandatory clearing.

Title VII also requires the execution of those swaps that are required to be cleared to occur on regulated trade execution platforms. It introduces a regulated trade execution platform, known as a swap execution facility, which provides for various modes of execution of swaps between multiple buyers and multiple sellers.173 There is an exception to this execution requirement where no such platforms make these swaps available to trade, which is a technical determination relating to the liquidity and other features of the swaps in question.174 As at 31 December 2021, certain interest rate swaps and credit default swaps subject to the CFTC's jurisdiction were subject to the mandatory execution requirements. These interest rate swaps and credit default swaps constitute a subset of those subject to mandatory clearing. In addition, the statute sets forth comprehensive registration, operational and self-regulatory requirements with which trade execution platforms must comply. Because the SEC had not yet designated any SBS as subject to mandatory clearing as at 31 December 2021, no SBS had been subject to the execution requirement at that time.

Registration and regulation of swap dealers and major swap participants

Title VII defines new classes of swap market participants: swap dealers and major swap participants with respect to CFTC-regulated swaps, and SBS dealers and major SBS participants with respect to SEC-regulated SBS. The concepts of swap dealer and SBS dealer are meant to capture market participants that serve as dealers in their relevant markets.

The statute defines swap dealer and SBS dealer in terms of whether an entity engages in certain types of activities:

  1. holding oneself out as a dealer in swaps;
  2. making a market in swaps;
  3. regularly entering into swaps with counterparties as an ordinary course of business for one's own account; or
  4. engaging in activity causing oneself to be commonly known in the trade as a dealer or market maker in swaps.175

In addition, the swap dealer definition (but not the definition of SBS dealer) provides that an IDI is not to be considered a swap dealer to the extent that it offers to enter into a swap with a customer in connection with originating a loan with that customer.176 The statute also provides for a de minimis exception that permits entities to engage in a minimal amount of swap dealing activity without being deemed a swap or SBS dealer. These definitions and exceptions were further defined through a joint CFTC and SEC rule-making on the topic.177 As at 31 December 2021, 108 entities were provisionally registered with the CFTC as swap dealers, and 43 entities were conditionally registered with the SEC as SBS dealers.

The concept of a major swap participant in the swaps markets is meant to capture entities that are not dealers but have a sufficiently large position in swaps as to threaten systemic stability. The statutory definitions of major swap participant and major SBS participant focus on the market impacts and risks associated with an entity's swap positions. These definitions were further defined through a joint CFTC and SEC rule-making, which introduced a complex quantitative test for determining whether an entity must register as a major swap participant or as a major SBS participant. As at 31 December 2021, no entities were registered as major swap participants or as major SBS participants.

Entities that act as swap dealers or SBS dealers must register as such with the CFTC or the SEC. In addition, Title VII requires comprehensive regulation of these registered swaps entities. Specifically, swaps entities must comply with minimum capital and minimum initial and variation margin requirements with respect to non-cleared swaps.178 The five prudential regulators and the CFTC have finalised uncleared swap margin requirements179 that largely mirror the international standards outlined in September 2013 (and as modified in March 2015) by the Basel Committee and the International Organization of Securities Commissions. The variation margin compliance deadline was either 1 September 2016 or 1 March 2017 and the initial margin compliance deadline is subject to a phase-in period that began on 1 September 2016 and will continue until 1 September 2022, with the applicable compliance date depending upon the size of the swaps entity's (and its affiliates') combined swap positions with the counterparty. The SEC uncleared SBS margin rules are not subject to a phase-in period and are currently effective for all SBS dealers.180

Additionally, swap entities must establish comprehensive risk-management programmes that are adequate for managing their businesses, and must designate a chief compliance officer to carry out certain enumerated duties and prepare annual compliance reports. Registered swaps entities must also comply with business conduct requirements that address, inter alia, interactions with counterparties, disclosure, supervision, reporting, record-keeping, documentation, confirmation, valuation, conflicts of interest, and avoidance of fraud and other abusive practices. Heightened business conduct requirements apply to dealings with special entities, including US federal or state agencies, municipalities, pension plans and endowments.

Reporting

Title VII requires all swaps that meet the territorial nexus described in the Commissions' cross-border guidance and rule-makings to be reported to a registered data repository. Under the CFTC's reporting rules, the reporting counterparty to a swap must report transaction and other specified information about a swap to a swap data repository. This information includes creation data (all primary economic terms of a swap and confirmation data for the swap) and continuation data (all the data elements that must be reported during a swap's existence to ensure that all data in the swap data repository remain current and accurate, including all subsequent changes to the swap's primary economic terms).181 Title VII also requires public dissemination of certain data relating to a swap transaction, including price and volume, as soon as technologically practicable after the transaction has been executed. In addition, Title VII sets forth comprehensive requirements with which data repositories must comply. The SEC requires similar reporting of SBS transaction information to SBS data repositories.182

The Swaps Pushout Rule

The Swaps Pushout Rule, as amended in December 2014,183 requires IDIs and US branches and agencies of non-US banks that are swap dealers or SBS dealers (collectively, covered depository institutions (CDIs)) to push out certain swaps based on an ABS or a group or index primarily composed of ABS (structured finance swaps) to their affiliates.184 An exception to this requirement allows CDIs to enter into structured finance swaps as principal for hedging and risk management purposes or if the ABS underlying such swaps is of a type authorised jointly by the prudential regulators in future uncompleted regulation, although until the prudential regulators jointly adopt rules permitting ABS swaps, the scope of the Swaps Pushout Rule remains unclear.185 In addition, the amended rule confirmed that uninsured branches of foreign banks are entitled to the same exceptions as IDIs and are similarly required to push out only certain structured finance swaps.

iii Transactions with affiliates

Sections 23A and 23B of the FRA and the Federal Reserve's Regulation W impose quantitative and qualitative limits on a variety of transactions between a bank and an affiliate, including loans and other extensions of credit (collectively referred to as covered transactions). Section 23A of the FRA limits a bank's covered transactions186 with any single affiliate to no more than 10 per cent of the bank's capital stock and surplus, and limits its covered transactions with all affiliates combined to no more than 20 per cent of the bank's capital stock and surplus.187 In addition, certain covered transactions must be secured at all times188 by a statutorily defined amount of collateral.189 Section 23B of the FRA requires that covered transactions190 between a bank and its affiliates be on market terms and at arm's length. The Federal Reserve implements Sections 23A and 23B of the FRA for all depository institutions and, jointly with the FDIC, has the power to grant exemptions from these provisions in addition to the exemptions contained in the statute itself.191

The Dodd–Frank Act further constrains the ability of banks to engage in derivatives and securities financing transactions with affiliates, and imposes more stringent collateral requirements on transactions with affiliates, all of which may require changes to banking organisations' risk-management systems and practices related to inter-company derivatives.192 Sections 23A and 23B of the FRA were modified by the Dodd–Frank Act to cover derivatives and securities lending and financing transactions with affiliates to the extent that they create bank credit exposure193 to the affiliate and, as a result, such transactions have been subject to quantitative limits and collateral requirements under these sections since 21 July 2012. The Dodd–Frank Act further requires that collateral must be maintained at all times on a mark-to-market basis for credit transactions, rather than only at the time the transactions are entered into, and debt obligations issued by an affiliate cannot be used to satisfy Section 23A collateral requirements. The Federal Reserve has indicated that it will issue regulations to implement the Dodd–Frank Act's revisions to Sections 23A and 23B. However, as at 31 December 2021, the Federal Reserve had not proposed any such regulations.

iv Consumer protection regulation

Overview

Traditional bank activities such as lending and deposit taking are subject to a broad range of consumer protection statutes and regulations at the federal and state levels. Consumer protection statutes can generally be grouped into three categories: disclosure laws, civil rights laws and privacy laws. Disclosure laws include the Truth in Lending Act,194 the Truth in Savings Act195 and the Electronic Fund Transfer Act.196 Civil rights laws include the Equal Credit Opportunity Act197 and the Community Reinvestment Act (CRA).

Banks are also subject to state and federal laws regarding consumer privacy and the use of certain consumer information. At the federal level, Title V of the GLB Act198 requires initial and periodic communications with consumers about institutions' privacy policies and the sharing of customer information, as well as an opportunity for customers to opt out of having their non-public personal information disclosed to non-affiliated third parties. The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, requires disclosures to consumers about the use of credit report information in certain credit decisions, and requires lenders to undertake remedial actions if there is a breach in the lender's data security. Regulatory guidelines require financial institutions to implement and maintain a comprehensive written information security programme designed to ensure the security and confidentiality of customer information, and protect against unauthorised access to or use of such information that could result in substantial harm or inconvenience to any customer.199

Depository institutions normally correct consumer protection violations voluntarily during the course of regulators' examinations. However, if institutions do not voluntarily comply or the violations are particularly severe or pervasive, regulators may bring enforcement actions, including the imposition of civil money penalties. A number of federal and state consumer protection laws can also be enforced by consumers through civil lawsuits.

Consumer Financial Protection Bureau

The CFPB has broad regulatory, supervisory and enforcement authority with respect to consumer financial services or products. The CFPB is authorised to write regulations under federal consumer financial protection laws, including with respect to small dollar lending, prepaid cards, payday lending, mortgage-related issues and debt collection. Carved out from the CFPB's authority are a number of entities and activities, including persons regulated by the SEC and the CFTC, and the business of insurance.200

The CFPB examines and supervises large depository institutions regarding compliance with federal consumer protection laws and regulations.201 In addition, the CFPB may supervise certain non-bank entities of any size engaged in certain consumer finance-related activities.202 Under its enforcement authority, the CFPB may investigate potential violations of federal consumer financial protection laws (including unfair, deceptive and abusive acts and practices)203 and may initiate enforcement actions. CFPB enforcement actions may result in, among other consequences, the assessment of significant civil monetary penalties.

Rohit Chopra, President Biden's appointee as Director of the CFPB, began his tenure in October 2021. Director Chopra's inaugural testimony before the House Financial Services Committee and Senate Banking Committee, and subsequent CFPB actions and reports, indicated that the Bureau would prioritise consumer protection concerns related to debt collection under Director Chopra's tenure, with a particular focus on overdraft fees.204 Following Director Chopra's appointment, the CFPB released reports on the overdraft practices of banks and credit unions and announced that it would take action to discourage banks from relying on overdraft fees as a source of revenue.205 CFPB Director Chopra has also prioritised monitoring consumer use of digital assets.206 The CFPB on several occasions has voiced concern with potential consumer protection risks presented by digital assets; following the release of the President's Working Group's Report on Stablecoins, for example, Director Chopra released a statement expressing concern that large tech companies 'could accelerate the adoption of stablecoins as a payment device, and lead to an excessive concentration of market power' and affirming that the CFPB was 'actively monitoring and preparing for broader consumer adoption of cryptocurrencies'.207

Pre-emption

Pre-emption in the context of consumer protection regulation refers to the degree to which the activities of a federally chartered IDI are regulated by federal law rather than by the laws of any individual state in which the IDI may have a branch or otherwise conduct activities. The OCC may determine that federal law pre-empts state consumer financial laws only on a case-by-case basis, on the basis of substantial evidence and 'in accordance with the holding of the Supreme Court in Barnett Bank v. Nelson'.208 Even where the OCC has made a pre-emption determination with respect to state consumer financial laws as applied to a national bank, those state laws remain applicable to the national bank's operating subsidiaries and affiliates. Further, no provision of the National Bank Act relating to state visitorial authority may be construed to limit the authority of state attorneys general to bring actions to enforce any applicable law against a national bank.

v Bank Secrecy Act and anti-money laundering

The Bank Secrecy Act (BSA),209 as amended by the USA PATRIOT Act in 2001210 and the Anti-Money Laundering Act of 2020 (the AML Act),211 requires all financial institutions, including banks, to establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. The BSA and its implementing regulations include a variety of record-keeping and reporting requirements (such as currency and suspicious activity reporting) as well as due diligence and know-your-customer documentation requirements (including customer identification programme requirements and requirements to obtain and verify the identities of beneficial owners of legal entity customers).212 Bank regulators and the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury Department, issue and enforce BSA implementing regulations. Additionally, criminal anti-money laundering (AML) violations may be prosecuted by the Department of Justice (DOJ).

The Anti-Money Laundering Act of 2020, which was enacted in January 2021, represents the most significant change to the US statutory AML framework since the 2001 USA PATRIOT Act. Among other things, the AML Act:

  1. requires the creation of a national beneficial ownership registry pursuant to regulations to be issued by FinCEN, following which existing requirements for banks to collect and verify beneficial ownership information for certain legal entity customers will be pared bank;
  2. requires the Secretary of the Treasury to establish AML-related national exam and supervision priorities and to update such priorities every four years;
  3. codifies FinCEN guidance and regulations applying the BSA to virtual currencies;
  4. expands incentives and protections for AML whistle-blowers;
  5. enhances penalties for violations; and
  6. includes a number of provisions intended to streamline reporting requirements and encourage innovation.

Many provisions of the AML Act require the issuance of implementing regulations from FinCEN or other government stakeholders. Rulemakings on key elements, including the beneficial ownership registry, began over 2021 and will continue through 2022 and beyond.213 In addition to implementing the AML Act, FinCEN's recent agenda has included a heightened focus on virtual assets and financial technology; the agency has, for example, issued advisories for financial institutions on the risks and typologies of ransomware attacks and financial crime through cryptocurrency.214

US economic sanctions

The Office of Foreign Assets Control of the US Department of the Treasury (OFAC) administers US economic sanctions against foreign countries, entities and individuals to counter threats to the national security, foreign policy or economy of the United States. The goal of these programmes is to deny, wholly or partly, the benefits of the US economy to targets of sanctions, by denying access to the financial system, capital markets and import and export markets for goods, services and technology. There are more than 25 separately imposed OFAC sanctions programmes, which may change rapidly and without prior notice in response to world events or changing US foreign policy or national security priorities. While OFAC is responsible for promulgating and administering the sanctions, all the bank regulatory agencies cooperate in ensuring that financial institutions comply with the sanctions. Wilful sanctions violations may also carry criminal penalties enforced by the DOJ. In addition, violations can result in the imposition of penalties by banking regulators. A number of bank settlements with OFAC have been part of global settlements with local, state, federal or non-US prosecutors and banking regulators.

As at 31 December 2021, the countries and territories that are targets of territorial US sanctions are Crimea, Cuba, Iran, North Korea and Syria (target countries).215 In most cases, individuals and entities located, organised or resident in a target country are also targets of sanctions. Target countries are subject to various trade embargoes that ban imports or exports, or both, of goods and services (including financial services) and technology into the United States or from the United States or by US persons.216 Additionally, while Venezuela is not a target of territorial sanctions, on 5 August 2019 the US government imposed sanctions that prohibit most transactions by US persons with the government of Venezuela, including state-owned entities.217

OFAC also administers list-based sanctions that are imposed on individuals and entities designated under various programmes for certain activities. These specially designated nationals and blocked persons (SDNs) include those:

  1. involved in narcotics trafficking, terrorism and terrorist financing, transnational crime, proliferation of weapons of mass destruction, human rights violations, corruption, election interference, malicious cyber activities;
  2. related to former or current regimes of certain countries; and
  3. engaged in certain targeted activities in or related to specified countries.

US persons are generally prohibited from conducting financial or commercial transactions with SDNs, and any assets the SDNs may have within the United States or within the possession or control of any US person are blocked. In addition, any property that is 50 per cent or more owned, directly or indirectly, by one or more SDNs is blocked property. This includes entities; thus, a company that is 50 per cent or more owned by one or more SDNs is also a sanctions target, regardless of whether the entity is placed on the SDN list.

Since July 2014, the US government has imposed targeted, non-blocking, less comprehensive sectoral sanctions on certain Russian energy and defence companies and financial institutions. OFAC has included these companies' names on its Sectoral Sanctions Identifications List (the SSI List). US persons are generally prohibited from dealing in new debt of greater than a specified maturity218 of the listed companies and of companies that are (50 per cent or more) owned, directly or indirectly, by one or more SSI Listed entities. In addition, US persons are generally prohibited from dealing in new equity of the SSI Listed financial institutions. Further, the sectoral sanctions prohibit US persons from providing goods, non-financial services or technology to certain entities in the Russian energy sector identified on the SSI List that are involved in Russian deep-water, Arctic offshore and shale-oil projects or in certain oil projects outside Russia that meet specified criteria.219

In January 2021, sanctions took effect prohibiting US persons from purchasing, selling for value or (after the end of a prescribed wind-down period) possessing publicly traded securities of or linked to certain identified Communist Chinese Military Companies.220

OFAC civil penalties, which vary depending on the authorising statute, can reach a maximum of US$91,816 per violation (as at 17 March 2021) under the Trading With the Enemy Act (the primary authorising statute for the Cuba sanctions programme), or the greater of US$311,562 per violation (as at 17 March 2021) or twice the value of the violative transaction or transactions under the International Emergency Economic Powers Act (IEEPA).221 Most US sanctions programmes are authorised by IEEPA.222

OFAC's enforcement guidelines223 note that the Office will consider certain general factors in determining the appropriate enforcement response to an apparent violation and, if a civil monetary penalty is warranted, in establishing the amount of that penalty. If it is determined that a civil penalty is appropriate, OFAC will generally mitigate the penalty based upon certain factors such as voluntary self-disclosure, cooperation with OFAC and whether the case involved is a first-time violation.

Funding

i Traditional funding sources

BHCs and banks have a number of different funding sources, including consumer-driven bank products and services such as demand deposit accounts, certificates of deposit and deposit sweeps; interbank borrowing through agreements such as repurchase agreements; and capital markets activities, including commercial paper, subordinated debt, preferred securities, and equity issuances and offerings.

BHCs and banks also have access to additional funding and liquidity sources during strained credit markets when traditional funding sources may either be prohibitively expensive or unavailable. The Federal Reserve's discount window, available only to member banks and other depository institutions, which has existed since the Federal Reserve System was created in 1913, has long served the banking industry 'as a safety valve in relieving pressures in reserve markets'.224 Its overnight extensions of credit to depository institutions can 'relieve liquidity strains in a depository institution and in the banking system as a whole',225 and ensure 'the basic stability of the payment system more generally by supplying liquidity during times of systemic stress'.226 Almost all discount window credit has been extended as secured advances for many years.227

The Dodd–Frank Act enacted a variety of changes to the Federal Reserve's emergency financial stabilisation powers. The Act limits emergency assistance to a 'program or facility with broad-based eligibility' rather than to any single and specific individual, partnership or corporation that is not part of such a broad-based programme.228 In addition, the Federal Reserve must establish by regulation, in consultation with the Treasury Secretary, policies and procedures designed to ensure that any emergency lending is to provide liquidity to the financial system and not to aid a single and specific failing financial company; that collateral for emergency loans is sufficient to protect taxpayers from losses; and that any such programme is terminated in a timely and orderly fashion. In addition, the Federal Reserve is required to obtain the Treasury Secretary's approval before establishing a programme or facility under Section 13(3) of the Federal Reserve Act.229 In the course of 2020, the Federal Reserve, with the approval of the Treasury Secretary, established a number of programmes and facilities under Section 13(3).

The Dodd–Frank Act also changed the FDIC's emergency financial stabilisation powers and imposed new substantive and procedural requirements over the FDIC's ability to establish programmes such as the Temporary Liquidity Guarantee Program. The Dodd–Frank Act limits the FDIC's authority to provide assistance to individual banks upon a systemic risk finding to only those banks that have been placed in receivership and only for the purpose of winding up the institution.

In the case of future guarantee programmes, the Dodd-Frank Act provides that upon a written determination of the FDIC and the Federal Reserve that a liquidity event exists, the FDIC would create a widely available programme to guarantee obligations of solvent depository institutions, depository institution holding companies and affiliates during times of severe economic distress. Such a determination requires a vote of two-thirds of the members of the boards of the Federal Reserve and the FDIC and the written consent of the Treasury Secretary. The Treasury Secretary, in consultation with the President, would determine the maximum amount of debt that the FDIC may guarantee. The Treasury Secretary must provide notice to Congress and the FDIC could exercise its authority only upon passage of a joint congressional resolution of approval.

ii Post-2008 financial crisis funding developments

Following the financial crisis of 2008, bank regulators issued two significant policy statements on their expectations regarding how BHCs and banks manage their funding and liquidity risks.

On 22 March 2010, federal bank regulators issued an inter-agency policy statement on funding and liquidity risk management.230 In the preamble to the guidance, regulators noted that they had observed deficiencies in liquidity risk management, including 'funding risky or illiquid asset portfolios with potentially volatile short-term liabilities and a lack of meaningful . . . liquidity contingency plans'. The guidance clarifies the processes that institutions should implement to identify, measure, monitor and control their funding and liquidity risk, such as having cash-flow projections, diversified funding sources, stress testing, a cushion of liquid assets and a formal well-developed contingency funding plan. Aside from overall funding needs, the guidance was specific in highlighting the importance of monitoring and managing intraday liquidity positions.

On 30 April 2010, the federal regulatory agencies issued final guidance addressing the risks associated with funding and credit concentrations arising from correspondent interbank relationships.231 The guidance highlights the need for institutions to identify, monitor and manage correspondent concentration risk on a stand-alone and organisation-wide basis. Notably, the guidance states that a financial institution should consider credit exposures232 of over 25 per cent of total capital and funding exposures as low as 5 per cent of total liabilities indicative of correspondent concentration risk.

Pursuant to the guidance, financial institutions are to establish written policies and procedures to monitor and prevent such correspondent concentration risk. The guidance also highlights regulators' concern with financial institutions conducting proper due diligence on all credit and funding relationships, including confirmation that terms for all credit and funding transactions are on an arm's-length basis and that they avoid potential conflicts of interest.233

On 2 September 2014, the OCC adopted final guidelines that establish minimum standards for the design and implementation of a risk-governance framework for large insured national banks, insured federal savings associations and insured federal branches of foreign banks with US$50 billion or more in average total consolidated assets, and minimum standards for a board of directors in overseeing the framework's design and implementation.234 The final guidelines also apply to banks with less than US$50 billion in average total consolidated assets if that bank's parent company controls at least one bank with assets greater than or equal to US$50 billion, and the OCC explicitly reserved authority to apply the guidelines to an entity with less than US$50 billion in average total consolidated assets entity not under such common control if it determines its operations to be highly complex or to otherwise present a heightened risk, but will only exercise this authority in extraordinary circumstances.235 The guidelines supersede the OCC heightened expectations programme initially formulated after the 2008 financial crisis, and include requirements for risk-governance frameworks to cover liquidity risk and concentration risk, concentration risk limits, and the definition and communication of an acceptable risk appetite with respect to, inter alia, liquidity and liquidity buffers.236

In 2014, the US banking agencies issued a final rule implementing the Basel Committee's quantitative liquidity standards, known as the liquidity coverage ratio (LCR), in the United States.237 The US LCR rule is designed 'to promote the short-term resilience of the liquidity risk profile of large and internationally active banking organisations'.238 Banking organisations subject to the rule are required to hold an amount of high-quality liquid assets sufficient to meet their total net cash outflows, as modelled over a 30-day period based on prescribed assumptions about the average outflow and inflow rates for specified categories of funding sources and funding needs. The US LCR rule is generally consistent with the Basel Committee's standards, but is more stringent in certain respects.

In 2020, the US banking agencies issued a final rule implementing the Basel Committee's Net Stable Funding Ratio Requirement (NSFR), in the United States.239 The NSFR is designed to reduce the likelihood that disruptions to a banking organisation's regular sources of funding will compromise its liquidity position. The rule requires banking organisations to maintain a stable funding profile relative to the liquidity of their assets, derivatives and commitments over a one-year period. In a key change from the proposal, the required stable funding for direct holdings of Level 1 liquid asset securities and for certain short-term lending transactions with financial sector counterparties secured by Level 1 liquid assets was reduced to zero in the final NSFR rule (rather than 5 per cent and 10 per cent, respectively, as proposed).240 Then Federal Reserve Vice Chair for Supervision Randal Quarles explained at the time that these changes are intended to promote financial stability and intermediation in the US Treasury market by ensuring that there is no regulatory or supervisory preference that would encourage banks to maintain central bank reserves instead of Treasury securities, to satisfy regulatory requirements or supervisory expectations.241

The Tailoring Rules changed the scope and stringency of the application of the US LCR to FBOs, and the scope and stringency of the application of the NSFR as compared to the US banking agencies' 2016 NSFR proposal.242

In addition to standardised quantitative requirements for US IHCs depending on their categorisation, an FBO with US$100 billion or more in total consolidated assets is, regardless of category, subject to a qualitative liquidity framework that includes liquidity stress testing, risk management and related governance requirements, as well as a requirement to maintain separate US liquidity buffers (based on results of internal liquidity stress tests) for its US branches or agencies and, if applicable, its US IHC.243 The liquidity buffers must consist of unencumbered highly liquid assets sufficient to meet net stressed cash flow needs. The Federal Reserve's prescribed method for calculating net stressed cash flow needs distinguishes between external and internal stressed cash flow needs such that internal cash flows cannot be used to offset external cash flows; it is designed to minimise maturity mismatches such that intra-group cash flow sources may offset intra-group cash flow needs of the US branches or agencies or US IHC only to the extent that the term of the intra-group cash flow source is the same as or shorter than the term of the intra-group cash flow need.

Control of banks and transfers of banking business

Investing in banks or BHCs has long been a strictly regulated process in the United States. There are three federal statutes that may potentially govern the acquisition of a bank or BHC, depending on the structure of the acquisition and the type of bank or holding company to be acquired:244

  1. The BHC Act: Section 3(a) of the BHC Act requires the prior approval of the Federal Reserve for transactions that result in the formation of a BHC or that cause a bank to become a subsidiary of a BHC; acquisitions by a BHC of more than 5 per cent of any class of voting shares of a bank or another BHC; acquisitions of all or substantially all of a bank's assets; and mergers of BHCs.245 Under the BHC Act, a controlling investment in a bank or BHC will generally cause the investor (and any controlling person of that investor) to become a BHC and subject it to Federal Reserve regulation.246 Control is presumed if a person or entity, acting alone or in concert with others, controls or has the power to vote 25 per cent or more of the outstanding shares of any class of voting stock of a bank or company; has the power to control the election of a majority of the board of directors of a bank or company; or has the power to exercise a controlling influence over the management or policies of a bank or company.247
  2. The Bank Merger Act: the Bank Merger Act requires the approval of the appropriate federal bank regulator for any merger involving two or more IDIs, transfers of assets by an IDI to an uninsured bank (or uninsured branch of a non-US bank) in consideration for the assumption of deposits, an insured bank's acquisition of assets of another insured bank and assumptions of liabilities of any depository institution (insured or uninsured) by an IDI.248 The appropriate federal bank regulator is that of the surviving entity in a merger.249
  3. The Change in Bank Control Act (the CIBC Act): the CIBC Act applies primarily to the acquisition of control of a US bank or BHC and requires that prior written notice be given to the bank regulator of the target bank or BHC.250 Control (defined as the power, directly or indirectly, to direct the management or policies of an IDI or to vote 25 per cent or more of any class of voting securities of an IDI)251 is presumed, but may be rebutted, and a filing under the CIBC Act is required if a person (including a bank or company) will, immediately after the transaction, own or control 10 per cent or more of any class of voting securities of a US bank and either no other person owns or controls a greater percentage of the same class of voting securities, or the shares of the bank or its holding company are registered with the SEC.252 The CIBC Act does not apply to transactions requiring approval under the BHC Act or the Bank Merger Act.253

On 2 March 2020, the Federal Reserve published a final rule in the Federal Register to formalise the Federal Reserve's framework for controlling influence determinations for purposes of the BHC Act or the Home Owners' Loan Act of 1933.254 The final rule codified a series of presumptions of control and non-control, generally using a 'see-saw' approach in which the lower the level of voting equity, the less restrictive the presumptions would be, and vice versa. Relative to the Federal Reserve's existing practices and precedents, including the Federal Reserve's 2008 Policy Statement on Equity Investments in Banks and BHCs (the Federal Reserve 2008 Policy Statement),255 the final rule:

  1. increases the level of voting equity ownership that benefits from a presumption of non-control from less than 5 per cent (i.e., up to 4.99 per cent) to less than 10 per cent (i.e., up to 9.99 per cent) (assuming no other applicable presumptions of control are triggered);
  2. leaves the levels of permitted total equity (voting equity plus non-voting equity) unchanged at less than one-third (i.e., up to 33.3 per cent),256 but, in a departure from prior practice, permits such total equity holdings regardless of the percentage of voting securities held;
  3. permits an increased level of an investor's representation on a company's board of directors, from the general precedent of one director to either less than 50 per cent or less than 25 per cent of the board, depending on the level of voting equity ownership;
  4. relaxes the limits on board committee representation for an investor's board representative or representatives;
  5. permits increased levels of business relationships between an investor and a company at voting equity levels of 14.99 per cent or less;
  6. leaves the restrictions on contractual covenants and consent rights over a company's operational and policy decisions effectively unchanged; and
  7. largely eliminates the quantitative differences between the presumptions of control and non-control that apply when a banking organisation is acquiring an interest in another company compared to when it is divesting control of the company.

The Federal Reserve's final rule explained that certain past policy statements, including the Federal Reserve 2008 Policy Statement, remain 'in effect to the extent not superseded by the final rule'.257 The Federal Reserve 2008 Policy Statement should therefore continue to be consulted where a presumption of control or non-control is not triggered under the 2020 final rule. The Federal Reserve 2008 Policy Statement clarified the Federal Reserve's views with respect to how a minority equity investment can be structured to prevent an investor from being deemed to exercise a controlling influence over a bank or BHC for the purposes of the BHC Act, including with respect to the following issues: director representation, total equity interest, consultations with management, business relationships and covenants limiting management discretion over major policies and decisions.

Dodd–Frank Act

The Dodd–Frank Act introduced significant changes to the regulation of investments in banks and BHCs in the United States.

Capital and management requirements

The Federal Reserve may approve a Section 3 application by a BHC to acquire control of all, or substantially all, the assets of a bank only if the BHC is well capitalised and well managed.258 The federal banking agencies may approve interstate merger transactions only if the resulting bank will be well capitalised and well managed after the transaction.

Financial stability factor

The Federal Reserve must consider the extent to which a proposed acquisition would result in greater or more concentrated risks to the stability of the US banking or financial system.259

The Federal Reserve has considered the financial stability factor in its review of several recent applications. It uses the following non-exhaustive criteria, both individually and in combination, in evaluating an acquisition's risk to the broader economy:

  1. the size of the resulting firm;
  2. the availability of substitute providers for any critical products and services offered by the resulting firm;
  3. the interconnectedness of the resulting firm with the banking or financial system;
  4. the extent to which the resulting firm contributes to the complexity of the financial system; and
  5. the extent of the cross-border activities of the resulting firm.260

In addition, the Federal Reserve has considered qualitative factors indicative of the difficulty of resolving the resulting firm, such as the opaqueness and complexity of the institution's internal organisation.261 In considering the financial stability factor in its order approving the merger of People's United Financial, Inc with Suffolk Bancorp and People's United's indirect acquisition of The Suffolk County National Bank of Riverhead, the Federal Reserve further explained that its experience has shown that proposals involving an acquisition of less than US$10 billion in assets, or that result in a firm with less than US$100 billion in total assets, are generally not likely to pose systemic risks.262 Accordingly, the Federal Reserve presumes that a proposal does not raise material financial stability concerns if the total assets involved fall below either of these size thresholds, absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities or other risk factors.263

Limitations on non-bank acquisitions by systemically important companies

Systemically important companies, including systemically important BHCs and non-bank financial companies supervised by the Federal Reserve, must provide prior notice to the Federal Reserve before acquiring control of voting shares of a company engaged in activities that are financial in nature or incidental thereto that has US$10 billion or more of consolidated assets.264 Such acquisitions also may not rely on the statutory exemption from Hart–Scott–Rodino Act filing requirements for transactions that require prior approval of the Federal Reserve.

The Dodd–Frank Act states that the prior notice requirement does not apply to an acquisition permitted under Section 4(c) of the BHC Act, thus exempting, among certain other types of investments, investments of less than 5 per cent and investments in companies the activities of which are closely related to banking, and an acquisition made in the course of a systemically important company's underwriting, dealing or market-making activities.265 This provision is already in effect; however, as at 31 December 2020, no implementing regulations had been issued.

Expansion of nationwide deposit cap

The Dodd–Frank Act prohibits acquisitions by IDIs and their holding companies of additional depository institutions that would result in the applicant controlling more than 10 per cent of the total amount of deposits of US IDIs.266 Current law imposes a deposit cap on BHCs and SLHCs.267 Exemptions are provided for acquisitions by BHCs or SLHCs of IDIs in default or in danger of default.

Concentration limits

A financial company is prohibited from merging with or acquiring substantially all the assets or control of another company if the resulting company's total consolidated liabilities would exceed 10 per cent of the aggregate consolidated liabilities of all financial companies at the end of the prior calendar year.268 There are exceptions for acquisitions of a bank in default or in danger of default, FDIC-assisted transactions, acquisitions that would result in only a de minimis increase in the liabilities of the financial company and certain securitisation transactions. The term financial company is defined as an IDI, a BHC, an SLHC, a company that controls an IDI, a systemically important non-bank financial company and a foreign bank or company treated as a BHC for purposes of the BHC Act. While the majority of merger and acquisition deals are not likely to trigger this provision, the concentration limits imposed by the Dodd-Frank Act may affect the prospects of much larger mergers between financial institutions.

The Dodd-Frank Act required the FSOC to complete a study of concentration limits and make recommendations regarding their implementation, including any modifications that would more effectively implement the concentration limits. The FSOC issued its study and recommendations on 18 January 2011.269 The Federal Reserve issued final rules implementing the concentration limits in light of the FSOC's recommendations on 14 November 2014.270 Pursuant to the methodology set forth in the final rules, the Federal Reserve calculated aggregate financial sector liabilities for the initial period between 1 July 2015 and 30 June 2016 using financial companies' consolidated financial sector liabilities as of 31 December 2014.271 For all subsequent periods, aggregate financial sector liabilities are calculated as the average of financial companies' aggregate financial sector liabilities as at 31 December of the previous two years.

Additionally, for a US company subject to applicable risk-based capital rules, consolidated liabilities are equal to its total RWAs minus its regulatory capital, calculated pursuant to the applicable rules. For companies not subject to applicable risk-based capital rules, consolidated liabilities generally are calculated using applicable accounting standards, specifically US generally accepted accounting principles or other standard approved by the Federal Reserve.272 Following a rule-making made subsequent to the passage of the EGRRCPA, for US companies that are qualifying community banking organisations subject to the community bank leverage ratio framework as defined in the Federal Reserve's Regulation Q,273 consolidated liabilities are equal to average total consolidated assets minus Tier 1 capital. The liabilities of an FBO are calculated with reference solely to the FBO's US operations, enumerated as the total liabilities of all the FBO's US branches, agencies and subsidiaries domiciled in the United States.274 The concentration limit rules establish a de minimis exception to engage in transactions exceeding the limit by up to US$2 billion in the aggregate during any 12-month period, but to rely on this exception the financial company must obtain prior consent from the Federal Reserve to ensure the particular transaction does not pose a threat to financial stability.275 In the alternative, if the financial company's transactions in the aggregate during any 12-month period do not exceed US$100 million, the financial company can meet the de minimis exception by providing notice to the Federal Reserve within 10 days of an acquisition.276 The rules do subject transactions made in the ordinary course of business that are structured as controlling investments to the concentration limit, and include merchant banking investments as covered acquisitions, explicitly distinguishing between intentional investment decisions covered by the limits and less-targeted investment activities such as collecting a previously contracted debt or bona fide underwriting or market making activity.277

Outlook and conclusions

We expect the future developments in the US financial framework to significantly depend on progress in overcoming the long-term consequences of the coronavirus pandemic, as well as on the ability of the Biden Administration and the Democratic Congress to implement the administration's programme for regulatory reforms. Whether the Democratic Party retains control of Congress following the midterm elections in 2022 will likely shape the outlook for legislative reforms. In 2021, the Biden Administration's progress in implementing its reforms was slowed by extended vacancies in key positions at the regulatory agencies. As many of these roles have been filled, regulatory activity may increase in 2022, including heightened supervisory and enforcement activity and new rulemakings. ESG, digital assets and financial technology will likely remain a primary area of focus for regulators in this regard. As regulators navigate the novel issues presented by these new areas of focus to implement the administration's programmes for regulatory reforms, the shape of financial regulation will continue to unfold.

Footnotes

1 Luigi L De Ghenghi is a partner and Karen C Pelzer is counsel at Davis Polk & Wardwell LLP. The authors would like to express their gratitude to contributors Boaz Goldwater, Kendall Howell, Eric Lewin, Kirill Lebedev, Suiwen Liang, Andrew Rohrkemper, Will Schisa, Dana Seesel, Sumeet Shroff, Tyler Senackerib and Marshall Wilson, all of Davis Polk & Wardwell LLP, for their contributions; their efforts in preparing this chapter were invaluable.

2 See generally Davis Polk & Wardwell LLP, 'Financial Services Regulatory Reform in the Biden Administration' (9 November 2020), https://www.davispolk.com/insights/client-update/financial-services-regulatory-reform-biden-administration-key-areas-focus.

3 Chairman Gensler has been outspoken in his view that the digital assets sector is under-regulated, comparing the sector to the 'Wild West'. Similarly, in response to the Presidential Working Group's Report on Stablecoins (a type of digital asset pegged to fiat currency) in 2021, Gensler expressed the view that stablecoins 'may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system', and present 'emerging financial stability concerns'. See SEC, Press Release, Chair Gary Gensler Remarks Before the Aspen Security Forum (3 August 2021), https://www.sec.gov/news/statement/gensler-statement-presidents-working-group-report-stablecoins-110121; SEC, Press Release, Statement of Chair Gary Gensler on President's Working Group Report on Stablecoins (1 November 2021), https://www.sec.gov/news/statement/gensler-statement-presidents-working-group-report-stablecoins-110121. In March 2022, the Biden Administration issued an executive order mandating a 'whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets', requiring a host of government agencies to undertake studies and issue reports on the governance of digital assets. See Davis Polk & Wardwell LLP, 'Biden Executive Order Begins Whole-of-Government Review of Digital Asset Policy and Regulation (10 March 2022), https://www.davispolk.com/insights/client-update/biden-executive-order-begins-whole-government-review-digital-asset-policy.

4 For example, in March 2022, President Biden's nominee for Vice Chair for Supervision of the Federal Reserve, Sarah Bloom Raskin, withdrew her nomination, following opposition from Republican members of the Senate Banking Committee. Federal Reserve Chair Jerome Powell was nominated for a second term under the Biden Administration. After his previous term expired in February 2022, Powell has served in a pro tempore role pending his confirmation. See David Morgan et al., Biden's Fed Nominees in Limbo after Republican Vote Boycott, Reuters (15 February 2022), https://www.reuters.com/business/finance/senate-panel-vote-advancing-bidens-fed-picks-raskin-under-microscope-2022-02-15/.

5 National Bank Act Section 2; 12 USC Section 26.

6 Office of the Comptroller of the Currency (OCC), Interim Final Rule: Office of Thrift Supervision Integration Pursuant to the Dodd–Frank Act, 76 Fed Reg 48950 (9 August 2011), www.gpo.gov/fdsys/pkg/FR-2011-08-09/pdf/2011-17581.pdf; OCC, Final Rule: Office of Thrift Supervision Integration; Dodd–Frank Act Implementation, 76 Fed Reg 43549 (21 July 2011), www.gpo.gov/fdsys/pkg/FR-2011-07-21/pdf/2011-18231.pdf. This chapter largely focuses on bank and bank holding company regulation, and does not cover the entire scope of thrift and thrift holding company regulation.

7 Federal Deposit Insurance Act, Section 1; 12 USC Section 1811(a).

8 See Federal Reserve Bank of Boston, Federal Reserve Membership, https://www.bostonfed.org/supervision-and-regulation/supervision/federal-reserve-membership.aspx; Federal Reserve Bank of Dallas, Becoming a Member Bank of the Federal Reserve System: Questions & Answers, www.dallasfed.org/banking/apps/faq.cfm.

9 The Bank Holding Company Act of 1956 (the BHC Act) defines a bank holding company as any company that has control over any bank or over any company that is or becomes a bank holding company (BHC) by virtue of the Act. See BHC Act, 12 USC Section 1841(a). The Home Owners' Loan Act of 1933 (HOLA) defines a savings and loan holding company as any company that controls a savings association or any other company that is a savings and loan holding company (SLHC). See HOLA, 12 USC Section 1467a(a)(1)(D)(i). Some depository institutions do not fall within the definition of bank under the BHC Act and do not trigger BHC status for companies that control such institutions – for example, an industrial loan company or a credit card bank.

10 The largest BHCs and banks are generally subject to continuous examinations. On 28 December 2018, the FDIC, the Federal Reserve and the OCC published final rules increasing the number of small banks and savings associations eligible for an 18-month examination cycle rather than a 12-month examination cycle. OCC, Federal Reserve and FDIC, Final Rule: Expanded Examination Cycle for Certain Small Insured Depository Institutions and US Branches and Agencies of Foreign Banks, 83 Fed Reg 43961 (28 December 2018), www.govinfo.gov/content/pkg/FR-2018-12-28/pdf/2018-28267.pdf.

11 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong (2010).

12 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 604 (2010).

13 ibid.

14 For a further discussion, see Section VI.

15 Pub L No. 111-203, Section 335, 124 Stat 1,540.

16 12 USCA 3104(c).

17 12 CFR Section 347.213, www.gpo.gov/fdsys/pkg/CFR-2011-title12-vol4/pdf/CFR-2011-title12-vol4-sec347-213.pdf; FDIC, Final Rule: Deposit Insurance Regulations; Temporary Increase in Standard Coverage Amount; Mortgage Servicing Accounts; Revocable Trust Accounts; International Banking; Foreign Banks, 74 Fed Reg 47711 (17 September 2009), www.fdic.gov/regulations/laws/federal/2009/09Final917.pdf.

19 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 331(b) (2010).

20 FDIC, Final Rule: Assessments, Large Bank Pricing, 76 Fed Reg 10672, 10673 (25 February 2011), www.gpo.gov/fdsys/pkg/FR-2011-02-25/pdf/2011-3086.pdf.

21 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 331(b) (2010).

22 FDIC, Final Rule: Assessments, Large Bank Pricing, 76 Fed Reg 10672 (25 February 2011), www.gpo.gov/fdsys/pkg/FR-2011-02-25/pdf/2011-3086.pdf.

23 A large insured depository institution (IDI) is defined as an IDI with at least US$10 billion in total assets for at least four consecutive quarters, while a highly complex IDI is an IDI (other than a credit card bank) with US$50 billion or more in total assets for at least four consecutive quarters controlled by a parent or intermediate parent company with more than US$500 billion in total assets, or a processing bank or trust company with at least US$10 billion in total assets for at least four consecutive quarters. FDIC, Final Rule: Assessments, Large Bank Pricing, 76 Fed Reg 10672, 10688 (25 February 2011), www.gpo.gov/fdsys/pkg/FR-2011-02-25/pdf/2011-3086.pdf.

24 Each scorecard assesses certain risk measures to produce two scores that are combined and converted into an initial assessment rate. The performance score measures an IDI's financial performance and its ability to withstand stress. The loss severity score quantifies the relative magnitude of potential losses to the FDIC in the event of the IDI's failure. According to the FDIC, the scorecard method better captures risk at the time it is assumed by a large or highly complex IDI, better differentiates risk among such institutions during periods of good economic and banking conditions based upon how they would fare during periods of stress or economic downturns, and better takes into account the losses that the FDIC may incur if such an institution fails.

25 OCC, Director's Reference Guide to Board Reports and Information (2020), https://www.occ.treas.gov/publications-and-resources/publications/banker-education/files/pub-directors-reference-guide.pdf; OCC, The Director's Book – Role of Directors for National Banks and Federal Savings Associations (2020), https://www.occ.gov/publications-and-resources/publications/banker-education/files/pub-directors-book.pdf.

26 Federal Reserve, SR 21-3 / CA 21-1: Supervisory Guidance on Board of Directors' Effectiveness (26 February 2021), https://www.federalreserve.gov/supervisionreg/srletters/SR2103.htm.

27 Federal Reserve, Proposed Supervisory Guidance, 83 Fed Reg 1351 (11 January 2018), https://www.federalregister.gov/documents/2018/01/11/2018-00294/proposed-supervisory-guidance.

28 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Sections 614, 615 (2010).

29 12 USC 5365(a)(2)(C).

30 12 USC 5365(a)(2)(A).

31 Federal Reserve, Prudential Standards for Large Bank Holding Companies, Savings and Loan Holding Companies, and Foreign Banking Organizations, 84 Fed Reg 59032 (1 November 2019), https://www.govinfo.gov/content/pkg/FR-2019-11-01/pdf/2019-23662.pdf.

32 An SLHC is covered by the Tailoring Rules (covered SLHC) if the SLHC is not: (1) a top-tier SLHC that is a grandfathered unitary SLHC that derives 50 per cent or more of its total consolidated assets or total revenues from activities that are not financial in nature under Section 4(k) of the BHC Act; (2) a top-tier depository institution holding company that is an insurance underwriting company; or (3) a top-tier depository institution holding company that holds 25 per cent or more of its total consolidated assets in subsidiaries that are insurance underwriting companies (other than assets associated with credit risk insurance). See 12 CFR §§ 217.2, 238.2(ff).

33 A firm is in Category II if it is not a US global systemically important bank (G-SIB) and has either US$700 billion or more in total consolidated assets or US$100 billion or more in total consolidated assets and US$75 billion or more in cross-jurisdictional activity. A firm is in Category III if it is not in Category I or Category II and has either US$250 billion or more in total consolidated assets or US$100 billion or more in total consolidated assets and US$75 billion or more in any of three specific risk indicators: weighted short-term wholesale funding (wSTWF), non-bank assets or off-balance sheet exposure. Firms with US$100 billion or more in total consolidated assets that are not in Category I, II or III are placed into Category IV.

34 From 2022, covered SLHCs will also become subject to the capital planning rule and stress capital buffer requirements, discussed below. See Federal Reserve, Capital Planning and Stress Testing Requirements for Large Bank Holding Companies, Intermediate Holding Companies and Savings and Loan Holding Companies, 86 Fed Reg 7927 (3 February 2021), https://www.govinfo.gov/content/pkg/FR-2021-02-03/pdf/2021-02182.pdf.

35 Federal Reserve, Single-Counterparty Credit Limits for Bank Holding Companies and Foreign Banking Organizations, 83 Fed Reg 38460 (6 August 2018), https://www.govinfo.gov/content/pkg/FR-2018-08-06/pdf/2018-16133.pdf.

36 Federal Reserve, Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations, 12 CFR Part 252, www.gpo.gov/fdsys/pkg/FR-2014-03-27/pdf/2014-05699.pdf.

37 A US IHC will not be subject to the US advanced approaches capital rules unless the US IHC expressly opts in. However, a US IHC that crosses the applicability threshold for the US advanced approaches capital rules will be subject to certain other capital requirements applicable to advanced approaches banking organisations.

38 Federal Reserve, Single Counterparty Credit Limits for Large Bank Holding Companies and Foreign Banking Organizations; Final Rule, 83 Fed Reg 38460 (6 August 2018).

39 As noted, the Tailoring Rules apply certain enhanced prudential standards to foreign banking organisations (FBOs) at both the US IHC level and the level of the FBO's CUSO.

40 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 616(d) (2010).

41 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 165(i) (2010), as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), Pub L No. 115-174, S 2155, 115th Cong Sections Section 402 (2018). From 2022, large SLHCs will also become subject to such rules. See footnote 30.

42 Federal Reserve, Capital Plans, 76 Fed Reg 74631 (1 December 2011), www.gpo.gov/fdsys/pkg/FR-2011-12-01/pdf/2011-30665.pdf.

43 Federal Reserve, Capital Plan and Stress Test Rules, 12 CFR Parts 225 and 252, www.gpo.gov/fdsys/pkg/FR-2014-10-27/pdf/2014-25170.pdf. Previously, large BHCs were required to submit their capital plans by early January of each year, and the Federal Reserve was required to take action by March of the same year. ibid.

44 In March 2019, the Federal Reserve announced that firms that have participated in four CCAR exercises and that have not received a qualitative objection in their fourth year would no longer be subject to a potential qualitative objection. The Federal Reserve did not object to any capital plan submitted to it in 2020 and, therefore, from 2021 no firms remain subject to a potential qualitative objection.

45 Federal Reserve, 'Assessment of Bank Capital during the Recent Coronavirus Event' (June 2020), https://www.federalreserve.gov/publications/files/2020-sensitivity-analysis-20200625.pdf.

46 Federal Reserve, 'Federal Reserve Board releases results of stress tests for 2020 and additional sensitivity analyses conducted in light of the coronavirus event' (25 June 2020), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200625c.htm.

47 See 12 CFR 225.8(k).

48 In the third and fourth quarters of 2020, large BHCs were permitted to: (1) make share repurchases relating to issuances of common stock related to employee stock ownership plans; (2) provided that the firm did not increase the amount of its common stock dividends, pay common stock dividends that did not exceed an amount equal to the average of the firm's net income for the four preceding calendar quarters, unless otherwise specified by the Federal Reserve; and (3) make scheduled payments on additional Tier 1 and Tier 2 capital instruments. See 'Assessment of Bank Capital during the Recent Coronavirus Event', footnote 45 at 19.

49 In the first quarter of 2021, large BHCs were permitted to: (1) provided that the firm did not increase the amount of its common stock dividends to be larger than the level paid in the second quarter of 2020, pay common stock dividends and make share repurchases that, in the aggregate, did not exceed an amount equal to the average of the firm's net income for the four preceding calendar quarters, except that, if the average of the firm's net income for the four preceding calendar quarters did not exceed an amount equal to one cent per share, the firm could pay common stock dividends of one cent per share; (2) make share repurchases that equal the amount of share issuances related to expensed employee compensation; and (3) redeem and make scheduled payments on additional Tier 1 and Tier 2 capital instruments. See Federal Reserve, 'December 2020 Stress Test Results' (18 December 2020), https://www.federalreserve.gov/publications/files/2020-dec-stress-test-results-20201218.pdf at 143. These limitations were modified slightly for US IHCs in light of their 'unique payout behaviour'. ibid.

50 See 12 CFR 217.1(c)(1); 12 CFR Part 225, Appendix C.

51 In late 2019, the US banking agencies, as required by the EGRRCPA, adopted a final rule to exclude from the supplementary leverage ratio certain funds of banking organisations deposited with central banks, if the banking organisation is predominantly engaged in custody, safekeeping and asset servicing activities. Federal Reserve, OCC and FDIC, Regulatory Capital Rule: Revisions to the Supplementary Leverage Ratio to Exclude Certain Central Bank Deposits of Banking Organizations Predominantly Engaged in Custody, Safekeeping, and Asset Servicing Activities, 85 Fed Reg 4569 (27 January 2020), https://www.govinfo.gov/content/pkg/FR-2020-01-27/pdf/2019-28293.pdf.

52 Federal Reserve, OCC and FDIC, Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for Certain Bank Holding Companies and their Subsidiary Insured Depository Institutions, 79 Fed Reg 24528 (1 May 2014), www.gpo.gov/fdsys/pkg/FR-2014-05-01/pdf/2014-09367.pdf.

53 Specifically, the requirement would be changed from a fixed 2 per cent buffer for all firms to a firm-specific buffer determined annually and based on the firm's risk-based G-SIB capital surcharge discussed below. Federal Reserve and OCC, Proposed Rule on Enhanced Supplementary Leverage Ratio Standards for US G-SIBs, 83 Fed Reg 17317 (19 April 2018), available at https://www.govinfo.gov/content/pkg/FR-2018-04-19/pdf/2018-08066.pdf.

54 Federal Reserve, Temporary Exclusion of US Treasury Securities and Deposits at Federal Reserve Banks From the Supplementary Leverage Ratio, 85 Fed Reg 20578 (14 April 2020), https://www.govinfo.gov/content/pkg/FR-2020-04-14/pdf/2020-07345.pdf. At the same time, the Federal Reserve modified its reporting forms to prevent this temporary exclusion from the denominator of the supplementary leverage ratio from 'impacting the measurement of the size systemic indicator'. ibid. In other words, this temporary exclusion did not provide relief to US G-SIBs for purposes of calculating their G-SIB surcharges, which are based (in part) upon size.

55 The Federal Reserve, FDIC and OCC later adopted an interim final rule giving depository institutions subject to the supplementary leverage ratio (SLR) (i.e., the bank subsidiaries of BHCs subject to the SLR) the ability to elect to temporarily exclude US Treasuries and deposits at Federal Reserve Banks from the denominator of the SLR. OCC, Federal Reserve and FDIC, Regulatory Capital Rule: Temporary Exclusion of US Treasury Securities and Deposits at Federal Reserve Banks From the Supplementary Leverage Ratio for Depository Institutions, 85 Fed Reg 32980 (1 June 2020), https://occ.gov/news-issuances/federal-register/2020/85fr32980.pdf. This interim final rule, like the interim final rule applicable to BHCs, expired at the end of the first quarter of 2021.

56 In a statement announcing that the SLR relief would expire as scheduled, the Federal Reserve acknowledged that, 'because of recent growth in the supply of central bank reserves and the issuance of Treasury securities, the [Federal Reserve] may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability.' The Federal Reserve is expected, in 2021, to seek comment on potential adjustments to the SLR that would avoid these strains while ensuring that overall bank capital requirements are not eroded. Federal Reserve, 'Federal Reserve Board announces that the temporary change to its supplementary leverage ratio (SLR) for bank holding companies will expire as scheduled on March 31' (19 March 2021), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210319a.htm.

57 These numbers reflect currently available public reporting.

58 See 12 CFR Section 217.405–06.

59 OCC, Federal Reserve, and FDIC, Regulatory Capital Rule: Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (22 July 2019), https://www.govinfo.gov/content/pkg/FR-2019-07-22/pdf/2019-15131.pdf.

60 OCC, Federal Reserve and FDIC, Standardized Approach for Calculating the Exposure Amount of Derivative Contracts (24 January 2020), https://www.govinfo.gov/content/pkg/FR-2020-01-24/pdf/2019-27249.pdf.

61 Federal Reserve, 'Amendments to the Regulatory Capital, Capital Plan, and Stress Test Rules' (25 April 2018), https://www.govinfo.gov/content/pkg/FR-2018-04-25/pdf/2018-08006.pdf.

62 Federal Reserve, 'Federal Reserve Board announces individual capital requirements for all large banks, effective on October 1' (5 August 2021), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210805a.htm.

63 As discussed above, in light of the coronavirus pandemic the Federal Reserve required each large BHC to resubmit its capital plan. Under the capital planning rule, as modified by the SCB final rule, when a capital plan resubmission is required the Federal Reserve 'may' recalculate a firm's SCB. See 12 CFR 225.8(f)(3). In December 2020, the Federal Reserve extended the deadline for it to notify firms of whether their SCBs would be recalculated, until 31 March 2021. See 'December 2020 Stress Test Results', footnote 46 at 143–44.

64 Basel Committee, Basel III: Finalising Post-Crisis Reforms (December 2017), available at https://www.bis.org/bcbs/publ/d424.htm.

65 In conjunction with the Tailoring Rules, on 1 November 2019, the Federal Reserve and FDIC published a joint final rule implementing the EGRRCPA to tailor resolution plan requirements based on institution size and other quantitative measures. Federal Reserve, FDIC, Final Rule, Resolution Plans Required, 84 Fed Reg 59194 (1 November 2019), https://www.govinfo.gov/content/pkg/FR-2019-11-01/pdf/2019-23967.pdf.

66 EGRRCPA, US Public Law No. 115-174, Section 402, 132 US Statutes at Large 1296, 1356 (2018).

67 Federal Reserve, FDIC, Final Guidance for the 2019, 84 Fed Reg 1438 (4 February 2019), https://www.govinfo.gov/content/pkg/FR-2019-02-04/pdf/2019-00800.pdf; Federal Reserve, FDIC, Guidance for Resolution Plan Submissions of Certain Foreign-Based Covered Companies, 85 Fed Reg 83557 (22 December 2020), https://www.govinfo.gov/content/pkg/FR-2020-12-22/pdf/2020-28155.pdf.

68 FDIC, Final Rule, Resolution Plans Required for Insured Depository Institutions with $50 Billion or More in Total Assets, 77 Fed Reg 3075 (23 January 2012), https://www.govinfo.gov/content/pkg/FR-2012-01-23/pdf/2012-1136.pdf.

69 FDIC, Advance Notice of Proposed Rulemaking, Resolution Plans Required for Insured Depository Institutions With $50 Billion or More In Total Assets, 84 Fed Reg 16620 (22 April 2019), https://www.govinfo.gov/content/pkg/FR-2019-04-22/pdf/2019-08077.pdf.

70 FDIC chairman Jelena McWilliams, Keynote Remarks, Speech Before the 2018 Annual Conference of the Clearing House (TCH) and Bank Policy Institute (BPI) (28 November 2018), https://www.fdic.gov/news/speeches/spnov2818.html.

71 FDIC, FDIC Announces Lifting IDI Plan Moratorium (19 January 2021), https://www.fdic.gov/resauthority/idi-statement-01-19-2021.pdf.

72 FDIC Outlines Modified Approach for Insured Depository Institution Resolution Planning Rule (25 June, 2021), https://www.fdic.gov/resources/resolutions/resolution-authority/idi-statement-06-25-2021.pdf.

73 FDIC, Final Rule: Certain Orderly Liquidation Authority Provisions under Title II of the Dodd–Frank Act, 76 Fed Reg 41626 (15 July 2011).

74 Martin J Gruenberg, acting chair, FDIC, 'Remarks to the Federal Reserve Bank of Chicago Bank Structure Conference' (10 May 2012), https://archive.fdic.gov/view/fdic/1789.

75 FDIC, Notice and Request for Comment, 'Resolution of Systemically Important Financial Institutions: The Single Point of Entry Strategy', 78 Fed Reg 76614 (18 December 2013).

76 See, e.g., 12 US Code of Federal Regulations Part 201; the Federal Reserve Discount Window (21 July 2010), https://www.frbdiscountwindow.org/pages/general-information/the%20discount%20window#eligibility.

77 12 USC Section 343.

78 See Dodd–Frank Act, US Public Law No. 111-203, Section 210(n), 124 US Statutes at Large 1375, 1506-09 (2010).

79 Financial Stability Board, Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution: Total Loss-absorbing Capacity (TLAC) Term Sheet (9 November 2015).

80 Federal Reserve, Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important US Bank Holding Companies and Intermediate Holding Companies of Systemically Important Foreign Banking Organizations, 82 Fed Reg 8266 (15 December 2016).

81 Federal Reserve, Restrictions on Qualified Financial Contracts of Systemically Important US Banking Organizations and the US Operations of Systemically Important Foreign Banking Organizations; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions, 82 Fed Reg 42,882 (12 September 2017); FDIC, Restrictions on Qualified Financial Contracts of Certain FDIC-Supervised Institutions; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions, 82 Fed Reg 50,228 (30 October 2017); OCC, Mandatory Contractual Stay Requirements for Qualified Financial Contracts, 82 Fed Reg 56,630 (29 November 2017).

82 12 CFR Section 252.85(a); 12 CFR Section 382.5(a); 12 CFR Section 47.6.

83 In October 2016, the US federal banking agencies issued an advance notice of proposed rule-making on enhanced cyber risk management standards (Enhanced Standards) for large and interconnected entities and their third-party service providers. The proposed rule addressed five broad categories of cyber standards: cyber risk governance; cyber risk management; internal dependency management; external dependency management; and incident response, cyber resilience and situational awareness. In January 2017, the comment period for the proposed rule was extended. As at 31 December 2020, the US federal banking agencies have yet to issue a final rule.

84 See, e.g., Interagency Guidelines Establishing Information Security Standards, 12 CFR Parts 30, 208, 225 and 364 (implementing Section 501(b) of the Gramm–Leach–Bliley Act (the GLB Act)); Federal Financial Institutions Examination Council Information Technology Examination Handbook, Internet Security (September 2016), ithandbook.ffiec.gov/media/216407/informationsecurity2016booklet.pdf.

85 A computer-security incident becomes a 'notification incident' if it 'has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, a banking organization's: (i) Ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of its customer base, in the ordinary course of business; (ii) business line(s), including associated operations, services, functions, and support, that upon failure would result in a material loss of revenue, profit, or franchise value; or (iii) operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a threat to the financial stability of the United States.' OCC, Federal Reserve and FDIC, Computer-Security Incident Notification Requirements for Banking Organizations and Their Bank Service Providers, 86 Fed Reg 66,424, 66425 (23 November 2021). For a summary of the rule when it was proposed, see also Davis Polk & Wardwell LLP, 'Banking Agencies Propose Cyber Reporting Rule: Implications for Cybersecurity Compliance' (22 December 2020), https://www.davispolk.com/sites/default/files/2021-06/banking_agencies_propose_cyber_reporting_rule_-_implications_for_cybersecurity_compliance.pdf.

86 New York Codes, Rules and Regulations Part 500.

87 ibid. See also NYDFS, Guidance Regarding the Adoption of an Affiliate's Cybersecurity Program (October 22, 2021), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20211022_affiliates_cybersecurity_program.

88 OCC, Policy Statement on Financial Technology Companies' Eligibility to Apply for National Bank Charters (31 July 2018), https://www.occ.gov/publications/publications-by-type/other-publications-reports/pub-other-occ-policy-statement-fintech.pdf.

89 OCC, Comptroller's Licensing Manual Supplement: Considering Charter Applications from Financial Technology Companies (July 2018), https://www.occ.gov/publications-and-resources/publications/comptrollers-licensing-manual/files/pub-considering-charter-apps-from-fin-tech-co.pdf .

90 'DeFi' is a term that 'broadly refers to a variety of financial products, services, activities, and arrangements supported by smart contract-enabled distributed ledger technology', often without the use of financial intermediaries or centralized institutions. See President's Working Group on Financial Markets et al., Report on Stablecoins, 7 (21 November 2021), https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf.

91 See, e.g., Government Accountability Office, Virtual Currencies – Emerging Regulatory, Law Enforcement, and Consumer Protection Challenges (May 2014), https://www.gao.gov/assets/670/663678.pdf. See also, the Anti-Money Laundering Act of 2020, Pub L No. 116-283, HR 6395, 116th Cong (2021).

92 For example, in 2015, the NYDFS finalised a rule that requires most businesses involved in digital asset business activity in or involving New York, excluding merchants and consumers, to apply for a licence, commonly known as a BitLicense, from the NYDFS and to comply with anti-money laundering, cybersecurity, consumer protection and financial and reporting requirements, among others; see, https://www.dfs.ny.gov/reports_and_publications/press_releases/pr1509221.

93 OCC, Interpretive Letter No. 1179, OCC Chief Counsel's Interpretation Clarifying (1) Authority of a Bank to Engage in Certain Cryptocurrency Activities; and (2) Authority of the OCC to Charter a National Trust Bank (18 November 2021), https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2021/int1179.pdf.

94 See, e.g., President's Working Group on Financial Markets et al., Report on Stablecoins 16 (21 November 2021), https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf.

95 See CFTC, Keynote Address of Commissioner Dan M. Berkovitz Before FIA and SIFMA-AMG, Asset Management Derivatives Forum 2021 (8 June 2021), https://www.cftc.gov/PressRoom/SpeechesTestimony/opaberkovitz7?utm_source=govdelivery; Press Release, SEC, SEC Charges Decentralized Finance Lender and Top Executives for Raising $30 Million Through Fraudulent Offering, https://fortune.com/2021/06/09/us-futures-regulator-defi-derivatives/.

96 The Federal Reserve, Money and Payments: The US Dollar in the Age of Digital Transformation (2022), https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf; Federal Reserve, Press Release, Federal Reserve Chair Jerome H. Powell Outlines the Federal Reserve's Response to Technological Advances Driving Rapid Change in the Global Payments Landscape (20 May 2021), https://www.federalreserve.gov/newsevents/pressreleases/other20210520b.htm.

97 See The White House, US Climate-Related Financial Risk Executive Order 14030: A Roadmap to Build a Climate-Resilient Economy (14 Oct. 2021), https://www.whitehouse.gov/wp-content/uploads/2021/10/Climate-Finance-Report.pdf?stream=top.

98 See FSOC, Report on Climate-Related Financial Risk, 3 (21 Oct. 2021), https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf.

99 See Davis Polk & Wardwell LLP, FSOC Climate Report: 10 Key Takeaways for the Banking Sector (26 Oct. 2021), https://www.davispolk.com/insights/client-update/fsoc-climate-report-10-key-takeaways-banking-sector.

100 See, e.g., The Honourable Jerome H. Powell, Chair Pro Tempore, Board of Governors of the Federal Reserve System, Testimony before the House Financial Services Committee (2 March 2022), https://financialservices.house.gov/uploadedfiles/03.02.2022_powelltestimony_mpr.pdf.

101 OCC, Principles for Climate-Related Financial Risk Management for Large Banks (16 Dec. 2021), https://www.occ.gov/news-issuances/bulletins/2021/bulletin-2021-62a.pdf.

102 ibid.

103 Michael J Hsu, Acting Comptroller of the Currency, Remarks at the Institute of International Bankers, Annual Washington Conference (7 March 2022), https://www.occ.gov/news-issuances/speeches/2022/pub-speech-2022-22.pdf.

104 See 12 USC Section 24. The specific authorising language is contained in Section 24(7) of the National Banking Act, pursuant to which a national banking association has the power to 'exercise . . . all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes'.

105 12 USC Section 24(7) permits the 'purchasing and selling [of securities and stock] without recourse, solely upon the order, and for the account of, customers'. In contrast, securities underwriting and dealing are expressly prohibited by the National Banking Act – 'The business of dealing in securities and stock by the association shall be limited to purchasing and selling [such securities as agent] and in no case for its own account, and the association shall not underwrite any issue of securities or stock' – except that the association may deal in US government or agency securities and purchase for its own account certain other investment securities.

106 12 USC Section 24(7) also permits 'the association [to] purchase for its own account investment securities under such limitations and restrictions as the Comptroller of the Currency may by regulation prescribe', subject to certain limits on the amount of investment securities issued by any single issuer, other than the United States and certain agencies and other bodies specified in the statute. The term investment securities is defined as 'marketable obligations, evidencing indebtedness of any person, copartnership, association, or corporation in the form of bonds, notes and/or debentures commonly known as investment securities under such further definition of the term “investment securities” as may by regulation be prescribed by the Comptroller of the Currency'. The OCC has further defined investment securities in 12 CFR Part 1.

107 It was debated for many years whether the business of banking was limited to the activities enumerated in 12 USC Section 24(7), or whether those activities were merely illustrative of the activities included within the business of banking. The US Supreme Court settled this debate in 1995 by holding that 'the business of banking is not limited to the enumerated powers in [12 USC Section 24(7)] and that the [OCC] therefore has discretion to authorise activities beyond those specifically enumerated. The exercise of the [OCC]'s discretion, however, must be kept within reasonable bounds'. See footnote 2 in NationsBank of North Carolina v. Variable Annuity Life Insurance Co, 513 US 251 (1995).

108 OCC, Activities Permissible for National Banks and Federal Savings Associations, Cumulative (October 2017), https://www.occ.treas.gov/publications-and-resources/publications/banker-education/files/pub-activities-permissible-for-nat-banks-fed-saving.pdf. Often, interpretations concluding that specific activities are permissible for national banks reflect new technologies and products. For example, the OCC confirmed in September 2020 that national banks may take deposits that serve as reserves for fiat currency-pegged stablecoins. See OCC, Interpretive Letter No. 1172, OCC Chief Counsel's Interpretation on National Bank and Federal Savings Association Authority to Hold Stablecoin Reserves.

109 See 12 USC Section 1843(a), (c)(8). The BHC Act also contains various narrow exemptions from this general prohibition, including exemptions that allow a BHC to make non-controlling investments for its own account or an investment fund controlled by it in up to 4.9 per cent of any class of voting securities of any non-banking company; invest in a subsidiary that does not have any office or direct or indirect subsidiary or otherwise engage in any activities directly or indirectly in the United States, other than those that are incidental to its foreign or international business; hold investments as a fiduciary; or furnish services to its subsidiaries (12 USC Sections 1843(c)(1)(C), (c)(4), (c)(6), (c)(7), (c)(13)).

110 12 USC Section 1843(a), (c)(8).

111 12 CFR Part 225.

112 For a comprehensive description of these activities in general, see the 1997 Federal Reserve revision of Regulation Y, available at www.federalreserve.gov/boarddocs/press/boardacts/1997/19970220/R-0935-36.pdf.

113 For example, flood zone determination services were found to be permissible under extending credit pursuant to 12 CFR Section 225.28(b)(2) and variable production payments and certain spot purchase-forward sale transactions have been interpreted as extending credit under 12 CFR Section 225.28(b)(1), (2).

114 See 12 USC Section 1843(a), (c)(8); 12 CFR Section 225.28(b).

115 GLB Act, Pub L No. 106-102, 106th Cong, 1st Sess (12 November 1999), 113 Stat 1338–1481 (1999). Although the GLB Act softened the US policy of maintaining an appropriate separation between banking and commerce, it did not eliminate that separation. To become a financial holding company (FHC), a BHC and each of its IDI subsidiaries must be well capitalised and well managed as those terms are defined in the Federal Reserve's Regulation Y. See 12 CFR Section 225.2(r) and (s).

116 12 USC Section 1843(k)(1).

117 12 USC Section 1843(k)(4), especially (k)(4)(F).

118 12 USC Sections 1843(k)(4)(B) (insurance underwriting); (k)(4)(E) (securities underwriting and dealing); (k)(4)(H) (merchant banking); (k)(4)(I) (insurance company portfolio investments). See, e.g., The Royal Bank of Scotland, 94 Federal Reserve Bulletin C60 (2008) (certain energy commodities trading as a complement to energy derivatives trading).

119 12 USC Section 1843(k)(4)(H) (merchant banking).

120 12 USC Section 1843(k)(4)(G).

121 See 12 CFR Part 211, Subpart A.

122 See 12 CFR Section 225.86(b).

123 Former Federal Reserve chair Paul Volcker, although not formally involved in the Dodd–Frank Act legislative process that added Section 13 to the BHC Act, was among the leading advocates for imposing restrictions on proprietary trading and private funds activities by banks and their affiliates in the Act.

124 As originally enacted, Section 13 defined banking entity as 'any insured depository institution (as defined in Section 3 of the Federal Deposit Insurance Act (12 USCA [Section] 1813)), any company that controls an IDI, or that is treated as a BHC for purposes of Section 8 of the International Banking Act (IBA), and any affiliate or subsidiary of any such entity', not including certain institutions that function solely in a trust or fiduciary capacity, under certain conditions. 12 USCA Section 1851(h)(1). Under Section 8 of the IBA, a foreign bank with a US commercial banking presence, and any company deemed to control such a foreign bank, is treated as a BHC. 12 USCA Section 3106(a). The Implementing Regulations largely conform to the statutory definition of banking entity but expanded the exclusions from banking entity to include any covered fund, portfolio company held under the merchant banking or insurance company investment authorities of Section 4(k) of the BHC Act, or portfolio concern controlled by a small business investment company, in each case, that is not itself a banking entity under the definition of such term, as well as the FDIC acting in its corporate capacity or as conservator or receiver. 12 CFR Section 248.2(c)(2). As a result of changes enacted by the EGRRCPA, Section 13's definition of banking entity also excludes an institution that does not have, and is not controlled by a company that has, more than US$10 billion in total consolidated assets, and total trading assets and trading liabilities that are more than 5 per cent of total consolidated assets.

125 12 USCA Section 1851(a).

126 The effective date of the Volcker Agencies' 2019 amendments to the Implementing Regulations, which focused on the Volcker Rule's restrictions on proprietary trading, was 1 January 2020, with compliance required by 1 January 2021. The effective date of the Volcker Agencies' 2020 amendments to the Implementing Regulations, which focused on the Volcker Rule's restrictions on sponsoring, investing in or having certain relationships with covered funds, was 1 October 2020.

127 12 CFR Section 248.3(a). The Implementing Regulations provide a more detailed definition of the term 'proprietary trading' than the statute. 12 USCA Section 1851(h)(4).

128 12 CFR Section 248.3(b)(1)(i).

129 12 CFR Section 248.3(b)(2)(i).

130 12 CFR Section 248.3(b).

131 The term derivatives includes swaps, security-based swaps (SBS), foreign exchange forwards and swaps, physical commodity forwards, and retail foreign exchange and retail commodity transactions. See 12 CFR Section 248.3(c)(2).

132 The exclusions cover, for example, loans, non-financial spot commodities, and foreign exchange and currency. See 12 CFR Section 248.3(c)(2).

133 See 12 CFR Section 248.3(d).

134 See 12 USCA Section 1851(d)(1)(A)-(J). Permitted activities may not include, however, any activity that would involve or result in a material conflict of interest between the banking entity and its clients, customers or counterparties; result, directly or indirectly, in a material exposure by the banking entity to high-risk assets or high-risk trading strategies; or pose a threat to US financial stability or the safety and soundness of the banking entity (backstop provisions). See 12 USCA Section 1851(d)(2)(A).

135 12 USCA Section 1851(a)(1).

136 15 USCA Section 80a-3.

137 Investment Company Act of 1940 Section 3(c)(1), (7), 15 USCA Section 80a-3. This definition is very broad. The exemptions under Section 3(c)(1) and (7) of the 1940 Act can be used to exempt any entity from the definition of investment company regardless of how it invests or what it invests in, so long as certain limits on the number or financial characteristics of its investors are satisfied.

138 A fund that is organised or established outside the United States that is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities, and all the ownership interests of which are offered and sold solely outside the United States, is a covered fund with respect to a banking entity that is located in or organised under US law, and any banking entity directly or indirectly controlled by such a banking entity, if that banking entity or an affiliate sponsors or directly or indirectly holds an ownership interest in that fund. 12 CFR Section 248.10(b)(1)(iii). A fund that is organised or established outside the United States but that relies on Section 3(c)(1) or 3(c)(7) of the 1940 Act is also a covered fund.

139 A commodity pool, as defined in Section 1a(10) of the Commodity Exchange Act (CEA), 7 USC Section 1a(10), is a covered fund if the commodity pool operator has claimed exempt pool status under 17 CFR Section 4.7, or if the operator is registered with the US Commodity Futures Trading Commission (CFTC) as a commodity pool operator in connection with the operation of the pool in question, and the pool's participation units are substantially all owned by qualified eligible persons (QEPs), as defined in 17 CFR Section 4.7(a)(2) and (3), and have not been publicly offered to persons that are not QEPs. 12 CFR Section 248.10(b)(1)(ii).

140 See 12 CFR Section 248.10(c).

141 For example, the 2020 amendments to the Implementing Regulations clarified and simplified the exclusion for foreign public funds and added exclusions, subject to certain requirements, for customer facilitation vehicles, qualifying venture capital funds and credit funds.

142 12 CFR Section 248.10(d)(6)(i).

143 12 CFR Section 248.10(d)(6)(ii).

144 12 CFR Section 248.10(d)(6)(i)(A).

145 12 CFR Section 248.10(d)(6)(i)(B)-(F).

146 12 CFR Section 248.10(d)(6)(i)(G).

147 See 12 CFR Section 248.10(a)(2).

148 A banking entity that serves as a trustee that does not exercise investment discretion is not a sponsor of a covered fund. See 12 CFR Section 248.10(d)(10)(i). With respect to such a covered fund, however, a banking entity that directs such a trustee or that otherwise possesses investment discretion with respect to the fund will be considered a sponsor of the fund. See 12 CFR Section 248.10(d)(10)(ii).

149 Serving as a commodity pool operator will only cause a banking entity to be a sponsor of a covered fund if the fund is a covered fund under 12 CFR Section 248.10(b)(1)(ii).

150 The EGRRCPA revised Section 13's covered fund name-sharing restriction to allow a covered fund to share the same name, or a variation of the same name, as a banking entity that is an investment adviser to the fund, if the investment adviser is not and does not share the same name as an IDI, a company that controls an IDI, or a foreign company treated as a BHC under the IBA, and the fund's name does not contain the word bank. Pub L 115-174, Section 204 (amending 12 USCA Section 1851(d)(1)(G)(vi)). 12 CFR Section 248.10(d)(9)(iii); 12 CFR 248.11(a)(6).

151 These exemptions include (1) organising and offering a covered fund in connection with asset management or similar customer services, see 12 CFR Section 248.11(a), (2) organising and offering an issuer of asset-backed securities (ABS), see 12 CFR Section 248.11(b), (3) underwriting and market making in ownership interests in covered funds, see 12 CFR Section 248.11(c), (4) risk-mitigating hedging of employee compensation arrangements, see 12 CFR Section 248.13(a), (5) certain covered fund activities and investments outside the United States by non-US banking entities, see 12 CFR Section 248.13(b), (6) covered fund activities and investments by a regulated insurance company, see 12 CFR Section 248.11(c), (7) qualifying foreign excluded funds, see 12 CFR Section 248.13(d), and (8) such other activity as the agencies determine 'would promote and protect the safety and soundness of the banking entity and the financial stability of the United States', see 12 USCA Section 1851(d)(1)(J).

152 Section 23B requires that many transactions between a bank and an affiliate, including any covered transaction under Section 23A, be conducted on market terms. 12 USCA Section 371c-1(a). For more information on Section 23B, see 'Transactions with affiliates' (Section IV.iii).

153 For a detailed discussion of regular Section 23A, see 'Transactions with affiliates' (Section IV.iii).

154 12 USCA Section 1851(f)(3); 12 CFR Section 248.14(a)(2)(ii).

155 12 CFR Section 248.14(a)(2)(iii).

156 12 USCA Section 1843(c)(9).

157 12 USCA Section 1843(c)(13).

158 12 USCA Section 1851(d)(1)(H).

159 12 USCA Section 1851(d)(1)(I).

160 12 USCA Section 1851(d)(1)(H) to (I).

161 12 CFR Section 248.13(b).

162 12 CFR Section 248.6(f); 12 CFR 248.13(d).

163 The definition of swap includes a wide range of agreements, contracts and transactions. In general, a swap includes swaps and options on non-securities, such as interest rate swaps and options, energy and metal swaps, agricultural swaps, commodity swaps and options, cross-currency swaps and non-deliverable forwards, foreign exchange options, swaps on broad-based indices and swaps on government securities, subject to certain exclusions. See CEA Section 1a(47). In November 2012, the US Treasury Secretary issued, pursuant to Title VII, a determination that deliverable FX swaps and FX forwards, as such terms are defined in the CEA, are not swaps and are exempt from many Title VII requirements. Department of the Treasury, Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 Fed Reg 69694 (20 November 2012), www.gpo.gov/fdsys/pkg/FR-2012-11-20/pdf/2012-28319.pdf.

164 SBS are defined as instruments that otherwise would be swaps, but have certain specified characteristics. Specifically, SBS are instruments that would otherwise be swaps but are based on certain underlying assets, including a single security, a loan, a narrow-based group or index of securities, or events relating to a single issuer or issuers of securities in a narrow-based security index, with exceptions for certain types of government-issued securities. Securities Exchange Act of 1934 (Exchange Act) Section 3(a)(68). In August 2012, the CFTC and SEC jointly issued a final regulation to further define the terms swap and security-based swap. CFTC and SEC, Further Definition of 'Swap', 'Security-Based Swap' and 'Security-Based Swap Agreement'; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 Fed Reg 48208 (13 August 2012), www.gpo.gov/fdsys/pkg/FR-2012-08-13/pdf/2012-18003.pdf.

165 Section 2(i) of the CEA states that the CFTC's swap rules added by the Dodd–Frank Act will not apply 'to activities outside the United States unless those activities (1) have a direct and significant connection with activities in, or effect on, commerce of the United States, or (2) contravene such rules or regulations as the [CFTC] may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of this chapter that was enacted by the [Dodd–Frank Act]'. Section 30(c) of the Exchange Act states that the SEC's SBS rules added by the Dodd–Frank Act will not apply 'to any person insofar as such person transacts a business in SBS without the jurisdiction of the United States, unless such person transacts such business in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate to prevent the evasion of any provision of this chapter that was added by the [Dodd–Frank Act]'.

166 Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed Reg 45292 (26 July 2013); Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants – Cross-Border Application of the Margin Requirements, 81 Fed Reg 34818 (31 May 2016).

167 Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants, 85 Fed Reg 56924 (14 September 2020).

168 See Application of 'Security-Based Swap Dealer' and 'Major Security-Based Swap Participant' Definitions to Cross-Border Security-Based Swap Activities, 79 Fed Reg 47278 (12 August 2014). Security-Based Swap Transactions Connected with a Non-US Person's Dealing Activity That Are Arranged, Negotiated, or Executed By Personnel Located in a US Branch or Office or in a US Branch or Office of an Agent; Security-Based Swap Dealer De Minimis Exception, 81 Fed Reg 8598 (19 February 2016). See also Cross-Border Application of Certain Security-Based Swap Requirements, 85 Fed Reg 6270 (4 February 2020).

169 See CEA Section 2(h) and Exchange Act Section 3C, as amended by the Dodd–Frank Act.

170 CEA Section 2(h)(7) and Exchange Act Section 3C(g) provide an exception from the mandatory clearing requirement for swaps if one of the swap counterparties is not a financial entity; is using swaps to hedge or mitigate commercial risk; and notifies the CFTC (for swaps) or the SEC (for SBS) how the counterparty generally meets its financial obligations associated with entering into non-cleared swaps.

171 The SEC has proposed, but not finalised, rules implementing end-user exceptions from the mandatory clearing requirement for SBSs. End-User Exception to Mandatory Clearing of Security-Based Swaps, 75 Fed Reg 79992 (21 December 2010).

172 See 17 CFR 50.4.

173 CEA Section 1a(50) defines a swap execution facility as 'a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility, that (A) facilitates the execution of swaps between persons; and (B) is not a designated contract market'. The CFTC has proposed changes to its swap execution facility rules, which would require certain additional brokers and aggregators of single-dealer execution platforms to register with the CFTC as swap execution facilities or to seek an exemption. See Swap Execution Facilities and Trade Execution Requirement, 83 Fed Reg 61949 (30 November 2018).

174 See CEA Section 2(h)(8) and Exchange Act Section 3C, as amended by the Dodd–Frank Act. See also Process for a Designated Contract Market or Swap Execution Facility To Make a Swap Available to Trade, Swap Transaction Compliance and Implementation Schedule, and Trade Execution Requirement under the Commodity Exchange Act, 78 Fed Reg 33606 (4 June 2013).

175 Entities that enter into swaps or SBS for their own accounts, either individually or in a fiduciary capacity but not as part of a regular business, are not included within the definitions.

176 The CFTC amended its rule implementing this exception to provide greater clarity regarding which of an IDI's swaps are entered into in connection with originating a loan with a customer and therefore eligible for the exemption. CFTC, De Minimis Exception to the Swap Dealer Definition – Swaps Entered Into by Insured Depository Institutions in Connection with Loans to Customers, 84 Fed Reg 12450 (1 April 2019).

177 CFTC and SEC, Further Definition of 'Swap Dealer', 'Security-Based Swap Dealer', 'Major Swap Participant', 'Major Security-Based Swap Participant' and 'Eligible Contract Participant;' 77 Fed Reg 30596 (23 May 2012), www.gpo.gov/fdsys/pkg/FR-2012-05-23/pdf/2012-10562.pdf. These rules initially established the threshold for the de minimis exception from swap dealer registration requirements at US$8 billion notional for CFTC-regulated swaps connected with dealing activity effected within 12 months, and the de minimis exception from SBS dealer registration requirements at US$8 billion notional for SEC-regulated credit default swaps and US$400 million notional for other SBS connected with dealing activity effected within 12 months. The swap threshold was set to decrease to US$3 billion on 31 December 2019, but the CFTC subsequently issued a rule permanently setting the swap threshold at US$8 billion. De Minimis Exception to the Swap Dealer Definition, 83 Fed Reg 56666 (13 November 2018).

178 See generally CEA Section 4s and Exchange Act Section 15F.

179 See Margin and Capital Requirements for Covered Swap Entities, 80 Fed Reg 74840 (30 November 2015); Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 Fed Reg 636 (6 January 2016); Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants – Cross-Border Application of the Margin Requirements, 81 Fed Reg 34818 (31 May 2016).

180 SEC, Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, 84 Fed Reg 43872 (22 August 2019).

181 See 17 CFR Part 45.

182 See Regulation SBSR – Reporting and Dissemination of Security-Based Swap Information, 81 Fed Reg 53546 (12 August 2016); Regulation SBSR– Reporting and Dissemination of Security-Based Swap Information, 80 Fed Reg 14563 (19 March 2015).

183 Consolidated and Further Continuing Appropriations Act of 2015 Pub L No. 113-235, HR 83, 113th Cong Section 630 (2015).

184 The Swaps Pushout Rule permits an IDI to have a swaps entity affiliate as long as there is compliance with Sections 23A and 23B of the Federal Reserve Act (FRA) (discussed below), as well as any additional requirements that the CFTC or SEC, as applicable, and the Federal Reserve, determine to be necessary and appropriate.

185 As at 31 December 2018, the prudential regulations have not adopted joint rules as to authorised ABS swap activity for covered depository institutions.

186 For the purposes of Section 23A of the FRA, covered transactions include (1) a loan or extension of credit to the affiliate, including a purchase of assets subject to an agreement to repurchase, (2) a purchase of or an investment in securities issued by the affiliate, (3) a purchase of assets from the affiliate, (4) the acceptance of securities or other debt obligations issued by the affiliate as collateral security for a loan or extension of credit to any person or company, (5) the issuance of a guarantee, acceptance or letter of credit, including an endorsement or standby letter of credit, on behalf of an affiliate, (6) a transaction with an affiliate that involves the borrowing or lending of securities, to the extent that the transaction causes a bank or subsidiary to have credit exposure to the affiliate, or (7) a derivative transaction with an affiliate, to the extent that the transaction causes a bank or a subsidiary to have credit exposure to the affiliate. Section 23A of the FRA also contains an attribution rule whereby a transaction with any person is considered to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or are transferred to, that affiliate.

187 Capital stock and surplus is essentially the sum of a bank's Tier 1 capital and Tier 2 capital, and the balance of the bank's allowance for loan and lease losses not included in its Tier 2 capital.

188 The Dodd–Frank Act added the at all times requirement, effective 21 July 2012. Previously, such transactions had to be secured by a statutorily defined amount of collateral at the time of the transaction.

189 Transactions that are subject to the collateral requirement in Section 23A include a loan or extension of credit to, or guarantee, acceptance or letter of credit issued on behalf of, an affiliate by a bank or its subsidiary, and, after 21 July 2012, any credit exposure of a bank or a subsidiary to an affiliate resulting from a securities borrowing or lending transaction or a derivative transaction.

190 Covered transactions for the purposes of Section 23B of the FRA include all Section 23A covered transactions (identified above) as well as any sale of assets by a bank to an affiliate; any payment of money or furnishing of services by a bank to an affiliate; any transaction in which an affiliate acts as an agent or broker for a bank or for any other person if the bank is a participant in the transaction; and any transaction by a bank with a third party if an affiliate has a financial interest in the third party or if an affiliate is a participant in the transaction. Section 23B of the FRA contains the same attribution rule as Section 23A.

191 The statutory and regulatory exemptions from Section 23A of the FRA include, inter alia, entering into certain covered transactions that are fully secured by obligations of the United States or its agencies; intraday extensions of credit to an affiliate (if certain risk-management and monitoring systems are in place); and giving immediate credit to an affiliate for uncollected items received in the ordinary course of business.

192 Dodd–Frank Act of 2010 Pub L No. 111-203, HR 4173, 111th Cong Section 608 (2010).

193 The Dodd–Frank Act does not define credit exposure for purposes of Sections 23A and 23B. This and other aspects of the Dodd–Frank Act's amendments to Sections 23A and 23B will most likely need to be addressed through amendments to Regulation W. The Dodd–Frank Act explicitly authorises the Federal Reserve to issue regulations or interpretations with respect to the manner in which a bank may take netting agreements into account under Section 23A in determining the amount of a covered transaction with an affiliate, including whether a covered transaction is fully secured. See Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 608(a) (2010).

194 The Truth in Lending Act of 1968 establishes standard disclosures for consumer creditors nationwide. See Pub L No. 90-321, 90th Cong, 2nd Sess (29 May 1968) 82 Stat 146 (1968).

195 The Truth in Savings Act of 1991 requires that consumers receive written information about the terms of their deposit accounts and also governs the advertising of deposits and interest computations. See Pub L No. 102-242, 102nd Cong, 1st Sess (19 December 1991) 105 Stat 2236 (1991).

196 The Electronic Fund Transfer Act of 1978 requires certain disclosures and provides other protections for consumers engaging in electronic fund transfers and remittance transfers. See Pub L No. 95-630, 95th Cong, 2nd Sess (10 November 1978) 92 Stat 3641 (1978).

197 The Equal Credit Opportunity Act of 1974 prohibits certain types of discrimination in personal and commercial transactions. See Pub L No. 93-495, 93rd Cong, 1st Sess (28 October 1974) 88 Stat 1521 (1974). In addition, creditors may not discriminate against an applicant, or discourage a potential applicant, on the basis of race, colour, religion, national origin, sex, marital status, age, receipt of income from public assistance programmes or good faith exercise of rights under the Consumer Credit Protection Act.

198 GLB Act of 1999, Pub L No. 106-102, 106th Cong, 1st Sess (12 November 1999), 113 Stat 1338–1481 (1999). The GLB Act and its regulations apply to individuals who acquire financial products or services primarily for personal, family or household purposes.

199 Interagency Guidelines Establishing Standards for Safeguarding Customer Information and Rescission of Year 2000 Standards for Safety and Soundness; Final Rule, 66 Fed Reg 8616 (1 February 2001), https://www.gpo.gov/fdsys/pkg/FR-2001-02-01/pdf/01-1114.pdf.

200 For a discussion of excluded entities and activities, see Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 1027 (2010).

201 Large depository institutions in this context are those with greater than US$10 billion in assets. See Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 1025 (2010).

202 For example, the Consumer Financial Protection Bureau (CFPB) has promulgated regulations extending its supervision authority to larger participants in the consumer reporting, consumer debt collection, international money transfer, student loan servicing and auto finance markets.

203 After concluding that there was 'uncertainty as to the scope and meaning' of the term 'abusive' in this context, in January 2020 the CFPB released a policy statement intended to provide a framework governing the exercise of CFPB authority to address abusive acts or practices. CFPB, Statement of Policy Regarding Prohibition on Abusive Acts or Practices, 85 Fed Reg 6733 (6 February 2020). In March 2021, the CFPB rescinded this statement, asserting that the 2020 policy statement was 'inconsistent with the Bureau's duty to enforce Congress's standard and rescinding it will better serve the CFPB's objective to protect consumers from abusive practices'. CFPB, Consumer Financial Protection Bureau Rescinds Abusiveness Policy Statement to Better Protect Consumers (11 March 2021), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-rescinds-abusiveness-policy-statement-to-better-protect-consumers/.

204 CFPB, Press Release, Written Testimony of Director Rohit Chopra before the House Committee on Financial Services, (28 October 2021), https://www.consumerfinance.gov/about-us/newsroom/written-testimony-director-rohit-chopra-before-house-committee-financial-services/; CFPB, Press Release, Written Testimony of Director Rohit Chopra before the Senate Committee on Banking, Housing, and Urban Affairs (28 October 2021), https://www.consumerfinance.gov/about-us/newsroom/written-testimony-director-rohit-chopra-before-senate-committee-banking-housing-urban-affairs.

205 See, e.g., CFPB, Overdraft/NSF Fee Reliance Since 2015 – Evidence from Bank Call Reports (December 2021), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-call_report_2021-12.pdf; CFPB, Press Release, Prepared Remarks of CFPB Director Rohit Chopra on the Overdraft Press Call (01 December 2021), https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-cfpb-director-rohit-chopra-overdraft-press-call/.

206 Nomination Hearing on the Honorable Gary Gensler, of Maryland, to be a Member of the Securities and Exchange Commission; and The Honorable Rohit Chopra, of the District of Columbia, to be Director, Bureau of Consumer Financial Protection: Hearing Before S. Comm. on Banking, Housing, and Urban Affairs (2 March 2021) (Statement of Rohit Chopra)), https://www.banking.senate.gov/hearings/02/22/2021/nomination-hearing.

207 CFPB, Press Release, Statement of CFPB Director Chopra on Stablecoin Report (1 November 2021), https://www.consumerfinance.gov/about-us/newsroom/statement-cfpb-director-chopra-stablecoin-report/.

208 517 US 25 (1996). One area of recent focus is whether a loan that is valid when made can become usurious under state law upon a sale or transfer to another person. The US Court of Appeals for the Second Circuit held in Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), cert. denied, 136 S. Ct. 2505 (2016), that a loan can become usurious under the theory that a loan originated by a national bank loses pre-emptive status over state usury law upon sale or transfer to a non-national bank. The OCC in 2020 finalised a regulation codifying the valid-when-made principle and rejecting the Second Circuit's conclusion in Madden. See OCC, Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 85 Fed Reg 33531 (2 June 2020). This rule-making is the subject of ongoing litigation.

209 Currency and Foreign Transactions Reporting Act, Pub L No. 91-508, Title II (1970).

210 The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub L No. 107-56, 115 Stat 272 (2001).

211 The Anti-Money Laundering Act of 2020, Pub L No. 116-283, HR 6395, 116th Cong (2021).

212 See, generally, 31 CFR Parts 1010 and 1020 (2020).

213 FinCEN, Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 69,920 (8 December 2021). The rule on beneficial ownership reporting requirements is one of three separate rules that FinCEN must issue under the AML Act to establish a national registry of beneficial ownership information.

214 See, e.g., FinCEN, FIN-2021-A004, Advisory on Ransomware and the Use of the Financial System to Facilitate Ransom Payments (8 November 2021), https://www.fincen.gov/sites/default/files/advisory/2021-11-08/FinCEN%20Ransomware%20Advisory_FINAL_508_.pdf.

215 Prior territorial sanctions targeting Sudan were lifted in October 2017.

216 US persons are defined as individual US citizens and permanent US resident aliens, wherever located; entities organised under US law, including their non-US branches (even when operating outside the United States); and individuals and entities located in the United States (even temporarily) regardless of the individual's citizenship or the entity's jurisdiction of incorporation (thus including branches of non-US organisations that are located in the United States). Non-US subsidiaries of US companies are also required to comply with US sanctions on Cuba and Iran and non US entities that are owned or controlled by US financial institutions are required to comply with certain of the sanctions on North Korea. Non-US persons may be also be liable for violations of US sanctions prohibitions if they engage in transactions with a US nexus (such as processing US dollar payments through the US financial system) or cause a US person to violate sanctions.

217 Executive Order 13884, Blocking Property of the Government of Venezuela (5 August 2019). This Order builds on earlier more limited sanctions prohibiting certain transactions with the government of Venezuela or specified persons in Venezuela imposed beginning in 2015.

218 The permissible tenor is 14 days or fewer for the affected financial institutions, 30 days or fewer for the affected defence companies and 60 days or fewer for the affected energy companies.

219 Following the Russian Federation's invasion of Ukraine in February 2022, the Biden Administration imposed a broad array of sanctions and export control restrictions targeting the Russian government and banking sector. See Davis Polk & Wardwell LLP, 'United States Escalates Sanctions and Export Controls in Response to Russian Invasion of Ukraine' (1 March 2022), https://www.davispolk.com/insights/client-update/united-states-escalates-sanctions-and-export-controls-response-russian.

220 Executive Order 13959, Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies (12 November 2020), as amended by Executive Order 13974; Executive Order on Chinese Military Companies (12 November 2020), as amended by Executive Order 13974; Executive Order on Amending Executive Order 13959 – Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies (13 January 2021).

221 As required by the Federal Civil Penalties Inflation Adjustment Act Improvements of 2015, the Office of Foreign Assets Control's (OFAC) maximum civil penalty amounts are subject to annual adjustment.

222 OFAC also has penalty authority under certain special-purpose economic sanctions statutes, such as the Foreign Narcotics Designation Act (the Kingpin Act). The Kingpin Act provides for penalties up to US$1,503,470 (as of 14 June 2019).

223 OFAC, Economic Sanctions Enforcement Guidelines, 31 CFR Part 501, Appendix A (2019).

224 Fed Reserve, The Federal Reserve Discount Window 1 (2008), https://www.frbdiscountwindow.org/pages/general-information.

225 ibid.

226 ibid.

227 See James Clouse, Recent Developments in Discount Window Policy, 80 Fed Reserve Bull. 966 (November 1994).

228 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 1101(a)(2) (amending Section 13(a) of the FRA). The final implementing regulations issued by the Federal Reserve became effective on 1 January 2016. See Federal Reserve, Final Rule: Extensions of Credit by Federal Reserve Banks, 80 Fed Reg 78959 (18 December 2015).

229 ibid.

230 Fed Reserve, FDIC, US Department of the Treasury, OCC, OTS, Final Guidance on Correspondent Concentration Risks, 75 Fed Reg 23764 (4 May 2010), www.fdic.gov/regulations/laws/federal/2010/10noticeMay4.pdf.

231 Fed Reserve press release, Interagency Guidance on Correspondent Concentration Risk (30 April 2010), www.federalreserve.gov/boarddocs/srletters/2010/sr1010.pdf.

232 Credit exposures include, due from bank accounts, federal funds sold on a principal basis, the over-collateralised amount on repurchase agreements, the under-collateralised portion of reverse repurchase agreements, net current credit exposure on derivatives contracts, unrealised gains on unsettled securities transactions, direct or indirect loans to or for the benefit of the correspondent, and investments, such as trust preferred securities, subordinated debt and stock purchases in the correspondent.

233 The guidance does not elaborate on exactly what conflicts of interests means within this context.

234 12 CFR Part 30.

235 The Honourable Thomas J Curry, Comptroller of the Currency, Address at the American Bankers Association Risk Management Forum (10 April 2014).

236 12 CFR Part 30.

237 OCC, Federal Reserve, and FDIC, Liquidity Coverage Ratio: Liquidity Risk Measurement Standards, 79 Fed Reg 61440 (10 October 2014).

238 ibid.

239 OCC, Federal Reserve, FDIC, Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements, 86 Fed Reg 9120 (11 February 2021).

240 ibid.

241 Statement by Vice Chair for Supervision Quarles (20 October 2020), https://www.federalreserve.gov/newsevents/pressreleases/quarles-statement-20201020a.htm.

242 Specifically, under the Tailoring Rules, and under the Net Stable Funding Ratio (NSFR) final rule, a US IHC in Category II is subject to a full daily liquidity coverage ratio (LCR) requirement (i.e., an outflow adjustment percentage calibrated at 100 per cent) and is subject to a full NSFR requirement (i.e., 100 per cent of the required stable funding amount). See OCC, Federal Reserve, FDIC, Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirement. The standardised liquidity requirements applicable to a US IHC in Category III or IV vary depending upon that US IHC's reliance upon wSTWF. A Category III US IHC with wSTWF of US$75 billion or more is subject to a full daily LCR and is subject to the full NSFR, while a Category III US IHC with wSTWF of less than US$75 billion is subject to a reduced daily LCR requirement (i.e., an outflow adjustment percentage calibrated at 85 per cent) and is subject to a reduced NSFR requirement (i.e., 85 per cent of the required stable funding amount). A Category IV US IHC with wSTWF of US$50 billion or more is subject to a reduced monthly LCR requirement (with the outflow adjustment percentage calibrated at 70 per cent rather than 85 per cent) and is subject to a reduced NSFR requirement (i.e., 70 per cent of the required stable funding amount). A Category IV US IHC with wSTWF of less than US$50 billion is not subject to standardised liquidity requirements.

243 Category II and III FBOs must conduct internal liquidity stress testing monthly; Category IV FBOs are subject to quarterly internal liquidity stress testing requirements. Liquidity risk management requirements are also slightly less stringent for Category IV FBOs.

244 This chapter does not address the requirements for the acquisition of thrifts or thrift holding companies. In connection with the abolition of the Office of Thrift Supervision, the power to regulate thrifts was transferred to the OCC, and the power to regulate thrift holding companies was transferred to the Federal Reserve in 2011. For a further discussion of the current state of thrift and thrift holding company regulation, see Section II.

245 12 USC Section 1842(a).

246 12 USC Section 1841(a)(1).

247 12 USC Section 1841(a)(2).

248 12 USC Section 1828(c)(1).

249 12 USC Section 1828(c)(2).

250 12 USC Section 1817(j).

251 12 USC Section 1817(j)(8)(B).

252 See, e.g., 12 CFR Section 225.41(c)(2).

253 12 USC Section 1817(j)(17).

254 Federal Reserve System, Final Rule, Control and Divestiture Proceedings, 85 Fed Reg 12398 (2 March 2020). For a summary of the proposal published in May 2019, which the final rule generally mirrors, see Davis Polk & Wardwell LLP, 'Client Memorandum, Federal Reserve's Proposed Rule on Controlling Influence: A Step in the Right Direction' (2 May 2019), available at https://www.davispolk.com/sites/default/files/2019-05-02_federal_reserves_proposed_rule_on_controlling_influence.pdf.

256 One-third is the limit for BHCs. For SLHCs, the limit under the final rule is 25 per cent.

257 See footnote 23 in Federal Reserve System, Final Rule, Control and Divestiture Proceedings, 85 Fed Reg 12398, 12399 (2 March 2020).

258 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Sections 606–607 (2010).

259 ibid. Section 604(d) (2010).

260 Webster Financial Corporation, Fed Res Bd Order No. 2021-13 at 20 (17 December 2021); SmartFinancial, Inc., Fed Res Bd Order No. 2021-10 at 17 (17 August 2021); First Bank Corp., Fed Res Bd Order No. 2021-09 at 18 (9 July 2021); First Citizens BancShares, Inc., Fed Res Bd Order No. 2021-12 at 20–21 (17 December 2021).

261 ibid.

262 People's United Financial, Inc, Fed Res Bd Order No. 2017-6 at 25–26 (16 March 2017).

263 ibid.; First Citizens BancShares, Inc., Fed Res Bd Order No. 2021-12 at 19–21 (17 December 2021); Huntington Bancshares Incorporated, Fed Res Bd Order No. 2021-07 at 33–34 (25 May 2021).

264 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 163. When initially passed, the prior notice requirement established by Dodd–Frank applied to BHCs with total consolidated assets of at least US$50 billion and non-bank financial companies subject to Federal Reserve supervision. The EGRRCPA changed the asset threshold from US$50 billion to US$250 billion.

265 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 163(b) (2010).

266 ibid. Section 623 (2010).

267 12 USC Sections 1842(d)(2)(A) and 1843(i)(8)(A) for BHCs and 12 USC Section 1467a(e)(2)(E) for SLHCs.

268 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 622 (2010).

269 Financial Stability Oversight Council, Study & Recommendations Regarding Concentration Limits on Large Financial Companies (2011), www.treasury.gov/initiatives/Documents/Study%20on%20Concentration%20Limits%20on%20Large%20Firms%2001-17-11.pdf.

270 Federal Reserve, Final Rule: Concentration Limits on Large Financial Companies, 79 Fed Reg 68,095 (14 November 2014), www.gpo.gov/fdsys/pkg/FR-2014-11-14/pdf/2014-26747.pdf.

271 Federal Reserve, Announcement of Financial Sector Liabilities, 80 Fed Reg 38,686 (7 July 2015), www.gpo.gov/fdsys/pkg/FR-2015-07-07/pdf/2015-16658.pdf.

272 See 12 CFR Section 251.3(c), (e).

273 See 12 CFR Section 217.12.

274 12 CFR Section 251.3(d).

275 12 CFR Section 251.4(a), (b).

276 12 CFR Section 251.4(c).

277 See Federal Reserve, Final Rule: Concentration Limits on Large Financial Companies, 79 Fed Reg 68,095 (14 November 2014), www.gpo.gov/fdsys/pkg/FR-2014-11-14/pdf/2014-26747.pdf.

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