Financial Services

Growing Past $50 Billion: What Banks Need To Know About Section 165 of the Dodd-Frank Act

Section 165(a) of the Dodd-Frank Act requires the Federal Reserve to establish “enhanced supervision and prudential standards” for bank holding companies with more than $50 billion assets. This scrutiny level is stronger than the standards applicable to smaller institutions and increases based on a bank holding company’s unique riskiness.

A. Standards the Federal Reserve Must Apply:

(i) Risk-based Capital Requirements and Leverage Limits

(ii) Liquidity Requirements

(iii) Overall Risk Management Requirements including the Formation of a Risk Committee

(iv) Resolution Plan and Credit Exposure Report Requirements

(v) Concentration Limits

(vi) Annual Stress Tests

B. Standards the Federal Reserve May Apply and May Tailor as Part of Enhanced Supervision:

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(i) Contingent Capital Requirements

(ii) Enhanced Public Disclosures

(iii) Limitations on Short-term Debt

Risk-Based Capital Requirements and Leverage Limits:

Banks with total consolidated assets between $50 billion and $250 billion are subject to enhanced capital and leverage standards under the “standardized approach.” Banks with total consolidated assets more than $250 billion are subject to the “advanced approach,” which imposes a more stringent standard that the “standardized approach.” Additionally, under the “advanced approach,” banks with total consolidated assets more than $700 billion and those subject to the Large Institution Supervision Coordination Committee are subject to additional capital and leverage surcharges.

The table below shows federal Common Tier 1 Equity Capital Requirements:

 $50 - $250 Billion$250 - $700 Billion$700+ BillionLISCC
Prompt Corrective Action Capital4.5%4.5%4.5%4.5%
Conservation Buffer2.5%2.5%2.5%2.5%
Countercyclical Buffer2.5%2.5%2.5%
Large Institution Supervision Coordination Committee2.5%
Total7%9.5%9.5%2.5%

Liquidity Requirements: Banks with total consolidated assets between $50 and $250 billion are subject to a more stringent review by the federal bank examiners, as well as increased 2052a reporting requirements than banking organizations with total consolidated assets less than $50 billion.

Overall Risk Management Requirements including the Formation of a Risk Committee: Under the statute, institutions with more than $10 billion in assets are required to establish a risk committee. For banks with total consolidated assets greater than $50 billion, regulations require the committee to be independent and report directly to the Board of Directors. Therefore, often the committee’s make up will change when a firm passes the $50 billion asset size threshold.

Resolution Plan (aka “Living Wills”) and Credit Exposure Report Requirements: U.S. financial institutions engaged primarily in banking activities with less than $100 billion in non-depository institution assets may submit a tailored proposal under the “Less Detailed Resolution Plan Alternative.”

Concentration Limits: The statute limits the ability of any company subject to enhanced prudential standards from having credit exposure to any unaffiliated company that exceeds 25 percent of the bank’s capital. Each bank, through its risk management process, is required to adhere to this limitation, although the Fed has the discretion to exempt an institution entirely if it deems it appropriate.

Annual Stress Tests: While the statute applies the annual stress test requirement to all banks with assets of more than $10 billion, regulators increase the reporting requirements for banks with assets between $50 and $250 billion.

Contingent Capital Requirements: The rule requires banks to have a contingency funding plan, which must have at least a quantitative assessment and an event-management process. The Federal Reserve does not itself say what should be in the plan, and different examination teams have been known to criticize the exact same plan that regulators passed on in prior examination(s).

Enhanced Public Disclosures: Enhanced disclosure in several areas, particularly in contingent liabilities and liquidity, is required. Disclosure is not tailored by bank size.

Swap Impact: Sections 723 and 763 prevent banks more than $50 billion in assets from receiving an exemption as an end-user from the requirement that swaps be cleared.

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About the Author

Carl is certified in the Scaled Agile Framework (SAFe), a Scrum Master, and a Six Sigma Green Belt project manager with more than 25 years of experience in financial services overseeing large-scale development global, multi-currency accounting, regulatory reporting, and financial reporting software platforms. He has hands-on experience completing, reviewing, and filing Federal Reserve, FFIEC, and IRS reports, including Call Reports, Y9C reports, 2900 reports, TIC reports, and arbitrage rebate reports.

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