Prudential Regulation

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Guidance for the largest US financial institutions is intended to promote climate risk management consistent with general safety and soundness practices.

By Sarah E. Fortt, Betty M. Huber, Arthur S. Long, Pia Naib, Karmpreet (Preeti) Grewal, Austin J. Pierce, and Deric Behar

On October 30, 2023, the three US federal bank regulatory agencies — the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the Agencies) — jointly finalized Principles for Climate-Related Financial Risk Management for Large Financial Institutions (the Principles).

The Principles are intended to provide large financial institutions (i.e., those with $100 billion or more in total assets) with a high-level framework for understanding and managing exposures to climate-related financial risks, including physical[1] and transition[2] risks. Such “financial institutions” include national banks and federal thrifts, state member banks, FDIC-insured state nonmember banks and savings associations, bank holding companies, savings and loan holding companies, intermediate holding companies, branches, agencies and the combined US operations of non-US banking organizations, and any systemically important non-banks that may become supervised by the FRB.

The proposals would give the Bank of England wide-ranging powers to deal with acute failure scenarios, treating policyholder liabilities as loss-absorbing.

By Victoria Sander and Tim Scott

HM Treasury is proposing a new UK resolution regime for insurers that would appoint the Bank of England as resolution authority with sweeping powers to resolve insurers through transfer or bail-in, and to make resolution plans and assess resolvability in advance. The regime would share many similarities with the Banking Act 2009 (BA09).

After a lengthy “holistic” review and a spring banking crisis, US bank capital requirements finally face overhaul.

By Arthur S. Long, Pia Naib, Ja Hyeon Park, and Deric Behar

On July 10, 2023, US Federal Reserve Board (FRB) Vice Chair for Supervision Michael Barr delivered a speech that outlined his approach to regulatory reform after the FRB’s nine-month-long “holistic” review of capital standards in the wake of the spring 2023 US bank failures (for more information, see this Latham blog post).

Proposed changes will include strengthening capital standards for a broad range of US banks with assets over US$100 billion. The changes to capital requirements would come as a proposal to implement the final aspects of the Basel III capital accord (the so-called “Basel III Endgame”).

Governor Bowman calls for transparent supervisory expectations and attention to the consequences of regulatory reform on the broader financial system.

By Arthur S. Long, Pia Naib, Ja Hyeon Park, and Deric Behar

On June 25, 2023, US Federal Reserve Board (FRB) Governor Michelle W. Bowman gave a speech that outlined her views of the best path forward for regulatory reform in the wake of the spring 2023 US bank failures (for more information, see this Latham blog post). To achieve optimal supervisory results and preserve a dynamic banking sector, while minimizing unintended consequences, Governor Bowman cautioned against implementing higher capital requirements on banks based on incomplete information or erroneous assumptions. Instead, she recommended bolstering institutional risk management and the effectiveness of the FRB’s supervisory program.

Following this spring’s shocks to the banking system, US, UK, and European regulators are considering whether existing regulatory and crisis management measures require reform and enhancement.

By David Berman, Nicola Higgs, Markus E. Krüger, Arthur S. Long, Rob Moulton, Axel Schiemann, Pia Naib, Ja Hyeon Park, Deric Behar, and Charlotte Collins

The spring of 2023 saw more dislocation in the global financial sector than any time since the 2008-09 financial crisis.…

In contrast with the White House’s position, the Vice Chairman denied that loosened Dodd-Frank rules contributed to the recent bank failures.

By Arthur S. Long, Pia Naib, and Deric Behar

On April 12, 2023, Federal Deposit Insurance Corporation (FDIC) Vice Chairman Travis Hill delivered a speech at the Bipartisan Policy Center, “Recent Bank Failures and the Path Ahead.” In it, he addressed key themes and takeaways from the March 2023 bank failures that saw the FDIC appointed as receiver for a bank with over $200 billion in consolidated assets and another with over $110 billion in consolidated assets, as well the voluntary liquidation of another bank with over $10 billion in consolidated assets. Notably, his views indicate that the US banking agencies do not agree over the regulatory lessons to be drawn from the failures.

President Biden is calling for tougher standards and supervision for large regional banks in the wake of recent instability in the US banking sector.

By Arthur S. Long, Pia Naib, and Deric Behar

On March 30, 2023, the White House issued a Fact Sheet calling on the federal banking agencies, the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), in consultation with the Treasury Department, to safeguard the banking system by imposing stricter rules on certain financial institutions — mostly large regional banks with US$ 100-250 billion in assets.

Notably, the White House recommended that regulators reverse some of the deregulatory measures that the Trump Administration had enacted in 2018. The Fact Sheet argues that this weakening of safeguards and supervisory requirements under the Dodd-Frank Act led directly to recent banking industry failures and the resulting threat of contagion.

The decisive action will mitigate emerging liquidity and solvency risks, contain pressure on the banking system, and protect depositors.

By Arthur S. Long, Pia Naib, and Deric Behar

On March 12, 2023, the Board of Governors of the Federal Reserve System (Federal Reserve) took a unanimous emergency step to protect the safety and soundness of the financial system from contagion risk following the second largest bank insolvency in US history. The move aims to “reduce stress across the financial system, support financial stability and minimize any impact on businesses, households, taxpayers, and the broader economy.”

The Acting Comptroller of the OCC discussed the limits of large bank manageability and the steps that regulators can take to address the risks posed by size and complexity.

Arthur S. Long, Pia Naib, and Deric Behar

On January 17, 2023, Acting Comptroller of the US Office of the Comptroller of the Currency (OCC) Michael Hsu delivered a speech titled “Detecting, Preventing, and Addressing Too Big to Manage.” The OCC charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of non-US banks. The speech is the latest statement by the leader of the OCC on US bank size in the wake of substantial mergers in the banking sector, which have become a political as well as supervisory issue.

The guiding principles are similar to related proposals from other banking regulators, but will require further clarification through the comment process.

By Nicola Higgs, Betty M. Huber, Arthur S. Long, Pia Naib, Anne Mainwaring, and Deric Behar

On December 2, 2022, the Board of Governors of the Federal Reserve System (Federal Reserve) published proposed Principles for Climate-Related Financial Risk Management for Large Financial Institutions (the Proposal). The Proposal urges large financial institutions[1] to consider how best to identify, measure, monitor, and control the various risks associated with climate change over a variety of time horizons. It also specifies that large financial institutions should monitor microprudential risks, including credit, market, liquidity, operational, and legal and compliance risks, as well as other financial and nonfinancial risks that could arise from climate change.

The Proposal aims to support financial institution boards of directors and management in incorporating mitigation of climate-related financial risks into their broader risk management frameworks, consistent with safe and sound practices and the Federal Reserve’s rules and guidance on sound governance.

Large financial institutions are defined as those with over $100 billion in assets that are subject to Federal Reserve supervision, including the US operations of non-US banking organizations. The Federal Reserve’s guidance is founded on the premise that climate change poses an emerging risk to the safety and soundness of financial institutions and the financial stability of the United States.