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U.S. Implementation of Basel III:Current Developments

Practicing Law InstituteMarch 12, 2012

Charles M. HornDwight C. Smith

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Topics

ü Current U.S. Requirements

ü History

ü Basel II

ü Basel III

ü U.S. Implementation

ü Impact of Dodd-Frank

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Current U.S. Requirements

ü All U.S. banks continue to follow Basel I as revised.

ü U.S. has adopted Basel II, but only for approximately 20 large banks.

ü Basel II-eligible banks continue to conduct parallel runs and have not begun to use Basel II exclusively.

ü U.S. regulators have established a capital floor for all U.S. banks, including Basel II banks.

ü Basel II-type proposal for all banks has been pending since 2008.

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Current U.S. Requirements

ü U.S. has not adopted Basel III, although certain Basel III standards already are in place.

ü Leverage ratio

ü Supervisory liquidity standards

ü Basel 2.5 rule pending

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History—Basel I

ü First international effort to regulate the financial condition of multinational banks on a global basis.

ü Basel Committee on Banking Supervision (“BCBS”) issued Basel I accord in July 1988.

ü Basel I was designed to assess capital adequacy in relation to credit risk.

ü Two key ratiosü 4% Tier 1 capital to risk-weighted assets

ü 8% total capital (Tier 1 plus Tier 2) to same group of risk-weighted assets

ü Different weights assigned to different assets to reflect differences in credit risk.

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History—Basel I

ü BCBS has continually revised Basel I.ü New risk weights to account for new assets—particularly

securitization positions

ü Recognition of credit risk mitigants

ü New forms of capital and new deductions from capital

ü Additional U.S. developments:ü Leverage ratio

ü Interest rate risk

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History—Basel II

ü Regulators realized need for more comprehensive approach to capital adequacy and its role in risk management.

ü Process began in 1998.

ü Core Basel II document was finalized in June 2006.

ü Three pillars of capital adequacy, only one of which is quantitative:ü Minimum capital requirements

ü Supervisory review

ü Market discipline

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History—Basel II

ü U.S. has adopted that portion of Basel II that applies to the most complex banks (“advanced approach”).ü Rule covers approximately 20 large and complex U.S. banks.

ü First U.S. banks began three-year parallel runs in 2009.

ü No U.S. bank has been permitted to use solely advanced approach for determining credit and operational risk capital requirements.

ü To preserve competitive balance between the Basel II banks and all other U.S. banks, federal banking agencies proposed “Basel IA” in June 2008.ü Basel IA based largely but not entirely on the Basel II

standardized approach.

ü Basel IA never finalized.

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History—Basel II

ü The financial crisis prompted several changes to Basel II.

ü January 2009—proposed new requirementsü Trading book exposures, including complex and illiquid credit

products.

ü Complex securitizations—e.g., CDOs of ABS.

ü Exposures to off-balance sheet vehicles—e.g., ABCP conduits.

ü July 2009—final enhancements of Basel IIü Higher capital requirements for resecuritizations

ü More rigorous credit analysis of externally rated securitizations

ü Improvements to Pillars 2 and 3

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History—Basel III

ü Financial crisis revealed broader deficiencies in the management of bank capital.ü Insufficient capital in general

ü Inadequate analysis of credit risk

ü Internationally, no leverage measure

ü Over-estimates of the loss-absorbing function of hybrid instruments

ü Opacity of certain complex financial instruments

ü Need for additional liquidity

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History—Basel III

üSeptember 2009: BCBS releases a “comprehensive response to the global banking crisis.”

üBCBS recommendations cover:üHigher quality Tier 1 capital

üLeverage ratio

üLiquidity ratios

üCountercyclical capital buffers

üFramework for cross-border resolutions

üCapital surcharges

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History—Basel III

üDecember 2009: Consultative documents on Basel III and liquidity risk management üIncreased capital for counterparty credit risk

üAugust 2010: Consultative documents on “gone concern”capital requirements

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History—Basel III

üDecember 2010: Basel III largely completedüComposition of capital

üRisk coverage—counterparty credit risk and reliance on external credit ratings

üCapital conservation buffer

üCountercyclical buffer

üLeverage ratio

üLiquidity buffers

üJanuary 2011: Requirements relating to loss absorbency at point of non-viability published

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History—Dodd-Frank Act

üStatute enacted mid-way through the Basel III consultative process

üFor banks with more than $50 billion in consolidated assets, Dodd-Frank Act is generally consistent with the Basel III reforms.ü Enhanced capital ratios generally

ü Higher leverage ratio

ü Liquidity

ü Contingent capital study

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History—Dodd-Frank Act

üDodd-Frank also applies certain elements of Basel III to all banksü Composition of capital and minimum leverage capital floor–

Collins Amendment

ü Countercyclicality requirement

üCapital-related qualitative reformsü Stress tests and capital and resolution planning

ü Financial holding company requirements and source of strength

ü Early remediation

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History—Basel 2.5üWeighting of assets in the trading book to reflect market

rather than credit risk

üMarket risk originally addressed in 1996 amendment to Basel I

üJuly 2009—revised market risk framework released

üFeb. 2011—new market risk rule proposed in U.S., without the securitization and re-securitization portions of the Basel document. These portions relied on external credit ratings, which is prohibited by Dodd-Frank.

üDec. 2011—market risk rule re-proposed with new provisions on creditworthiness to replace references to external credit ratings

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Basel II

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Basel II—Pillar 1

Minimum Capital Requirementsü Basel II focused on more granular approach to determining the credit

risk of particular assets.

ü Two different methods for calculating risk weights:

üStandardized approach—risk weights assigned by regulators, with greater range than under Basel I. Available to all banks, except large and complex banks.

üInternal ratings-based (IRB) approach—internal calculations based on three key elements: risk parameters; risk weight functions; minimum requirements. Available only to largest and most complex banks.

üIRB approach has two subcomponents: foundation IRB and advanced IRB.

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Basel II—Pillar 1

Minimum Capital RequirementsüInternal ratings-based (IRB) methodology

üKey risk parameters are probability of default (PD), loss given default (LGD), exposure at default (EAD, and maturity (M).

üUnder foundation IRB, banks internally calculate PD and supervisors provide LDG, EAD and M.

üUnder advanced IRB, banks internally all risk parameters subject to supervisory review.

üSecuritization exposures

üTraditional and synthetic securitization exposures

üTreatment of different types of exposures, credit facilities andcredit risk mitigants

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Basel II—Pillar 1

Minimum Capital Requirements

üOperational risk: “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.”

üTwo calculation approaches for operational risküStandardized approach

üAdvanced measurement approach (AMA)

üComponents of capital, however, remained substantively the same as those in Basel I, with some adjustments.

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Basel II—Pillar 2

Supervisory Review

üBased on four key principles:üBank processes for assessing overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels.

üSupervisory review and evaluation of internal capital adequacy assessments and strategies.

üSupervisory expectation that bank operate above minimum regulatory capital ratios.

üEarly intervention and remediation for inadequate capital ratios.

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Basel II—Pillar 2

Supervisory Review

üSpecific issues to be addressed:üInterest rate risk in the banking book

üCredit risk, including stress testing, risks associated with collateral and guarantees, credit concentrations, counterparty credit risk

üOperational risk

üMarket risk

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Basel II—Pillar 3

Market Discipline

üComplements Pillars 1 and 2.

üMarket discipline is disclosure-based.

üGuiding principles for disclosure:üBoard-approved disclosure policies and procedures.

üPillar 3 applies to top level of consolidated banking group.

üQualitative and quantitative disclosures.

üDisclosure elements: capital structure and adequacy; risk disclosures (general qualitative disclosures, credit, market, operational, equity positions, interest rate).

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Basel III

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Basel III

Key Provisions (new provisions in red)

üComponents of capital

üRisk coverage

üLeverage ratio

üLiquidity coverage requirements

üPillar 2—risk management and supervision

üPillar 3—market discipline

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Basel III

Capital

üCapital quality

üLevel of capital

üCapital conservation buffer

üCountercyclical buffer

üLoss absorption at the point of non-viability

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Chart prepared by BCBS and available at http://www.bis.org/publ/bcbs207.pdf.

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Capital Quality

üThree types of qualifying capital üTier 1 common equity

üTier 1 additional equity

üTier 2 capital

üThe emphasis of Basel III plainly is on Tier 1 common equity.

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Capital Quality

üTier 1 common equityüBank’s common shares meeting criteria for such classification (or equivalent for non-joint stock companies)

üStock surplus/share premium on common equity Tier 1 instruments

üRetained earnings and other disclosed reserves

üCommon shares issued by bank’s consolidated subsidiaries and held by third parties (as minority interests) that meet certain additional criteria for inclusion in common equity Tier 1 after regulatory adjustments (deductions)

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Capital Quality

Criteria for common equityü The most subordinated claim in liquidation of the bank

ü Entitled to a claim on the residual assets that is proportional with its share of issued capital, after all senior claims have been repaid in liquidation (i.e. has an unlimited and variable claim, not a fixed or capped claim).

ü Principal is perpetual and never repaid outside of liquidation (other than discretionary repurchases or other allowable discretionary capital reductions under relevant law).

ü No expectation is created at issuance that the instrument will be bought back, redeemed or cancelled nor do the statutory or contractual terms provide any feature which might give rise to such an expectation.

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Capital Quality

Criteria for common equityü Distributions paid out of distributable items and not tied or linked to

the amount paid in at issuance and not subject to a contractual cap

ü No circumstances under which the distributions are obligatory (no event of default for non-payment)

ü Distributions paid only after all legal/contractual obligations have been met (including payments on more senior capital instruments). Therefore no preferential distributions

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Capital Quality

Criteria for common equityü It takes the first and proportionately greatest share of any losses as

they occur and absorbs losses on a going concern basis proportionately and pari passu with all the other instruments within the Tier 1 common category.

ü The paid-in amount is recognised as equity capital (i.e., not as a liability) for determining balance sheet insolvency.

ü The paid-in amount is classified as equity under the relevant accounting standards.

ü It is directly issued and paid-in and the bank cannot directly or indirectly have funded the purchase of the instrument.

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Capital Quality

Hybrid Tier 1 capital

üTo qualify as Tier 1 capital, hybrid instruments must be:üsubordinated to all depositors and all creditors

ünot secured or guaranteed

üperpetual, with no incentives to redeem and no investor put option

üfully discretionary non-cumulative dividends/coupons

ücallable by bank only after 5 years

üany return of capital only with prior supervisory authorisation

ücapable of principal loss absorption on a going concern basis

üSeveral hybrid Tier 1 instruments will be phased out, including step-up instruments, cumulative preferred stock, and trust preferred stock.

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Capital Quality

New deductions from Tier 1 capital:-Minority interests in consolidated subsidiaries of banks

-Banks’ own non-controlling, minority investments in financial institutions

-Deferred tax assets up to a limit

-Shortfall in reserves

-Mortgage serving rights

-Goodwill and other intangibles

-Gains on sale in securitization transactions

-Gains and losses due to changes in banks’ own credit risk

-Defined benefit pension fund assets and liabilities.

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Capital Quality

Tier 2 Capital RequirementsüOriginal maturity of at least 5 years, with no incentive to redeem

üCallable only by the issuer and only after 5 years, with prior supervisory approval

üDividends/Coupons – may not have a credit-sensitive dividend feature

üIn liquidation, subordinated to all non-subordinated creditors

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Level of Capital

ü Minimum common equity-Current Basel requirement is 2%.

-New requirement of 3.5% will take effect Jan. 1, 2013, rising to4.5% by Jan. 1, 2015.

ü Minimum Tier 1 capital-Current requirement is 4%.

-Requirement of 4.5% will take effect Jan. 1, 2013, rising to 6% by Jan. 1, 2015.

ü Minimum total capital requirementüRemains at 8%

ü New ratios based on more stringent definition of capital

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Conservation Buffer

üRequires banks to build up capital outside periods of stress which can be drawn down as losses are incurred

üRatio of Tier 1 common equity to risk-weighted assets

üBuffer is phased in in equal increments over three year period, beginning with 0.625% on Jan. 1, 2016

üOn Jan. 1, 2019, permanent buffer of 2.5% takes effect

• Restraints on dividends and discretionary bonuses if buffer falls below 2.5%

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Conservation Buffer Surcharge

üAs part of the capital conservation buffer for 29 global systemically important banks (G-SIBs), BCBS has established an “additional loss absorbency” surcharge.üG-SIBs will be allocated initially to four buckets, from 1.0% to 2.5%.

üA fifth bucket of 3.5% has been created as a “penalty box.”

üAllocations depend on scoring system that takes into account several factors, including levels of cross-border activity, size, interconnectedness, substitutability, and complexity.

üGeneral supervisory judgment is also a factor.

üG-SIBs may use certain instruments in addition to Tier 1 to satisfy surcharge requirement.

üSurcharge phases in between 2016 and 2019.

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Countercyclical Buffer

ü Buffer is to be employed when “excess credit growth is judged to be associated with a build-up of system-wide risk.”

ü Buffer is an extension of the capital conservation buffer.

ü Buffer is set on a national basis; buffers will not be internationally uniform.

ü Buffer requirement should be announced 12 months in advance of effective date.

ü Phase-in along the same time frame and in the same amounts as conservation buffer.

ü Ceiling will be 2.5% as of Jan. 1, 2019.

ü Requirements higher than the phase-in amounts presumably could not be imposed.

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Capital Phase-ins

% of Risk Weighted Assets

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Capital Phase-ins(%) 2011 2012 2013 2014 2015 2016 2017 2018 2019

Minimum Common Equity Capital Ratio 3.50 4.00 4.50 4.50 4.50 4.50 4.50

Capital Conservation Buffer 0.625 1.25 1.875 2.50

Minimum Common Equity plus Capital Conservation

Buffer3.50 4.00 4.50 5.125 5.75 6.375 7.00

Minimum Tier 1 Capital 4.50 5.50 6.00 6.00 6.00 6.00 6.00

Minimum Tier 1 Capital plus Capital Conservation

Buffer16.625 7.25 7.875 8.50

Minimum Total Capital 8.00 8.00 8.00 8.00 8.00 8.00 8.00

Minimum Total Capital plus Capital Conservation

Buffer8.00 8.00 8.00 8.625 9.25 9.875 10.50

Phase-in of deductions from Tier 1(including

amounts exceeding limit for DTAs, MSRs and certain

investments)

20 40 60 80 100 100

Phase-out capital instruments no longer qualifying

as Tier 1 capital or Tier 2 capitalPhased out over 10 year horizon (10 per year beginning 2013)

Public Sector Capital Injections Included in CapitalNot included in capital

(as of Jan. 1 2018)

Leverage Ratio Supervisory monitoring

Parallel run

Jan. 1 2013 – Jan. 1 2017

Disclosure starts Jan. 1 2015

Final

Adjustments3.0 (Unless Adjusted)

Liquidity Coverage Ratio (LCR)Observation

period begins

Introduce

minimum

standard

Net Stable Funding Ratio (NSFR)Observation

period begins

Introduce

minimum

standard

Source: BCBS Press release, Group of Governors and Heads of Supervision announces higher global minimum capital standards, Annex 2 (Sept. 12, 2010), available at http://www.bis.org/press/p100912b.pdf

Phase-in arrangements (all dates are of January 1 of each year)

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Loss AbsorptionüContractual terms of instruments should allow for either

the permanent write-down of principal or conversion to common equity when a bank is viewed as non-viable.

üNon-viability is when a public sector injection or the equivalent is needed, without which the bank would become non-viable, or a write-off is required, without which the firm would become non-viable

üLocal regulators would have discretion to specify a conversion rate and also whether to implement either a write-off or a conversion

üEU regulators are considering more onerous “bail-in”measures.

üUS position on bail-in capital is not fully developed.

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Risk Coverage

Securitizations and credit ratingsü BCBS believes aspects of existing capital framework encouraged

investors to place too much reliance on external credit ratings.

ü Requirements

üIssue-specific rating assessment may only be applied to unrated issues by the same issuer that ranks pari passu or senior to rated issue.

üBanks must develop methodologies to assess credit risk of securitization exposures even if rated.

üEligibility criteria for entities providing credit protection have been amended.

üBanks should use ratings of credit rating agencies consistently for both risk weighting and risk management purposes.

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Risk Coverage

Trading Bookü Revisions to the Basel II market risk framework (Feb. 2011)

ü Guidelines for computing capital for incremental risk in the trading book (July 2009)

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Risk CoverageCounterparty Credit Risk (“CCR”)üMeasures designed to strengthen risk coverage include:

üexpected positive exposure with stressed parameters to address wrong-way risk

ürequirement that banks determine capital charges for CCR using stressed inputs

ücapital charge for mark-to-market losses associated with a deterioration in the creditworthiness of a counterparty (credit valuation adjustment)

ühigher capital charges for bilateral OTC exposures to financial institutions

üMeasures take effect in 2013.

ü Banks determine capital charges for CCR using stressed inputs.

ü 1.25 asset value correlation multiplier to large regulated financial institutions whose total assets are at least U.S.$100bn

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Risk Coverage

Exposures to Central CounterpartiesüOngoing work on this topic by International Organization of Securities Commissions

üStandards were to be finalised during 2011; action now hoped forby the end of 2012.

üBCBS consultative document relating to capitalisation of exposures to CCPs.

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Leverage

ü Leverage ratio new to Basel process but well-established in U.S.

ü U.S. requirement already at 4%; 3% for very highly rated banks

ü Lengthy phase-in of 3% ratio; fully effective Jan. 1, 2018

ü Capital Measure: numerator of the leverage ratio (capital) would consist of only high quality capital that is generally consistent with the revised definition of Tier 1 capital.

ü Total Exposure Measure: generally, denominator of the leverage ratio (the total exposures) would be determined in accordance with applicable accounting rules.

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Leverage Ratio

üTier 1 leverage ratio to be set at 3% during parallel run period between 2013 and 2017

üBank level disclosure of leverage ratio and components to start in January 2015

üSupervisory monitoring period to commence on 1 January 2011

üLeverage ratio not to become binding until early 2018

üCurrent proposal is to base leverage ratio on banks’capital (the numerator) compared to their exposure (the denominator) on new definition of tier 1 capital.

üExposure should follow accounting standards.

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Leverage Ratio

ü High quality liquid assets include cash and cash-like instruments in the measure of exposure.

ü Securitisation exposures will be counted in a manner generally consistent with accounting treatment.

ü Derivatives exposures will either follow the applicable accounting treatment or use the current exposure method.

ü Other off-balance sheets are included:

ücommitments

üunconditionally cancellable commitments

üdirect credit substitutes

ü 10% credit conversion factor for any commitments that are unconditionally cancellable at any time by the bank.

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Liquidity

üLiquidity requirements under Basel II consist of two key liquidity ratios:üLiquidity Coverage Ratio, which is a short term measure of liquidity

üNet Stable Funding Ratio, which is a medium term measurement of liquidity

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Liquidity

Liquidity Coverage Ratio

ü Ratio:

üRatio of high quality liquid assets to total net cash outflows over next 30 days

üMust be equal to or greater than 100%.

üBuilds on traditional internal methodologies used by banks to assess exposure to contingent liability events.

üDefined as stock of high quality liquid assets divided by total net cash outflows for next 30 days.

ü Certain high quality liquid assets (“level 1 assets”) to be included on asset side on an unlimited undiscounted basis.

ü Level 2 assets must comprise no more than 40% of the overall stock and must have a minimum 15% haircut.

ü Observation period for liquidity coverage ratio commences in 2011 and ratio to be introduced at start of 2015.

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Liquidity

Net Stable Funding Ratioü “Final” version has been published but still under discussion.

ü Net stable funding ratio:

üRatio of available amount of stable funding (“ASF”) to required amount of stable funding (“RSF”)

üMust exceed 100%

üDesigned to promote resilience over a period of one year

üBuilds on net liquid asset and cash capital methodologies used by internationally active banks

ü Ratio should be reported at least quarterly

üMinimum standard will be required by Jan. 1, 2018.

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Liquidity

Principles for Sound Liquidity Risk Management (2008)ü Five subject matter areas; 17 principlesüFundamental principle for management and supervision

üGovernance

üMeasurement and management of liquidity risk

üPublic disclosure

üRole of supervisors

Supervisory Monitoring Metricsü Contractual maturity mismatches

ü Concentration of funding

ü Available unencumbered assets

ü Currencies

üMarket information

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Pillar 2

Several enhancements to supervisory reviewü Firm-wide governance and risk management

ü Off-balance sheet exposures

ü Securitizations

ü Risk concentrations

üManagement of risks versus rewards

ü Compensation

ü Valuation

ü Stress testing

ü Accounting standards

ü Corporate governance

ü Supervisory colleges

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Pillar 3

Enhancements to market discipline and disclosuresü New requirements for securitization exposures and sponsorship of

off-balance sheet vehicles

ü Other enhanced disclosure requirements

üComponents of regulatory capital

üReconciliation to reported accounts

üComprehensive explanation of how bank calculates its capital ratios

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U.S. Implementation

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U.S. Implementation

üCurrent U.S. regulatory intentions with respect to implementation of Basel II revisions and Basel III:üAdoption of 6-year transition period for Basel III requirements:

üU.S. banking organizations would not be expected to meet fully phased-in Basel III requirements prior to their effective times, but would be expected to

ütake affirmative steps to increase capital levels in order to meet applicable deadlines, and

üimprove their capital ratios through prudent earnings retention policies.

üU.S. may look to progress towards Basel III in evaluting capital adequacy for various purposes.

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U.S. Implementation

üBasel III tasks for U.S. regulatorsüCapital surcharges for systemically important financial firms

üCoordination with Basel Committee on identification of, and surcharges for, G-SIBs

üMore stringent capital requirements for large U.S. banking organizations consistent with the requirements of the Dodd-Frank Act.

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Impact of Dodd-Frank

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Dodd-Frank and Capital

üThe Dodd-Frank Act does not expressly address Basel II or Basel III capital requirements, but it contains several provisions that (i) impose requirements that either are harmonious with the Basel Committee regime, or (ii) create capital requirements that are greater than those imposed by Basel III.

ü Issues addressed under Dodd-Frank:

üQuality of capital

üContingent capital

üCapital levels

üLeverage

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Dodd-Frank Capital Quality

üPrimary but by no means the only Dodd-Frank provision affecting regulatory capital is the Collins Amendment.

üRequires the establishment of new minimum leverage and risk-based capital requirements for bank and thrift holding companies.

üThe floor for the new standards is the current set of rules applicable to insured banks and thrifts under the “prompt corrective action” rules.

üEffectively disqualifies trust preferred and other hybrid capital securities from treatment as Tier 1 primary capital.

üBut unclear how the U.S. regulators will treat new holding company instruments that are modeled on earlier capital instruments.

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Dodd-Frank Capital Quality

üCollins Amendment rules will exclude trust preferreds and other hybrids from the numerator of Tier 1, subject to limited exceptions:

- Exclusion applies to all hybrid securities issued on or after May 19, 2010.

- Mutual holding companies and thrift and bank holding companies with less than $15 billion in total consolidated assets may include hybrids issued before May 19, 2010, until they mature.

- Bank holding companies with assets of $50 billion or more and systemically important nonbank financial companies must phase out from Tier 1 hybrids issued before May 19, 2010 from January 2013 to January 2016.

- Intermediate U.S. holding companies of foreign banks have a five-year transition period to phase out pre-May 19, 2010, hybrid securities from Tier 1 capital.

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Dodd-Frank Capital Quality

üNew capital-related requirements under section 165 for bank holding companies with more than $50 billion in consolidated assets and nonbank financial companies deemed systemically important (“SIFIs”)

ü Higher capital levels than required for other banks

ü Stress testing

ü Capital and resolution planning

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Dodd-Frank Capital Quality

üHybrids

ü Within 18 months of enactment, GAO must conduct a study of the use of hybrid capital instruments as a component of Tier 1, which shall consider, among other things:

-the benefits and risks of allowing instruments to be used to comply with Tier 1 requirements

-the economic impact of prohibiting the use of hybrids

-possible specific recommendations for legislative or regulatory actions regarding the treatment of hybrids

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Dodd-Frank Contingent Capital

ü Within two years of enactment, the Financial Stability Oversight Council (“FSOC”) must conduct a study on contingent capital that evaluates, among other things:

ü the effect on safety and soundness of a contingent capital requirement

ü the characteristics and amounts of contingent capital that should be required

ü the standards for a triggering requirement

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Dodd-Frank Contingent Capital

ü FSOC may make recommendations to the Federal Reserve on contingent capital requirements for bank holding companies with consolidated assets more than $50 billion and systemically important non-bank financial companies.

üFederal Reserve authorized but not required to set a contingent capital requirement.

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Dodd-Frank Capital Levels

üOther than the Collins Amendment and section 165, the Dodd-Frank Act does not call for any specific regulatory capital levels for banking organizations.

üDodd-Frank does address regulatory capital levels in an indirect manner:üCountercyclical buffer: regulators are directed to set capital requirements with countercyclicality in mind.

üDodd-Frank imposes direct source-of-strength requirements on bank and savings and loan holding companies.

üFinancial holding companies now must be and remain well-capitalized in order to engage in expanded “financial” activities under the Bank Holding Company Act.

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Dodd-Frank Leverage

ü4% requirement at bank level already in effect and pre-dates Dodd-Frank.

üCollins amendment elevates 4% requirement to the holding company level.

ü4% requirement is one of the floors for Basel II capital calculations.

üDodd-Frank addresses leverage in other waysüPossible limits on short term debt.

üSpecific debt-to-equity limit of 15% for bank holding companies with consolidated assets of $50 billion or more and systemicallyimportant nonbank financial companies.

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Dodd-Frank Liquidity

üSection 165 requires Federal Reserve to set liquidity requirements for SIFIs.

üProposed enhanced prudential standards include liquidity buffers and stress testing specifically for liquidity.

üFSOC may make recommendations.

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Dodd-Frank and Pillar 2

üNew requirements as part of supervisory review

üConcentration limits

üCounterparty credit risk exposure limits

üRisk committees

üThese requirements are fully harmonious with Basel II and III.

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Dodd-Frank and Pillar 3

üNew disclosure requirements for SIFIs, includingüStress test results

üCapital plans

üResolution plans

üThese requirements also are fully harmonious with Basel II and III.

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Contacts

Charles M. Horn

Tel.: (202) 887-1555CharlesHorn@mofo.com

Dwight C. Smith

Tel.: (202) 887-1562 dsmith@mofo.com