Clifford Chance

Proposed Enhanced Prudential Requirements for US-Based Systemically Important Financial Institutions

13 January 2012

On December 20, 2011, the Federal Reserve proposed regulations to implement the enhanced prudential standards mandated by Section 165 and the early remediation requirements mandated by Section 166 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") with respect to US-based systemically important financial institutions.

The proposed regulations are designed to reduce the risks inherent in the operations of large banking organizations and systemically important nonbank financial companies principally through improvements in the organization's quantity and quality of capital, liquidity management, limits on credit exposure concentrations, and limits on the ability of these institutions to leverage their capital base. To that effect, the proposed regulations mandate extensive stress testing requirements, cash flow projections and analysis, capital planning, and improvements to risk management structures and processes. The proposed regulations also provide a set of tools that expand the existing supervisory powers of the Federal Reserve to intervene early upon identification of financial weaknesses or finding of deteriorating management or financial condition of a covered financial institution that may affect its ability to withstand adverse economic and financial market conditions. In addition to requiring more capital and constraining capital leverage and corresponding returns on capital, the proposed regulations would impose significant incremental compliance costs and regulatory risk. The proposed regulations are also indicative of the much more intrusive and hands on approach that US regulators are adopting towards large banking organizations and nonbank financial institutions deemed to be systemically significant. In this memorandum we provide an overview of the provisions of the proposed regulations and encourage covered companies to actively participate in the rulemaking consultative process. Comments on the proposal are due by March 31, 2012.

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