Dodd-Frank Act - Title 1: Financial Stability (Part 3)

Systemically Important Nonbank Financial Companies: A “nonbank financial company” is defined as any company, other than a bank holding company or a company that is treated as a bank holding company that is “predominantly engaged in financial activities.”

To be “predominantly engaged in financial activities,” 85% or more of the company’s and its subsidiaries’ consolidated annual gross revenues or consolidated total assets must be attributable to activities that are financial in nature.

Exclusions from the definition of “nonbank financial companies  excludes U.S. national securities exchanges, clearing agencies, security-based swap execution facilities, registered security-based swap data repositories, boards of trade designated as a contract market, derivatives clearing organizations, swap execution facilities or registered swap data repositories, and farm credit institutions.

Information-Gathering for Financial Stability Purposes: The Council, acting through the OFR, may require periodic and other reports from any nonbank financial company or bank holding company for the purpose of assessing whether the company itself, or any financial activity or market in which it participates, is systemically important.

No Dollar Threshold: Unlike the $50 billion threshold for bank holding companies, there is no minimum asset limit for nonbank financial companies to be considered systemically important. It is possible that the threshold above which bank holding companies are subject to enhanced standards will be used as a proxy.

Safe Harbor Exemption:  The Senate Banking Committee report on the Senate bill indicated that the safe harbor provision is intended to take into account potential overlap between the requirements of Title I and the payment, clearing and settlement provisions in Title VIII for financial market utilities.

Automatic Systemic Designation: Bank holding companies with $50 billion or more in assets are automatically subject to enhanced prudential standards. No Federal Reserve action or Council determination is required.There is no authority to lower the $50 billion threshold. The Federal Reserve has authority to raise the limit, and the Council may recommend such action, but only with respect to the application of the contingent capital requirement, resolution plans, credit exposure reporting, concentration limits, enhanced public disclosures and short-term debt limits. The Federal Reserve may not raise the threshold for risk-based capital requirements, leverage limits, liquidity requirements and overall risk-management requirements.

Enhanced Prudential Standards: The Federal Reserve is required to establish enhanced risk-based capital, leverage and liquidity requirements, overall risk management requirements, resolution plans, credit exposure reporting, concentration limits and prompt corrective action to apply to systemically important companies. Generally, rules implementing these requirements must be issued within 18 months after enactment.

Customizing Standards: The systemic regime includes a number of provisions designed to tailor the application of stricter prudential standards to individual companies and take in account differences in the business models of financial companies.

Tailored Application: The Federal Reserve is authorized, in prescribing enhanced prudential standards, to differentiate among companies on an individual basis or by category, taking into account their size, capital structure, riskiness, complexity, financial activities, including those of their subsidiaries and any other risk-related factors the Federal Reserve deems appropriate.

Inclusion of Off-Balance Sheet Activities in Computing Capital Requirements: For any bank holding company with $50 billion or more in assets or any systemically important nonbank financial company, off-balance sheet activities must be taken into account for the purposes of meeting capital requirements. This includes standby letters of credit, repos, interest rate swaps and credit swaps etc.

Credit Exposure Reports: The Federal Reserve must require systemically important companies to submit periodic reports to the Federal Reserve, the Council and the FDIC on the nature and extent to which the company has credit exposure to other “significant” nonbank financial companies and “significant” bank holding companies and vice-versa.