Alert April 26, 2011

FRB Seeks Comments on its Intention to Apply Certain Supervisory Guidance to SLHCs

The FRB issued a notice seeking comment on its intent to apply certain supervisory guidance to savings and loan holding companies (“SLHCs”).  Title III of the Dodd-Frank Act transfers supervisory functions (including rulemaking) relating to SLHCs and their non‑depository subsidiaries to the FRB on July 21, 2011.

The FRB noted its intention to assess the condition, performance and activities of SLHCs on a consolidated risk-based basis in a manner that is consisted with the FRB’s established approach regarding bank holding company (“BHC”) supervision, and identified three elements of its current supervisory program that it believes are critical to the effective evaluation of the consolidated condition of holding companies: (1) the FRB’s consolidated supervision program for large and regional holding companies, (2) the FRB’s supervisory program for small, noncomplex holding companies, and (3) the FRB’s holding company rating system.

The FRB believes that its consolidated supervision program may entail more intensive supervisory activities than under current OTS practice, at least for some SLHCs; nevertheless, the FRB does not believe that application of the consolidated supervision program to SLHCs would require any specific action on the part of SLHCs prior to July 21, 2011 or cause undue burden on an ongoing basis.

In addition, for a number of small, noncomplex SLHCs, the FRB expects that application of its supervisory program for small, noncomplex holding companies may have the effect of reducing burden as onsite examinations/inspections will no longer be required.

Finally, the FRB believes that its holding company rating system – known as “RFI/C(D)” (commonly referred to as “RFI”) – is similar to the OTS rating system for SLHCs (known as “CORE”), and as such, the FRB is considering transitioning SLHCs to the RFI rating system as the FRB conducts its own independent supervisory assessment of the condition of the SLHC after July 21, 2011.

The FRB noted that one material difference between the OTS and FRB supervisory programs for holding companies is the assessment of capital adequacy.  Currently, SLHCs are not subject to minimum regulatory capital ratio requirements.  Section 171 of the Dodd‑Frank Act requires that BHCs and SLHCs be subject to minimum leverage and risk based capital requirements that are not less than the generally applicable leverage and risk-based capital requirements applied to depository institutions.  The FRB is considering applying to SLHCs the same consolidated risk-based and leverage capital requirements as those to which BHCs are subject, to the extent reasonable and feasible taking into consideration the unique characteristics of SLHCs and the requirements of the Home Owners’ Loan Act.  In addition, the FRB noted that it, together with the other Federal banking agencies, expects to issue a notice of proposed rulemaking in 2011 that will outline how Basel III-based requirements will be implemented for all institutions, including any relevant provisions needed to comply with the Dodd-Frank Act.

The FRB requests comment with regard to:

(1)   The burden of these potential modifications to supervisory activities on SLHCs; and

(2)   Whether there are any unique characteristics, risks, or specific activities of SLHCs that should be taken into account when evaluating which supervisory program should be applied to SLHCs and what changes would be required to accommodate these unique characteristics.

Additionally, the FRB is seeking comment on the following:

(3)   What instruments that are currently includable in SLHCs’ regulatory capital would be either excluded from regulatory capital or more strictly limited under Basel III?  How prevalent is the issuance of such instruments?  What is the appropriateness of the Basel III transitional arrangements for non-qualifying regulatory capital instruments?

(4)   Are the proposed Basel III-based transition periods appropriate for SLHCs and, if not, what alternative transition periods would be appropriate and why?

Finally, the FRB is seeking specific comment with respect to what methods the FRB should consider implementing for assessing capital adequacy for SLHCs during the period between July 21, 2011 and implementation of consolidated capital standards for SLHCs.

Comments on are due on or before May 23, 2011.