Navigating the Bank Regulation Landscape (2024)

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On July 27, 2023, the federal banking regulators—i.e., the FRB, the OCC, and the FDIC—released the long-awaited US Basel III Final Reforms

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On April 28, the Board of Governors of the Federal Reserve System (FRB) and the Federal Deposit Insurance Corporation (FDIC) published reports on the specific risk and supervisory issues that led to two significant bank failures in March of this year.

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By March 2023, the US economy experienced a shock to the banking industry as a result of multiple bank failures, primarily driven by substantial liquidity and interest rate risk management weaknesses. These failures have raised questions on the health of the US banking system given the speed at which the recent events took place. Have challenges related to banks deemed as “too big to fail” really been addressed? Are the existing regulatory frameworks keeping pace with the risks posed by large regional banks? In the absence of stronger resolution and recovery planning requirements for large regional banks, regulators believe failures are highly likely to pose substantial risks to the banking system and potentially further erode a loss of trust in the US banking system.

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The stability of the banking system experienced a recent shock largely due to concerns around interest rate risk management practices and liquidity mismatches, together with a loss of market confidence in certain large institutions. During such times of distress, it is even more important that regulatory bodies across the globe have a clear understanding of the risks global firms pose to their respective jurisdictions, which largely crystallize through the legal entities they supervise and the relationships those entities have with internal and external counterparties.

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The recently finalized FR 2052a reporting rule is the next evolution of liquidity data reporting requirements, increasing the level of detail of an institution’s liquidity profile, including additional information on securities financing transactions, wholesale unsecured funding, deposits, loans, unfunded commitments, collateral, derivatives, and foreign exchange.

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Global and local financial regulators have reinforced their requirements for strengthening governance, risk management, and controls since the financial crisis in 2008 through new regulations, supervisory guidance, and focused examinations and inspections.

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US regulators have reiterated the requirements and expectations for banks to demonstrate effective and sustainable governance structures since the financial crisis in 2008 through new regulations, changes to rating systems, and additional issuances of supervisory guidance. However, despite enhancement efforts, regulatory feedback continues to indicate that banks have not done enough to evaluate the effectiveness of their governance structures and the impact these structures have on the bank’s operations, regulatory standing, operationalization of risk management framework, and promotion of culture across the firm.

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The Federal Reserve Board issued proposed guidance outlining supervisory expectations for senior management, business line management, and independent risk management and controls in the form of principles. The guidance is generally consistent with a high-level preview of expectations provided in the August 2017 proposal to establish a new rating system for large financial institutions.

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