AIBAAn Update on ABC Regs

Martin FeuerDeloitte LLP

December 3, 2014

ABC Regs

Reg Section Topic

A 201 Extensions of Credit / Discount Window

B 202 Equal Credit Opportunity

C 203 Home Mortgage Disclosure

D 204 Reserve Requirements

E 205 Electronic Funds Transfers

F 206 Limitations on Interbank Liabilities

G 207 Disclosure of CRA Agreements

H 208 Membership of State Banking Institutions

I 209 Stock Subscriptions

J 210 Check Collections / Fedwire

K 211 International Banking Operations

L 212 Management Interlocks

M 213 Consumer Leasing

N 214 Relations with Foreign Banks and Bankers

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ABC Regs (Continued)

Reg Section Topic

O 215 Loans to Officers / Directors / Shareholders

P 216 Privacy

Q 217 Capital Adequacy

R 218 Exception for Banks from Definition of Brokers

S 219 Reimbursements re: Financial Records

T 220 Credit Extensions by Brokers - Margin

U 221 Credit Extensions by Brokers - Non Purpose

V 222 Fair Credit Reporting

W 223 Transactions With Affiliates

X 224 Application of Regs T / U Non U.S. Borrowings

Y 225 Bank Holding Companies

Z 226 Truth In Lending

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ABC Regs (Continued)

Reg Section Topic

AA 227 Unfair / Deceptive Acts

BB 228 Community Reinvestment

CC 229 Check Collection / Availability

DD 230 Truth In Savings

EE 231 Netting Of Amounts Due

FF 232 Using Medical Info in Connection withCredit

GG 233 Unlawful Internet Gambling

HH * 234 Designated Market Utilities

II * 235 Debit Cards

JJ * 236 Incentive Based Compensation

KK * 237 Margin / Capital for Swap Entities

* Dodd Frank related

CCRP/Global Center for Corporate Governance 4

ABC Regs (Continued)

Reg Section Topic

LL * 238 Savings & Loan Companies

MM * 239 Mutual Holding Companies

NN * 240 Retail Foreign Exchange

OO * 241 Securities Holding Companies

PP * 242 Dodd Frank Non-Bank Companies

QQ * 243 Resolution Plans

RR * 244 Credit Risk Retention

TT * 246 Assessment Fees

VV * 248 Prop Trading / Covered Funds

WW * 249 Liquidity Risk Measurement

YY * 250 Enhanced Prudential Standards

* Dodd Frank related

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ABC Regs - Key Topics

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Lending Deposits Financials Dodd FrankA E D HH to YY

B J Q

C CC S

G DD EE

M

T

U

V

X

Z

AA

BB

FF

Regulations K

Regulation K

Provides governance on the international banking front, offering guidelines for bank holding companies that engage in international trade and also foreign banks located domestically. It limits the kinds of business and financial practices and transactions in which foreign banks located domestically can participate. Regulation K allows corporations that qualify under the Edge Act to participate in a wide variety of global banking practices. It also allows domestic banks to own entire nonfinancial foreign business entities. Reserve requirements are also imposed on Edge Act corporations under this statute.

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Regulation K (continued)

Final rule, effective August 28, 1996.

• Implements a provision regarding the management of shell branches of foreign banks by such bank's U.S. offices.

• The provision prohibits foreign banks from using their U.S. branches or agencies to manage types of activities through offshore offices that could not be managed by a U.S. bank at its foreign branches or subsidiaries. This prohibition applies with respect to those offshore offices that are "managed or controlled" by a foreign bank's U.S. branches or agencies.

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Regulation W

Regulation W

Regulation

• Regulation W, which encompasses Section 23A and 23B of the Federal Reserve Act, applies to all member banks of

the Federal Reserve.

• The regulation is a very significant focus for Federal Reserve examiners.

• It has broad implications for a bank and the bank’s holding company (aka Bank Holding Company, or BHC).

Scope

• This regulation governs transactions with affiliates.

• It established quantitative limits.

• It also imposes prudential requirements for extensions of credit, purchases of assets, and certain other transactions

between a Bank and its affiliates.

Purpose

• Originally enacted as part of the Banking Act of 1933, sections 23A and 23B are designed to prevent adverse impacts

on a bank's financial resources through transactions with its affiliates.

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Regulation W (continued)

Why Reg W?

• From experience, regulators know that executives may “tap into” the bank’s strength and divert funding into a weak or failing affiliate. This “propping up” of a weakened affiliate spreads the affiliate’s losses into the bank which has FDIC-insured deposits.

• The regulators want to protect the bank's capital, and the FDIC insurance fund.

• The Federal Reserve operates the Discount Window, which is also known as its “lender of last resort” function.

• The Fed does not want to “prop up a bank” that is secretly propping-up a nonbank affiliate.

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Regulations W (continued)

Section 23A primarily focuses on the quantities limits, and defines the types of transactions between the Bank and its

affiliates that must be measured and monitored.

“Covered Transactions” are defined as Loans, investments, asset purchases, guarantees, and letters of credits.

The regulation does not prohibit covered transactions entirely – instead it requires ongoing measurement, monitoring

and limits on covered transactions.

The limits work on two level – per affiliate and aggregated.

• Section 23A prohibits covered transactions to any one affiliate in excess of 10% of the bank’s Tier 1 capital

• Section 23A prohibits covered transactions, when aggregated, in excess of 20% of the bank’s Tier 1 capital

Section 23A requires that covered transactions be “adequately capitalized.”

• Ineligible collateral includes: low-quality assets, securities issued by an affiliate, and intangible assets.13

Regulation W (continued)

Section 23A prohibits the transfer of low-quality assets from the affiliate to the Bank. • Low quality assets include classified or non-promising loans, non-accrual loans. Renegotiated

loan and assets acquired through foreclosure.

Section 23B governs the prudential terms and conditions under which covered transactions must be executed.

• All such transactions must be on market-terms (aka “arms-length transactions”}• Market terms analysis must be adequately documented.

What is “the attribution rule ,” and what does it require?

• The attribution rule of section 23A states that "any transaction by a member bank with any person shall be deemed to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, that affiliate.

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Regulation W (continued)

What is “Super 23A,” and what does it require?

• “Super 23A” is a part of the Volcker Rule. Super 23A prohibits transactions that would be “covered transactions” as defined in Section 23A of the Federal Reserve Act. It prohibits a banking entity or its affiliate from engaging in so-called “covered transactions” with a covered fund for which it serves, directly or indirectly, as the investment manager, investment adviser, commodity trading advisor, or which it sponsors or organizes and offers or a covered fund controlled by such fund.

• “Covered transactions” include loans and other extensions of credit from the banking entity to the covered fund, purchases of assets by the banking entity from the covered fund and certain other specified transactions.

• As noted above, the proposed rule’s implementation of Super 23A would have severely limited many of the available exemptions provided for permitted covered funds, which were not exempt from Super 23A.

• The Volcker Rule’s new exclusions from the definition of “covered fund” resolve the issue of the application of Super 23A to many permissible covered funds.

• Super 23A does, however, continue to apply as a blanket prohibition on “covered transactions” with sponsored and advised entities that are covered funds.

• The Supplementary Information clarifies that Super 23A does not include the “attribution rule” under Section 23A of the Federal Reserve Act.

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Regulation Y

Regulation Y

Regulates corporate bank holding company practices as well as certain practices of state-member banks. Practices or issues that fall under Regulation Y governance include establishment of minimum capital reserves (ratio of reserves to assets) for bank holding companies, certain bank holding company transactions and the definition of nonbanking activities for bank holding companies, state member banks and foreign banks operating in the U.S. Regulation Y outlines several bank holding company transactions which require Federal Reserve approval:

• The acquisition of, or merger with, another bank holding company• Directly or indirectly engaging in nonbanking activity• Individual or group acquisition of a state member bank or bank holding company• Appointment of a new senior officer or director by a troubled bank holding company or state member bank

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Regulation Y (continued)

Regulation

• Anti-tying has broad application to BHCs.

Scope

• Anti-tying regulation prohibit the following scenario: the bank restricts the availability of its products and services on the condition that another product or service be purchase from the Bank or an affiliate of the Bank.

• These rules do not apply to an affiliate of the bank UNLESS the affiliate's products and services are tied to the Bank’s products or services.

Why Anti-tying?

• In theory, when a client seeks a loan (or other desirable bank product) the Bank could seek to coerce the client to purchase a product that the client does not want to obtain from the bank's affiliate.

• For example, if the bank has very favorable lending rates, a client may seek a loan; but what if the bank insists that the client makes use of the bank's broker-dealer affiliate when the client will next be issuing stocks and bonds.

• If that happens, the bank is wrongly “tying” its loan product to the broker-dealer’s underwriting activity.

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Regulation Y (continued)

It’s Complicated

• There are MANY exceptions to anti-tying. This because banks often “bundle” products and services, and banks often establish affiliates that specialize in certain activates (e.g., custody of assets, loan servicing).

• For example, as a condition of making a loan, banks may generally require that the client maintain collateral in a designated account controlled by the bank.

• In sum, if the tied service reduces the bank’s risk and it is a “traditional banking service” it is likely to be permissible.

• Anti-tying does not apply to Non-US customers. • This is complicated, however, because of complexities in defining this term, and changing definitions of a

“U.S. customer.” • And, if it is prohibited by law in the US, is it proper to engage in tying outside the US?

• Perhaps, and it depends on local market practices in foreign countries.

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Regulation Y (continued)

Traditional Bank Products & Services

• Extensions of Credit• Letters of Credit and Financial Guarantees• Lease Transactions• Credit Derivatives• Deposit Accounts• Safe Deposit Box Services• Escrow Services• Payment and Settlement Services

• Payroll Services• Traveler Cheques and Money Orders• Cash Management Services• Trustee, Executor, or Administrative Services• Discretionary Asset Management• Custody Services• Paying and Transfer Agent and Registrar Services• Acquiring, Brokering, Arrange Syndicated Credits (aka SNC’s)

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Potential Consequences of Violations

Informal Enforcement Actions

• Board Resolutions

• Commitment Letters

• Memorandum Of Understanding (“MOUs”)

Formal Enforcement Actions

• Written Agreements

• Cease & Desist Orders (“C&Ds”)

• Prompt Corrective Action Directives

• Civil Money Penalties (“CMPs”)

• Prohibition and Removal Actions

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Components of an Effective Compliance Program

• Governance (including “lines of defenses”)

• Risk Assessment

• Testing & Monitoring

• Training

• Reporting & Communication

• Technology Enablement

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Thank You!***

Questions?

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