Treasury has released the proposed legislative language for, among other things, the new regulatory regime for "Tier 1 financial holding companies." I've only had time to skim it, and I hope to take the time to read it in depth at some point today. Here are the highlights (based on my quick read). Definition of "Tier 1 financial holding company," and criteria to be considered in designating a Tier 1 FHC:
[The Fed] may designate ... any United States financial company as a United States Tier 1 financial holding company, if it determines that material financial distress at the company could pose a threat to global or United States financial stability or the global or United States economy during times of economic stress based on a consideration of the following criteria:What looks like an informal threshold for being considered a Tier 1 FHC:
(i) the amount and nature of the company’s financial assets; (ii) the amount and types of the company’s liabilities, including the degree of reliance on short-term funding; (iii) the extent of the company’s off-balance sheet exposures; (iv) the extent of the company’s transactions and relationships with other major financial companies; (v) the company’s importance as a source of credit for households, businesses and State and local governments and as a source of liquidity for the financial system; (vi) the recommendation, if any, of the Financial Services Oversight Council; and (vii) any other factors that the Board deems appropriate.
(A) UNITED STATES FINANCIAL COMPANY.—The Board may require any United States financial company that, based on the most recent audited or unaudited financial statements available, has—Prudential standards for Tier 1 FHCs have to be more stringent than prudential standards for bank holding companies:
(i) $10 billion or more in assets; (ii) $100 billion or more in assets under management; or (iii) $2 billion or more in gross annual revenue, to submit such information that the Board may reasonably require for the sole purpose of determining whether to designate the company as a United States Tier 1 financial holding company.
The prudential standards shall be more stringent than the standards applicable to bank holding companies to reflect the potential risk posed to financial stability by United States Tier 1 financial holding companies and shall include, but not be limited to—Tier 1 FHCs, like FDIC-insured banks, will be subject to "prompt corrective action" requirements (see Section 6A). Mandatory leverage limit range for Tier 1 FHCs:
(A) risk-based capital requirements; (B) leverage limits; (C) liquidity requirements; and (D) overall risk management requirements.
The level specified under subparagraph (A)(i) shall require tangible equity in an amount—Mandatory Chapter 11 bankruptcy petition for Tier 1 FHCs within 90 days of becoming "critically undercapitalized" under the new prompt corrective action rules for Tier 1 FHCs:
i) not less than 2 percent of total assets; and (ii) except as provided in clause (i), not more than 65 percent of the required minimum level of capital under the leverage limit.
The Board shall, not later than 90 days after a Tier 1 financial holding company becomes critically undercapitalized—Credit exposure to an unaffiliated entity can't exceed 25 percent:
(1) require the Tier 1 financial holding company to file a petition for bankruptcy under section 301 of title 11, United States Code; or (2) file a petition for bankruptcy against the Tier 1 financial holding company under section 303 of title 11, United States Code.
(b) LIMITATION ON CREDIT EXPOSURE.—The regulations prescribed by the Board shall prohibit each Tier 1 financial holding company from having credit exposure to any unaffiliated company that exceeds 25% of the Tier 1 financial holding company’s capital stock and surplus or such lower amount as the Board may determine by regulation to be necessary to mitigate risks to financial stability. (c) CREDIT EXPOSURE.—For purposes of subsection (b), a Tier 1 financial holding company’s “credit exposure” to a company means—
(1) All extensions of credit to the company, including loans, deposits, and lines of credit; (2) All repurchase agreements and reverse repurchase agreement with the company; (3) All securities borrowing and lending transactions with the company to the extent that such transactions create credit exposure of the Tier 1 financial holding company to the company; (4) All guarantees, acceptances, or letters of credit (including endorsement or standby letters of credit) issued on behalf of the company; (5) All purchases of or investment in securities issued by the company; (6) Counterparty credit exposure to the company in connection with a derivative transaction between the Tier 1 financial holding company and the company; and (7) Any other similar transactions that the Board by regulation determines to be a credit exposure for purposes of this section.