Advocates of strict bank regulation often point in their defense to an iconic photograph of regulators cutting “red tape,” with one of them brandishing a chain saw. We’ve never taken the anti red-tape thing all that seriously. We saw the campaign a few years ago against red tape as pretty much an excuse for bankers to hand out buttons. Now, though, we’re thinking chain-saw massacre thoughts. Clients today received an in-depth analysis of a proposal from the FRB for forms it wants to use in assessing BHC capital plans. We don’t argue with the premise – the need for disciplined, forward-looking capital plans – indeed, we’ve lamented their lack at several times during the crisis. In fact, we like good capital plans so much that our complaint about the FRB proposal isn’t based just on burden – awesome as you’ll see below. Worse, we fear that these filings will be the equivalent of an over-complex cockpit, leading supervisors and bankers to fixate on all the little blinking lights instead of the mountain looming in front.
Although the FRB’s data demand is nominally a proposal, it has already received Board approval. The biggest BHCs are, it says, supposed to get with this program no later than November and, then, to file all these reports by year-end – this one, 2011. Here’s an excerpt from the FRB’s laughably-headlined “paperwork reduction” notice. Bear in mind as you read it that this is a description of a “summary” annual report, just one of the several annual reports BHCs must file starting now along with seven quarterly reports that are all at least as daunting. Indeed, as we re-read the rule, we think the summary below is too kind to the Fed, as it’s perhaps the clearest of the report descriptions and it isn’t, like others, accompanied by queries about still more data the Fed thinks might also be nice to have. Take a look:
The Summary schedule would consist of three primary components– income statement projections, balance sheet projections, and capital-related projections. There are also a number of worksheets for the BHCs to project various data items, including charge-offs, gains or losses related to trading activities and counterparty positions, gains or losses on securities, and pre-provision net revenue. The complete Summary schedule would be submitted for each scenario evaluated by the BHC and would include nine quarters of projections. The Income Statement worksheet would collect data on quarterly projections of losses and revenues. This is organized similar to, but not identical to, the mandatory Consolidated Financial Statements for Bank Holding Companies (FR Y-9C; OMB No. 7100-0128). For example, BHCs would report estimates of losses for all categories of loans, securities and trading assets and would include estimates of the components of BHC revenue. In addition, this worksheet would collect certain tax-related data items. The Balance Sheet worksheet would collect data on quarterly projections of the BHC balance sheet, which includes components of assets, liabilities, and equity capital. The Capital worksheet would collect data on quarterly projections of equity capital and regulatory capital. In addition, this worksheet would also collect projections of capital actions such as: common dividends and share repurchases that affect a BHC’s equity capital, projections of the filters and deductions necessary to estimate regulatory capital, ancillary data on other balance sheet items and risk-weighted assets, supporting data necessary to estimate the effect of the deferred tax asset on regulatory capital, and supporting data related to discretionary capital actions. The Summary schedule would also collect separate projection data worksheets related to various components of the income statement, including charge-offs on various loan portfolios, gains or losses related to trading activities and counterparty positions, gains or losses on securities, operational risk, and PPNR. The Retail Risk worksheet would collect expected losses on the respective portfolios. The Operational Risk worksheets would collect the BHC’s projections for operational losses. Additional detail would be requested on translating historical loss experience into operational loss projections and on any budgeting processes used to project operational losses. The Trading Risk and CCR worksheets would contain projected losses associated with a market shock. There would be multiple worksheets related to Available-for-Sale (AFS) and Held-to-Maturity (HTM) securities (Securities Risk worksheets). The worksheets would request data and information such as: projected other-than-temporary impairment (OTTI) by asset class for each quarter of the forecast time horizon; methodologies and assumptions used to generate the OTTI projections for each asset class; projected stressed fair market value (FMV) for each asset class as well as qualitative information on the methodologies and assumptions used to generate the stressed market value; and actual FMVs such as the source (vendor or proprietary) as well as key assumptions used for determining market values (if using a proprietary model). The PPNR worksheets would collect data related to projected net interest income and noninterest revenues and expenses under the relevant scenario. This would include projections of balances of interest-bearing assets and liabilities and the associated interest income and expense for each line item; noninterest income related to loan origination, servicing, advisory services, trading commissions and fees, noninterest expense related to compensation, occupancy, and services; and other relevant line items.
Sorry we made you wade through that, but now pity the BHCs that must actually do something to comply with this. And, if you’re still not moved to side with them, pick up the rule itself. This excerpt is just a s’amuse bouche.