Financial Reforms, Obama style.

This is the seventh in a series of articles on te financial reforms sought to be implemented by the Obama Administration, in U.S.A.

Tier I FHCs would be subject to more robust and conservative regulation as compared to other FHCs.   The rationale for this is the potential of their causing systemic failure in the event of their own failure.   Conversely, it was also felt that imposing onerous regulatory requirements on them could stunt their long term growth.   Hence a balance needs to be achieved between these two concerns.

Accordingly, Tier I FHCs would be required to meet certain higher standards on the following parameters:

1. Capital Requirements:  Stressful economic and financial conditions would be the backdrop against which this requirement would be judged for Tier I FHCs.   They would be required to hold capital at a level to ensure comfort in times of distress.   At any rate, they would have to have capital above prudential minimum capital requirements.   The firms’ capital planning practices and market based indicators of their credit quality would be assessed as part of the process to recommend the optimum level of capital.
2. Prompt Corrective Action:  There will be no dilly dallying when it comes to taking corrective action against Tier I FHCs in the event of a decline in their capital levels.
3. Liquidity standards:  The risk management practices of Teir I FHCs should incorporate liquidity risk management.   Liquidity stress scenarios should be worked out against which the firm should conduct stress tests, both short term and long term, institution- specific, as also market-wide scenarios, and for on and off balance sheet exposures. 
4. Overall risk management:  Tier I FHCs should identify and provide for risk management across the spectrum of their activities, especially firm-wide risk concentrations.
5. Market discipline and disclosure:  Appropriate disclosures in regard to capital adequacy, risk profile, and risk management capabilities should be made by Tier I FHCs.
6. Restrictions on non-financial activities:  The non-financial acitivity restrictions applicable to the BHCs would also be applicable to those BHCs that do not control a insured depository institution.
7. Rapid resolution plans:  Every Tier I FHC would be required to have a contingency plan ready to resolve any problem faced by it under stressful conditions.   These plans should be regularly updated and revised as often as needed.

                                                                                                    To be concluded.