FRB Issues Guidance on Consolidated Supervision Framework for Large Financial Institutions
The Board of Governors of the Federal Reserve System ("FRB") issued guidance on how certain risk transfer transactions affect assessments of capital adequacy at large financial institutions covered by the Federal Reserve's Consolidated Supervision Framework for Large Financial Institutions.
According to the FRB, large financial institutions should carefully evaluate transactions intended to reduce risk to ensure that, if risks are shifted to a thinly capitalized counterparty or affiliated entity of the firm, any residual risk is effectively captured in the firm's internal capital adequacy assessment. The FRB issued the guidance to clarify that while efforts to reduce risk can be positive, certain transactions can result in residual risks to the firm that may not be accounted for in risk-based capital measures. Institutions should be able to demonstrate that the residual risks are fully reflected in their internal assessment of capital adequacy and that they maintain sufficient capital to account for such risks.