Shearman & Sterling LLP | Financial Regulatory Developments Focus | Financial Stability Oversight Council Announces Proposed Decision to not Apply "Hotel California" Provision to Large US National Bank
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  • Financial Stability Oversight Council Announces Proposed Decision to not Apply "Hotel California" Provision to Large US National Bank
    07/18/2018

    The U.S. Financial Stability Oversight Council issued a proposed decision with respect to a national bank’s petition to not treat the surviving entity of a bank holding company parent merging into its large U.S. national bank subsidiary as a nonbank financial company supervised by the U.S. Board of Governors of the Federal Reserve System pursuant to Section 117 of the Dodd Frank Act (commonly referred to as the “Hotel California” provision).  Section 117 applies to any entity, or its successor entity, that received financial assistance under, or participated in, the Capital Purchase Plan established under the Troubled Asset Relief Program and was a bank holding company with total consolidated assets of at least $50 billion as of January 1, 2010.  If an entity meeting these requirements ceases to be a bank holding company, Section 117 requires that the entity be treated as a nonbank financial company supervised by the Federal Reserve Board as if the FSOC had made this determination under Section 113 of the Dodd-Frank Act.  Section 117, however, provides a mechanism by which the affected entity can appeal its treatment as a nonbank financial company supervised by the Federal Reserve Board.  In considering these appeals, the FSOC considers whether material financial distress experienced by the entity, or the nature, scope, size, scale, concentration, interconnectedness or mix of the activities of the entity, could pose a threat to U.S. financial stability.  In evaluating this standard, the FSOC considers three transmission channels—exposure, asset liquidation and critical function or service—which are intended to inform the extent to which any material financial stress  could be transmitted to other financial firms.  In reaching its proposed decision to grant the appeal of the petitioner, the FSOC determined that there was not any significant risk that material financial distress experienced by the bank would pose a threat to U.S. financial stability through these three transmission channels.  In addition, the FSOC considered to what extent any material distress at the bank would be mitigated by the complexity or resolvability of the bank.  The FSOC found that while the failure of the appealing entity would be one of the largest U.S. bank failures, such a failure would be mitigated by the fact that a resolution of the failed entity would be relatively straightforward.  The FSOC also noted that the surviving bank entity currently is, and would continue to be, subject to extensive regulation and supervision by the U.S. Office of the Comptroller of the Currency, U.S. Federal Deposit Insurance Corporation and U.S. Consumer Financial Protection Bureau.

    The FSOC noted that any determination to grant the bank’s appeal would be conditioned on the completion of the bank’s proposed merger under the terms of the merger agreement within 90 days of the FSOC’s final decision.  The OCC and FDIC have already approved the proposed merger.

    View full text of the FSOC’s proposed decision.