The Federal Reserve Board approved a final rule establishing guidelines for how to determine if a bank is ‘predominately engaged in financial activities.'
This distinction, which is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, identifies which banks meet the guidelines for supervision by the Federal Reserve. The final rule takes effect May 6.
A firm will be considered ‘predominantly engaged in financial activities’ if 85% or more of its revenue or assets are related to activities defined as financial in nature under the Bank Holding Co. Act, the Fed said.
The prudential regulator noted a few exemptions. For example, engaging in physically settled derivatives transactions will generally not be considered a financial activity, which is a variation from the original proposal.
In addition, the final rule defines what firms are 'significant nonbank financial companies' and 'significant bank holding companies.'
"Among the factors the FSOC must consider when determining whether to designate a nonbank financial company for consolidated supervision by the Federal Reserve is the extent and nature of the company's transactions and relationships with other significant nonbank financial companies and significant bank holding companies," the Federal Reserve wrote.
"If designated, those nonbank financial companies will be required to submit reports to the Federal Reserve, the FSOC, and the Federal Deposit Insurance Corporation on the company's credit exposure to other significant nonbank financial companies and significant bank holding companies as well as the credit exposure of such significant entities to the company," the regulator added.
As a general rule of thumb, a firm will be considered significant if it has $50 billion or more in total consolidated assets.
Click here to access the full final rule.