Section 166 of Dodd–Frank requires the Federal Reserve Board (FRB) to provide for the early remediation of financial weakness of bank holding companies with $50 billion or more in assets and all FSOC–designated nonbanks (covered companies). Dodd–Frank instructs the FRB to employ forwardlooking indicators as triggers for remedial actions that increase in stringency as an institution’s condition dteriorates.

The FRB has proposed a four–level regime for the early remediation of financial distress at covered companies. The FRB will use a set of triggers that vary in accordance with the associated remediation level, and include (i) regulatory capital levels, (ii) performance in supervisory stress tests, (iii) market indicators, and (iv) “identified weakness” in any of the enhanced risk management or liquidity risk management standards required by the FRB’s proposed rule.

Level 1 ‐ Heightened Review: The FRB will report on the deterioration of the covered company’s financial condition within 30 days and determine whether the company should be elevated to a higher level of remediation.

• Trigger: Signs of financial distress or material risk management weakness indicating that further decline is probable.

Level 2 ‐ Initial Remediation: The FRB will place restrictions on capital distributions, acquisitions, and asset growth. The company must enter into a non–public memorandum of understanding with the FRB that includes an action plan for the company to improve its financial condition.

• Trigger: Risk–based capital and leverage ratios fall to adequately–capitalized levels and failure to meet supervisory stress–test expectations, or ongoing weakness with respect to multiple risk management or liquidity risk management standards.

Level 3 ‐ Recovery: The FRB will prohibit capital distributions and growth, require the company to raise additional capital, and place limits on executive compensation. The company must enter into a formal written agreement with the Board. The FRB may require senior management changes.

• Trigger: Risk–based capital and leverage ratios fall to under–capitalized levels and serious failure to meet supervisory stress–test expectations, or substantial non–compliance with risk management or liquidity risk management standards.

Level 4 ‐ Resolution Assessment: The FRB will consider whether to recommend to Treasury and the FDIC that the company be resolved under Title II of Dodd‐Frank.

• Trigger: Risk–based capital and leverage ratios fall to significantly under–capitalized levels.

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