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On July 31, the Federal Housing Finance Agency announced a 60-day extension on the public comment period for a proposed rule that would implement a new regulatory capital framework for Freddie Mac and Fannie Mae. Among other things, the proposed rule would implement: (i) a new framework for risk-based capital requirements; and (ii) two alternative approaches to setting minimum leverage capital requirements. (Previously covered by InfoBytes here). The previous deadline for comments was September 17, and the deadline is now November 16.
On June 12, the Federal Housing Finance Agency (FHFA) announced a proposed rulemaking, which implements a regulatory capital framework for Freddie Mac and Fannie Mae (the Enterprises) including (i) a new framework for risk-based capital requirements; and (ii) two alternative approaches to setting minimum leverage capital requirements. Regulatory capital requirements for the Enterprises have been suspended since the Enterprises were placed in conservatorship in September 2008, and these new requirements would continue to be suspended while the Enterprises remain under conservatorship. FHFA stated that the purpose of the rulemaking effort is to develop a risk measurement framework to better evaluate each Enterprise’s business decisions while in conservatorship. As a result, the proposed risk-based capital requirements would “provide a granular assessment of credit risk specific to different mortgage loan categories, as well as market risk, operational risk, and going-concern buffer components.” The two options for minimal leverage capital requirements include (i) requiring the Enterprises to hold capital equal to 2.5 percent of total assets and off-balance sheet guarantees related to securitization activities; and (ii) requiring the Enterprises to hold capital equal to 1.5 percent of trust assets and 4 percent of non-trust assets. Comments on the proposed rulemaking must be submitted within 60 days of publication in the Federal Register.
On April 10, the Federal Reserve Board (Board) announced proposed changes intended to simplify the capital regime applicable to bank holding companies with $50 billion or more in total consolidated assets by integrating the Board’s regulatory capital rule (capital rule) and Comprehensive Capital Analysis and Review (CCAR) and stress test rules. The proposal introduces a “stress capital buffer” (SCB) requirement which will replace the existing fixed capital conservation buffer requirement. Under the proposal, the size of the SCB will be based on the annual stress test and will be added to the bank’s capital requirements for the coming year. For globally systemically important banks (GSIB), a GSIB surcharge will be added to the determined SCB amount. According to the Board’s announcement, the amount of capital required for GSIBs will generally stay the same or somewhat increase, while non-GSIBs will generally see a modest decrease. Overall, the Board states that the changes would reduce the number of capital-related requirements from 24 to 14. Comments on the proposal are due 60 days after publication in the Federal Register.
On October 6, the U.S. Treasury Department published a report that focuses on capital market oversight and outlines challenges and recommendations to reduce regulatory burdens. The report, “A Financial System That Creates Economic Opportunities: Capital Markets,” is the second in a series of four the Treasury plans to issue in response to President Trump’s Executive Order 13772, which mandated a review of financial regulations for inconsistencies with promoted “Core Principles.” (See Buckley Sandler Special Alert here.) The report notes that while certain capital market regulatory framework elements function well, there remain significant challenges. Specifically, the report recommends—among other things—reducing fragmentation, overlap, and duplication in the U.S. regulatory structure. This includes focusing on effecting changes to promote efficiency and more clearly defining regulatory mandates that would allow agencies to issue joint rulemaking and foster coordination.
Treasury’s recommendations focus primarily on market regulations but also build upon themes identified in the first report published in June 2017, which primarily focused on solutions for providing relief to banks and credit unions. The second report identifies recommendations, actions, and associated “Core Principles” within the following categories:
- “promoting access to capital for all types of companies, including small and growing businesses, through reduction of regulatory burden and improved market access to investment opportunities”;
- “fostering robust secondary markets in equity and debt”;
- “appropriately tailoring regulations on securitized products to encourage lending and risk transfer”;
- “recalibrating derivatives regulations to promote market efficiency and effective risk mitigation”;
- “ensuring proper risk management for [central counterparties] and other financial market utilities because of the critical role they play in the financial system”;
- “rationalizing and modernizing the U.S. capital markets regulatory structure and process”; and
- “advancing U.S. interests by promoting a level playing field internationally.”
A fact sheet accompanying the report further highlights Treasury’s recommendations to streamline regulations.
On September 27, the Federal Reserve Board, the FDIC, and the OCC (agencies) issued a joint notice of proposed rulemaking to simplify capital rule compliance requirements and reduce the regulatory burden in accordance with the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). Among other things, the proposed rule will “apply a simpler regulatory capital treatment” for mortgage servicing assets, certain deferred tax assets, investments in unconsolidated financial institutions, and capital issued by a consolidated subsidiary of a banking organization and held by third parties, or minority interest. To assist banks in evaluating the potential impact of the proposal, the agencies provided an estimation tool template and summary of the proposal. As previously discussed in InfoBytes, the agencies—all members of the Federal Financial Institutions Examination Council (FFIEC)—issued a report in March following an EGRPRA review, in which the agencies outlined initiatives designed to reduce regulatory burdens, particularly on community banks and savings associations. In a statement issued by FDIC Chairman Martin J. Gruenberg, commenters are encouraged to also consider methods for simplifying existing regulatory capital rules impacting community banks. Comments on the joint proposed rule are due 60 days after publication in the Federal Register.
On June 26, the Federal Reserve fined a New York-based bank $3 million for unsafe and unsound banking practices after the firm allegedly assigned a lower risk weighting to a portfolio of assets in violation of then-applicable Basel I regulatory risk capital requirements. According to the consent order, between 2010 and 2014, the bank consolidated a portfolio of collateralized loan obligations onto its balance sheet. It allegedly assigned a zero-risk weighting to the assets improperly, and therefore overstated its risk-based capital ratios and set aside less capital than it should have.
On February 8, the National Credit Union Administration (NCUA) published a notice of proposed rulemaking to expand the types of investment capital that federally insured credit unions could use to meet certain regulatory requirements. NCUA is considering whether to allow credit unions to use investment capital (that would be uninsured capital subordinate to all other claims) to satisfy the risk-based net worth ratio requirement. Currently, only low-income designated credit unions are allowed to use secondary capital to satisfy two regulatory requirements: the net worth ratio and the risk-based net-worth ratio. Although any changes to the definition of net worth would require an act of Congress, the NCUA asserted in the proposal that it has broad authority to adjust the risk-based net worth ratio requirement and therefore may choose to allow credit unions that are not “low-income designated” to use alternative capital to meet this requirement.
On December 2, 2016, the Office of the Comptroller of the Currency (“OCC”) announced its plans to move forward with developing a special purpose national bank charter for financial technology (“fintech”) companies. Accompanying the Comptroller of the Currency, Thomas J. Curry’s announcement, the OCC published a white paper that describes the OCC’s authority to grant national bank charters to fintech companies and outlines minimum supervisory standards for successful fintech bank applicants. These standards would include capital and liquidity standards, risk management requirements, enhanced disclosure requirements, and resolution plans. Over the past several months, the OCC has taken a series of carefully calculated steps to position itself as the preeminent regulator of fintech companies in a hotly-contested race among other federal and state regulators who have similarly expressed interest in formalizing a regulatory framework for fintech companies. This proposal from the OCC reflects the culmination of those efforts.
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BuckleySandler welcomes questions regarding this new approach to fintech and banking, and would be happy to assist companies in determining whether a national bank charter would be beneficial for executing on their corporate strategies. Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeremiah S. Buckley, (202) 349-8010
- Valerie L. Hletko, (202) 349-8054
- John P. Kromer, (202) 349-8040
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- Jonice Gray Tucker, (202) 349-8005
- Walter E. Zalenski, (202) 461-2910
- Noel M. Gruber, (202) 349-8043
- Shara M. Chang, (202) 349-8096
On September 8, the Federal Reserve Board (FRB) released a policy statement providing details regarding its Countercyclical Capital Buffer Framework (Framework). The FRB explained that the Framework is designed to implement requirements under the Basel III International bank capital rules, and will generally raise capital holding requirements for internationally active banks when there is an elevated risk of systemic credit losses. In responding to comments, the FRB used the policy statement to clarify that when the systemic threat is reduced, banks would be allowed to release excess capital into the economy to further create financial stability. Meanwhile, the Group of Central Bank Governors and Heads of Supervision (Group) that oversees the Basel Committee on Banking Supervision (Committee) cautioned the Committee to avoid significant increases in overall bank capital requirements as the Committee creates a final rule to address excessive variability in risk-weighted assets. The Group expressed its desire that the Committee focus on improving and harmonizing the methods through which banks determine their own risks. The Committee’s final rule is due by year’s end.
On November 10, the Financial Stability Board issued policy proposals in response to G20 Leaders’ request at the 2013 St. Petersburg Summit to develop proposals by the end of 2014. The proposals consist of “a set of principles and a detailed term sheet on the adequacy of loss-absorbing and recapitalization capacity of global systemically important banks (G-SIBs).” The proposals will establish a new minimum standard for total loss-absorbing capacity (TLAC). The new TLAC standard should (i) ensure home and host authorities that G-SIBs have adequate capacity to absorb losses; (ii) allow resolution authorities “to implement a resolution strategy that minimi[zes] any impact on financial stability and ensures the continuity of critical economic functions;” and (iii) help achieve an equal playing field internationally. Comments and responses to the proposals are due by February 2, 2015.
- Michelle L. Rogers to discuss "Preparing for servicing exams in the current regulatory environment" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jon David D. Langlois to discuss "Regulatory risks of convenience fees" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- APPROVED Webcast: NMLS Annual Conference & Ombudsman Meeting: Review and recap
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jessica L. Pollet to discuss "Law & compliance speedsmarts" at the American Financial Services Association Law & Compliance Symposium
- Daniel P. Stipano to discuss "Lessons learned from recent high profile enforcement actions" at the Florida International Bankers Association AML Compliance Conference
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Aaron C. Mahler to discuss "Regulation B/fair lending" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Heidi M. Bauer to discuss "'So you want to form a joint venture' — Licensing strategies for successful JVs" at RESPRO26
- Jonice Gray Tucker to discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" at CBA Live
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference
- Moorari K. Shah to discuss "State regulatory and disclosures" at the Equipment Leasing and Finance Association Legal Forum
- Hank Asbill to discuss "Creative character evidence in criminal and civil trials" at the Litigation Counsel of America Spring Conference & Celebration of Fellows
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program