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GAO calls for the FDIC to address outstanding recommendations
On April 30, GAO sent a letter to the FDIC on its outstanding recommendations, emphasizing the importance of two priority recommendations, which pertained to blockchain technology and fintech. Regarding blockchain technology, the letter stressed the need for the FDIC and other financial regulators to establish a formal mechanism to identify and address blockchain-related risks. Despite the regulator's coordination, the response to crypto-asset risks had been criticized as untimely. With respect to fintech, this recommendation would have the FDIC and relevant agencies clarify the appropriate use of alternative data in loan underwriting for banks that partner with fintech lenders. The letter also called for the FDIC's attention to additional high-risk areas, including IT management, human capital, federal real property, cybersecurity, and the personnel security clearance process.
OCC and FDIC release CRA evaluations on 69 banks
On May 2, the OCC released its CRA performance evaluations for April and the FDIC released its evaluations for February. The OCC evaluated 13 national banks, federal savings associations, and insured federal branches of foreign banks. Of the 13 evaluations, most entities were rated “Satisfactory,” one entity was rated “Outstanding,” and one entity was rated as “Needs to Improve.” The FDIC released its May list of state nonmember banks of assigned CRA ratings in February. Out of 56 evaluations, two banks were rated “Outstanding,” 52 were rated as “Satisfactory,” one bank was rated as “Needs to Improve,” and one bank was rated as “Substantial Noncompliance.”
Fed’s Bowman discusses risk management and bank supervision
On April 18, Fed governor Michelle Bowman delivered opening remarks at the Regional and Community Banking Conference in New York. During her speech, Bowman acknowledged the recent challenges that have impacted the U.S. banking system. She pointed out that recent events, including the pandemic, a rapid rise in inflation and interest rates, market uncertainties, and bank failures, have brought traditional risks, such as liquidity and interest rate risks, to the forefront, while other risks, like cybersecurity and third-party risks, “continue to evolve and pose new challenges.”
Bowman emphasized the importance of banks having robust risk management frameworks to identify and control both existing and emerging risks. She also stressed the need for banks to innovate responsibly and adapt their risk management as new products and services are introduced, while cautioning that regulators must balance supervision and regulation so as not to stifle responsible innovation. In light of the recent bank failures, Bowman also underscored the need for banks to have of contingency funding plans in place, which may include borrowing from the Federal Home Loan Banks or the Fed’s discount window. While regulators can encourage banks to maintain and test these plans, she noted that they should not overstep their role and interfere with management decisions.
Highlighting that these evolving risks can be exacerbated by inadequate bank supervision and acknowledging the need for a review and potential adjustments in supervision following the recent bank failures, Bowman stressed that supervision should remain commensurate to a bank’s size, complexity, and risk profile, and should focus on core and emerging risks so as not to impair the long-term viability of the banking system, including mid-sized and smaller banks.
OCC releases March CRA evaluations for 19 banks
On April 1, the OCC released its Community Reinvestment Act (CRA) performance evaluations for last March. The OCC evaluated 19 national banks, federal savings associations, and insured federal branches of foreign banks with a rubric that included four possible ratings: Outstanding, Satisfactory, Needs to Improve, and Substantial Noncompliance. Of the 19 evaluations reported by the OCC, two Midwest banks received the lowest rating, which was “Needs to Improve.” Most entities were rated “Satisfactory,” and four entities were rated “Outstanding.” A full list of the bank evaluations is available here. In an OCC FAQ regarding the implementation of the CRA, the OCC detailed how it evaluated and rated financial institutions by reviewing both the institution itself (such as its capacity, constraints, business strategies, competitors, and peers) and the community the institution serves (such as its demographics, economic data, and its lending, investment, and service opportunities).
FDIC Vice Chair delivers remarks on tokenization
On March 11, FDIC Vice Chairman Travis Hill delivered prepared remarks on “Banking’s Next Chapter? Remarks on Tokenization and Other Issues.” The speech addressed the evolution of money and payment systems, focusing on the recent innovation of tokenizing commercial bank deposits and other assets and liabilities. Hill distinguished tokenization from assets like Bitcoin and Ether: “tokenization involves a representation of ‘real-world assets’ on a distributed ledger, including… commercial bank deposits, government and corporate bonds, money market fund shares, gold and other commodities, and real estate.” Hill highlighted the potential benefits of tokenization, such as improved efficiency in payments and settlements, 24/7/365 operations, programmability, atomic settlement (the settlement, or the act of transferring ownership of an asset from seller to buyer, combining instant and simultaneous settlements) and the creation of an immutable audit trail. He also mentioned that these innovations could streamline complex processes like cross-border transactions and bond issuances, offering notable advantages over traditional banking systems.
The speech also acknowledged challenges and risks associated with tokenization, including technical, operational, and legal uncertainties. Questions remain about the structure of the future financial system, interoperability between different blockchains, and the legal implications of transferring ownership via tokens, Hill added.
Regarding the regulatory approach to digital assets and tokenization, Hill expressed the need for as much clarity as possible, even in areas whether the technology is evolving quickly. For example, Hill noted that “it would be helpful to provide certainty that deposits are deposits, regardless of the technology or recordkeeping deployed, and if there are reasons to distinguish some or all tokenized deposits from traditional deposits for any regulatory, reporting, or other purpose, the FDIC should… explain how and why.”
GAO report calls for FDIC, Fed to fix bank supervision issues
On March 6, the U.S. Government Accountability Office (GAO) released a report to congressional requesters, including Senator Sherrod Brown (D-OH), Chairman of the U.S. Senate’s Committee on Banking, Housing, and Urban Affairs, regarding the Fed and FDIC’s communication of supervisory concerns related to the 2023 banking issues and the agencies’ procedures for escalating concerns. The report found that while both regulators generally met their requirements for communicating concerns, the Fed’s escalation procedures lacked clarity and specificity, which could have contributed to delayed enforcement last year.
The GAO recommended that the Fed revise its escalation procedures to be more precise and include measurable criteria. The Fed agreed with the recommendation and acknowledged that clearer examination procedures could help in addressing supervisory concerns more promptly. For the FDIC, the GAO recognized that the FDIC already updated its escalation procedures in August 2023 and will intend to implement further revisions to respond promptly. The GAO report also suggested that Congress amend the FDI Act to incorporate noncapital triggers related to unsafe banking practices before they affect capital.
FDIC releases March CRA evaluations for 56 banks, three rated as “Needs to Improve”
On March 4, the FDIC released a list of state nonmember banks evaluated for compliance with the Community Reinvestment Act (CRA) for March. The FDIC evaluated 56 banks with four ratings: Outstanding, Satisfactory, Needs to Improve, and Substantial Noncompliance. Of the 56 evaluations reported by the FDIC, three banks hold the lowest given ratings as “Needs to Improve.” Most banks were rated “Satisfactory,” and seven banks were rated “Outstanding.” According to the FDIC’s release, a copy of a bank’s CRA evaluation is available directly from the bank, as required by law, or from the FDIC’s Public Information Center.
OCC names Ted Dowd as Acting Senior Deputy Comptroller and Chief Counsel
On February 23, the OCC announced that Ted Dowd will serve as the Acting Senior Deputy Comptroller and Chief Counsel for the agency while the OCC searches for a successor to Ben McDonough. Dowd is currently the Deputy Chief Counsel, a position he has fulfilled since 2018 where he oversaw the operations of all OCC district counsel offices. Under the new position, Dowd will oversee all legal aspects of the OCC, as well as support the agency’s activities in bank chartering, supervision, enforcement, and rulemaking, among others. This positional change will go into effect on April 8 when the current OCC Chief Counsel Ben McDonough begins a new position at another agency.
CFPB revises its supervisory appeals process
On February 16, the CFPB issued a procedural rule updating its process for financial institutions that appeal the Bureau’s supervisory findings. The CFPB examined financial institutions to ensure they followed federal consumer financial law. After an examination or targeted review, supervised entities may appeal their compliance rating or any other findings.
First, the procedural rule expanded the pool of potential members for the appeals committee within the CFPB. Now, any CFPB manager with relevant expertise who did not participate in the original matter being appealed can be considered, rather than previously only managers from the Supervision department. The CFPB’s General Counsel will assign three CFPB managers and legal counsel to advise them. Second, the revised process introduced a new option for resolving appeals—in addition to upholding or rescinding the original finding, matters can now be remanded back to supervision staff for further consideration, potentially resulting in a modified finding. The Bureau also recommended in its procedural rule that entities engage in “open dialogue” with supervisory staff to discuss their preliminary findings to attempt to resolve disputes before an examination is final.
Third, institutions now can appeal any compliance rating issued to them, not just negative ratings, as was the case previously. Fourth, the updated process included additional clarifications and specifies that it applied to pending appeals at the time of its publication.
Fed, FDIC, and OCC release stress test scenarios for 2024
On February 15, the Fed, OCC, and the FDIC released their annual stress test scenarios for 2024 to assist the agencies in evaluating their respective covered institution’s risk profile and capital adequacy. The Fed released its “2024 Stress Test Scenarios” to be used by banks and supervisors for the 2024 annual stress test. The scenarios include hypothetical sets of conditions to evaluate the banks under baseline and severely adverse scenarios. The OCC similarly released economic and financial market scenarios to be used by national banks and federal savings associations and include both baseline and severely adverse scenarios as mandated by the stress testing requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The FDIC also released its stress test scenarios for certain state nonmember banks and state savings associations in conjunction with the OCC and the Fed.