InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Agencies issue statement on the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act
On July 6, the Federal Reserve Board, FDIC, and OCC issued an interagency statement regarding the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), S.2155/P.L. 115-174, which was signed into law by President Trump on May 24. The joint statement describes the interim positions the federal agencies will take with regard to amendments within the Act, including, among other things, (i) extending the deadline to November 25 for all regulatory requirements related to company-run stress testing for depository institutions with less than $100 billion in total consolidated assets; (ii) enforcing the Volcker Rule consistently with the Act’s narrowed definition of banking entity; and (iii) increasing the total asset threshold for well-capitalized insured depository institutions to be eligible for an 18-month examination cycle. The agencies intend to engage in rulemakings to implement certain provisions at a later date. The accompanying OCC and the FDIC releases are available here and here.
The Federal Reserve Board also issued a separate statement describing how, in accordance with the Act, the Board will no longer subject certain smaller, less complex banking organizations to specified regulations, including stress test and liquidity coverage ratio rules. The Act raised the threshold from $50 billion to $100 billion in total consolidated assets for bank holding companies to be subject to Dodd-Frank enhanced prudential standards. The Board intends to collect assessments from all assessed companies for 2017 but will not collect assessments from newly exempt companies for 2018 and going forward. Additionally, the statement provides guidance on implementation of certain other changes in the Act, including reporting high volatility commercial real estate exposures.
Comptroller Otting discusses regulatory priorities during congressional testimonies
On June 13 and 14, Comptroller of Currency Joseph Otting appeared before the House Financial Services Committee and the Senate Committee on Banking, Housing, and Urban Affairs to discuss his priorities as Comptroller. As highlighted in the identical press releases for both House and Senate hearings, Otting testified about the OCC’s achievements and efforts since being sworn in as Comptroller in November 2017. Among other things, Otting discussed the agency’s efforts to (i) modernize the Community Reinvestment Act (CRA); (ii) promote compliance with the Bank Secrecy Act and anti-money laundering regulations (BSA/AML); and (iii) simplify the Volcker Rule, particularly for small and mid-size banks. Otting emphasized in his written testimony that his priority is to reduce the regulatory burden on financial institutions, specifying that the CRA requirements have become "too complex, outdated, cumbersome, and subjective." To that end, Otting stated that the OCC, in coordination with other federal agencies, is preparing an advance notice of proposed rulemaking to gather information on potential CRA updates, which, in Otting’s view, should include (i) expanding the types of activities that are eligible for CRA credit; (ii) changing assessment areas so they are not based solely on where the bank has a physical presence; and (iii) providing clearer metrics. As for BSA/AML, Otting noted this was his “number two issue” behind reforming the CRA and the working group—the OCC, FinCEN, the FDIC, the Federal Reserve, and NCUA— will likely address key issues like de-risking and improvement of transparency over the next three to six months. Otting noted his pleasure with the Volcker Rule changes in the Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155/ P.L. 115-174) but cautioned that fine-tuning may be necessary as the OCC proceeds with implementation.
FDIC FIL addendum: Federal banking agencies will not enforce Volcker rule for financial institutions exempt under S.2155
On June 4, the FDIC issued FIL-31-2018, which contains an addendum describing legislative changes to Section 13 of the Bank Holding Company Act (Volcker rule) under the Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155/P.L. 115-174) that are applicable to FDIC-insured depository institutions with total assets under $10 billion. (See previous InfoBytes coverage on S.2155 here.) Effective immediately, any financial institution that “‘does not have and is not controlled by a company that has (i) more than $10,000,000,000 in total consolidated assets; and (ii) total trading assets and trading liabilities as reported on the most recent applicable regulatory filing filed by the institution, that are more than 5 percent of total consolidated assets’” is exempt from the rule. As result, the federal banking agencies will no longer enforce the Volcker rule for qualifying financial institutions in a manner inconsistent with the statutory amendments to the Volcker rule, and announced plans “to address these statutory amendments outside of the current notice of proposed rulemaking.”
The federal banking agencies responsible for developing the proposal (the Federal Reserve Board, CFTC, FDIC, OCC, and SEC) also formally announced on June 5 a joint notice and request for public comment on the proposed revisions. Comments will be accepted for 60 days following publication in the Federal Register.
Visit here for InfoBytes coverage on the federal banking agencies’ proposed revisions to the Volcker rule announced May 30.
Federal Reserve Board issues proposed joint revisions to Volcker rule
On May 30, the Federal Reserve Board (Board) announced proposed revisions designed to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds (the Volcker rule). The proposal, subject to public comment for 60 days after publication in the Federal Register, was developed in coordination with the OCC, FDIC, SEC, and CFTC, and would modify regulations finalized in December 2013 to reduce compliance costs for banks. Two information collections were issued along with the proposal: Information Schedules and Quantitative Measurements Daily Schedule.
According to a Board memo, the proposed amendments would tailor Volcker rule requirements to better align with a bank’s level of trading activity and risks. The proposal would establish the following three categories based on trading activity: (i) “significant trading assets and liabilities,” which would consist of banks with gross trading assets and liabilities of at least $10 billion, and require a comprehensive compliance program tailored to reflect the Volcker rule’s requirements; (ii) “moderate trading assets and liabilities,” which would include banks with gross trading assets and liabilities of at least $1 billion but less than $10 billion, and impose reduced compliance obligations; and (iii) “limited trading assets and liabilities,” which would include banks with less than $1 billion in gross trading assets and liabilities, and subject them to the lowest level of regulatory compliance.
In addition, the proposal would, among other changes:
- provide more clarity by revising the definition of “trading account” to be an account used to buy or sell financial instruments recorded at fair value under commonly used accounting definitions;
- clarify that banks whose trades do not exceed appropriately developed internal risk limits are engaged in permissible market-making-related activity;
- streamline the criteria that applies when a bank relies on the hedging exemption from the proprietary trading prohibition, and remove a requirement that a trade “demonstrably reduces or otherwise significantly mitigates” a specific risk;
- ease the documentation requirement banks face when demonstrating trades are hedges, and eliminate requirements that a bank with only moderate or limited trading activity must develop “a separate internal compliance program for risk-mitigation hedging”;
- eliminate the 60-day rebuttable presumption for trades;
- expand the scope of the “liquidity management exclusion” in the Volcker rule to allow banks to use foreign exchange forwards, foreign exchange swaps, and physically settled cross-currency swaps as a part of liquidity management activities;
- limit the impact of the Volcker rule on foreign banks’ activity outside of the U.S.; and
- simplify the type of trading activity information that banks will be required to provide to the agencies.
Federal Reserve Board Chair Jerome Powell noted that after nearly five years of experience applying the Volcker rule, the proposed rule is a way to “allow firms to conduct appropriate activities without undue burden, and without sacrificing safety and soundness.”
Federal Reserve Board Governor Lael Brainard also commented that “[r]ather than requiring banking institutions to undertake specific quantitative analyses prescribed by the regulators, the proposed revisions would require banking institutions to establish internal risk limits to achieve the principle of not exceeding the reasonably expected near-term demands of customers, subject to supervisory review.”
Federal Reserve Board Vice Chair of Supervision Randal Quarles stated that while the regulatory relief bill signed into law on May 24 exempts banks with less than $10 billion in total assets from the Volcker rule (see previous InfoBytes coverage here), the “proposed rule, however, would recognize that small asset size is not the only indicator of reduced proprietary trading risk.” Furthermore, the proposed rule is a “best first effort at simplifying and tailoring the Volcker rule” and does not represent the “completion of [the Board’s] work.”
Federal Reserve meeting to consider proposed overhaul of Volcker Rule set for May 30
On May 23, the Federal Reserve Board issued a notice announcing it will meet on May 30 to consider a proposal to modify the Volcker Rule. Section 13 of the Bank Holding Company Act currently restricts banks from engaging in proprietary trading and restricts their ownership of certain funds. As previously discussed in InfoBytes, last month the House passed the “Volcker Rule Regulatory Harmonization Act,” which, among other things, would provide clear exemptions for banking entities with $10 billion or less in consolidated assets or those comprised of five percent or less of trading assets and liabilities. A similar exemption is also included in the bipartisan Senate financial regulatory reform bill, S.2155, which was signed by President Trump on May 24. (See InfoBytes coverage on S.2155 here.)
Trump signs legislation enacting bipartisan regulatory relief bill
On May 24, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) (the bill) — which modifies provisions of the Dodd-Frank Act and eases certain regulations on certain smaller banks and credit unions. Upon signing, the White House released a statement quoting the president, “[c]ommunity banks are the backbone of small business in America. We are going to preserve our community banks.”
The House, on May 22, passed the bipartisan regulatory reform bill by a vote of 258-159. The bill was crafted by Senate Banking, Housing, and Urban Affairs Committee Chairman Mike Crapo, R-Idaho and passed by the Senate in March. The House passed the bill without any changes to the Senate version, even though House Financial Services Chairman, Jeb Hensarling, originally pushed for additional reform provisions to be included. Specifically, the bill does not include certain provisions that were part of Hensarling’s Financial CHOICE Act, such as (i) a complete repeal of the Volker Rule; (ii) subjecting the CFPB to the Congressional appropriations process and restructure the agency with a bipartisan commission; and (iii) reducing the Financial Stability Oversight Council’s (FSOC) authority to designate nonbank financial institutions as Systemically Important Financial Institutions (SIFIs).
In response to the bill’s passage, the OCC’s Comptroller of Currency, Joseph Otting, issued a statement supporting the regulatory changes and congratulating the House, “[t]his bill restores an important balance to the business of banking by providing meaningful reductions of regulatory burden for community and regional institutions while safeguarding the financial system and protecting consumers.” Additionally, acting Director of the CFPB, Mick Mulvaney, applauded Congress, noting that the reforms to mortgage lending were “long overdue” and called the bill “the most significant financial reform legislation in recent history.”
As previously covered by InfoBytes, the highlights of the bill include:
- Improving consumer access to mortgage credit. The bill’s provisions state, among other things, that: (i) banks with less than $10 billion in assets are exempt from ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) appraisals will not be required for certain transactions valued at less than $400,000 in rural areas; (iii) banks and credit unions that originate fewer than 500 open-end and 500 closed-end mortgages are exempt from HMDA’s expanded data disclosures (the provision would not apply to nonbanks and would not exempt institutions from HMDA reporting altogether); (iv) amendments to the S.A.F.E. Mortgage Licensing Act will provide registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines; and (v) the CFPB must clarify how TRID applies to mortgage assumption transactions and construction-to-permanent home loans, as well as outline certain liabilities related to model disclosure use.
- Regulatory relief for certain institutions. Among other things, the bill simplifies capital calculations and exempts community banks from Section 13 of the Bank Holding Company Act if they have less than $10 billion in total consolidated assets. The bill also states that banks with less than $10 billion in assets, and total trading assets and liabilities not exceeding more than five percent of their total assets, are exempt from Volcker Rule restrictions on trading with their own capital.
- Protections for consumers. Included in the bill are protections for veterans and active-duty military personnel such as: (i) permanently extending from nine months to one year the protection that shields military personnel from foreclosure proceedings after they leave active military service; and (ii) adding a requirement that credit reporting agencies provide free credit monitoring services and credit freezes to active-duty military personnel. The bill also addresses the creation of an identity theft protection database. Additionally, the bill instructs the CFPB to draft federal rules for the underwriting of Property Assessed Clean Energy loans (PACE loans), which would be subject to the TILA ability-to-repay requirement.
- Changes for bank holding companies. Among other things, the bill raises the threshold for automatic designation as a SIFI from $50 billion in assets to $250 billion. The bill also subjects banks with $100 billion to $250 billion in total consolidated assets to periodic stress tests and exempts from stress test requirements entirely banks with under $100 billion in assets. Additionally, certain banks would be allowed to exclude assets they hold in custody for others—provided the assets are held at a central bank—when computing the amount such banks must hold in reserves.
- Protections for student borrowers. The bill’s provisions include measures to prevent creditors from declaring an automatic default or accelerating the debt against a borrower on the sole basis of bankruptcy or cosigner death, and would require the removal of private student loans on credit reports after a default if the borrower completes a loan rehabilitation program and brings payments current.
Each provision of the bill will take effect at various intervals from the date of enactment up to 18 months after.
Quarles testifies before House Financial Services Committee
On April 17, Vice Chairman for Supervision of the Federal Reserve Board, Randal Quarles, testified at a hearing with the House Financial Services Committee entitled “Semi-Annual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System.” Quarles’ prepared testimony covered (i) the current condition of U.S. bank institutions; (ii) the Fed’s supervisory and regulatory agenda; and (iii) the Fed’s engagement with foreign regulators. During the hearing, Quarles emphasized transparency and simplicity, specifically highlighting the Fed’s recent proposed changes to the capital rules for large banks (previously covered by InfoBytes here). With regard to the global systemically important banks (GSIB) surcharge, Quarles responded to committee member concerns that the surcharge calculation may be seen as a penalty based on a growing economy and acknowledged that the Fed will look into the calculation with respect to those concerns. However, Quarles also emphasized that, “it is generally accepted that [the calculation] has resulted in improvement in the resolvability of the firms.” With regard to the Volker Rule, Quarles stated it is “unarguable” that the rule is detrimental to capital markets, and while the rule cannot be repealed by the Board because of statutory limitations, “there is a lot that [the Fed] can do to increase the certainty of application, to reduce the burden of application.” As previously covered by InfoBytes, the House passed a bill granting the Federal Reserve exclusive authority to implement the Volker Rule (currently the Fed, the OCC, the FDIC, the SEC, and the CFTC share rulemaking authority under the Rule). Quarles also discussed the Treasury Department’s recommendations (previously covered by InfoBytes here) to regulators regarding suggestions to modernize the Community Reinvestment Act (CRA), calling the CRA “a little formulaic and ossified,” commending Treasury’s efforts to review the CRA, and stating that regulators should “think about ways to apply [the CRA] more effectively.”
House passes bipartisan bill granting Federal Reserve exclusive authority to implement Volcker Rule
On April 13, the House passed H.R. 4790, the “Volcker Rule Regulatory Harmonization Act,” by a vote of 300-104. The bipartisan bill designates the Federal Reserve Board (Fed) as the exclusive regulatory authority to implement and amend rules under Section 13(b) of the Bank Holding Company Act. (Currently the Fed, the OCC, the FDIC, the SEC, and the CFTC share rulemaking authority under the rule.) H.R. 4790 also provides clear exemptions for banking entities with $10 billion or less in consolidated assets or those comprised of five percent or less of trading assets and liabilities. A similar exemption is included in the bipartisan Senate financial regulatory reform bill, S.2155, which passed the Senate in March (previously covered by InfoBytes here). According to a press release issued by the House Financial Services Committee, while H.R. 4790 does not repeal the Volcker Rule—which restricts banking entities from engaging in proprietary trading or entering into certain relationships with hedge and private equity funds—it does create a streamlined, efficient framework to provide increased regulatory clarity for entities required to comply with the rule.
Senate passes bipartisan financial regulatory reform bill
On March 14, by a vote of 67-31, the Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) (the bill)—a bipartisan regulatory reform bill crafted by Senate Banking, Housing, and Urban Affairs Committee Chairman Mike Crapo, R-Idaho—that would repeal or modify provisions of Dodd-Frank and ease regulations on all but the biggest banks. (See previous InfoBytes coverage here.) The bill’s highlights include:
- Improving consumer access to mortgage credit. The bill’s provisions state, among other things, that: (i) banks with less than $10 billion in assets are exempt from ability-to-repay requirements for certain qualified residential mortgage loans; (ii) appraisals will not be required for certain transactions valued at less than $400,000 in rural areas; (iii) banks and credit unions that originate fewer than 500 open-end and 500 closed-end mortgages are exempt from HMDA’s expanded data disclosures (the provision would not apply to nonbanks and would not exempt institutions from HMDA reporting altogether); (iv) amendments to the S.A.F.E. Mortgage Licensing Act will provide registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines; and (v) the CFPB must clarify how TRID applies to mortgage assumption transactions and construction-to-permanent home loans, as well as outline certain liabilities related to model disclosure use.
- Regulatory relief for certain institutions. Among other things, the bill simplifies capital calculations and exempts community banks from Section 13 of the Bank Holding Company Act if they have less than $10 billion in total consolidated assets. The bill also states that banks with less than $10 billion in assets, and total trading assets and liabilities not exceeding more than five percent of their total assets, are exempt from Volcker Rule restrictions on trading with their own capital.
- Protections for consumers. Included in the bill are protections for veterans and active-duty military personnel such as: (i) permanently extending the protection that shields military personnel from foreclosure proceedings after they leave active military service from nine months to one year; and (ii) adding a requirement that credit reporting agencies provide free credit monitoring services and credit freezes to active-duty military personnel. The bill also addresses general consumer protection options such as expanded credit freezes and the creation of an identity theft protection database. Additionally, the bill instructs the CFPB to draft federal rules for the underwriting of Property Assessed Clean Energy loans (PACE loans), which would be subject to TILA consumer protections.
- Changes for bank holding companies. Among other things, the bill raises the threshold for automatic designation as a systemically important financial institution from $50 billion in assets to $250 billion. The bill also subjects banks with $100 billion to $250 billion in total consolidated assets to periodic stress tests and exempts from stress test requirements entirely banks with under $100 billion in assets. Additionally, certain banks would be allowed to exclude assets they hold in custody for others—provided the assets are held at a central bank—when computing the amount such banks must hold in reserves.
- Protections for student borrowers. The bill’s provisions include measures to prevent creditors from declaring an automatic default or accelerating the debt against a borrower on the sole basis of bankruptcy or cosigner death, and would require the removal of private student loans on credit reports after a default if the borrower completes a loan rehabilitation program and brings payments current.
The bill now advances to the House where both Democrats and Republicans think it is unlikely to pass in its current form.
Federal Reserve vice chairman evaluates post-crisis regulations
On January 19, Federal Reserve Vice Chairman for Supervision Randal Quarles spoke at the American Bar Association Banking Law Committee Annual Meeting to discuss his initial observations on the post-crisis regulation regime and provide a status update on the Fed’s key areas of focus for improving the “efficiency, transparency, and simplicity of regulation.” Quarles emphasized that there are a variety of means to improve efficiency, such as (i) addressing unintended adverse consequences of a regulation, or (ii) calibrating a regulation “more precisely to the risks in need of mitigation.” Transparency around rulemaking encourages a variety of perspectives, and simplifying regulations “promotes public understanding of regulation, promotes meaningful compliance by the industry with regulation, and reduces unexpected negative synergies among regulations,” he added.
According to Quarles, “small bank capital simplification, burden reduction in resolution planning, enhancements to stress testing, leverage ratio recalibration, and Volcker rule simplification” are common ground areas for improvement, efforts have progressed, and regulations have been proposed for changes, including extending the resolution planning cycle to reduce the reporting burden. Quarles also noted that the Fed expects to release a proposal on leverage ratio recalibration in the near future, and has started working with five banking agencies on a proposal to streamline the Volcker rule.
Another area of focus Quarles highlighted is the Fed’s plan to revisit the “advanced approaches” thresholds used to identify internationally active banks, including risk-based capital requirements as well as the supplementary leverage ratio. Quarles further noted that the current $250 billion-asset or $10 billion in on-balance-sheet foreign exposures thresholds were formulated more than a decade ago “and have not been refined since then.” Additionally, Quarles announced plans to work with his Fed colleagues to simplify the framework for loss absorbency requirements. According to Quarles, candidates for simplification include (i) eliminating the advanced approaches risk-based capital requirements; (ii) eliminating one or more stress testing ratios; and (iii) modifying the total loss-absorbing capacity requirements. The framework for making determinations of control under the Bank Holding Company Act—while not a post-crisis regulation—could also be improved to be less “burdensome and time-consuming,” Quarles added.
Finally, as previously covered in InfoBytes, Quarles commented on the Fed’s requests for comments issued last December on three proposals designed to increase stress testing transparency while also testing the resiliency of large, complex banks. “I believe that the disclosure we have provided does not go far enough to provide visibility into the supervisory models that often deliver a firm's binding capital constraint,” Quarles noted.