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FDIC announces Arkansas and Mississippi disaster relief
On April 5, the FDIC issued FIL-14-2023 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Arkansas affected by severe storms and tornadoes on March 31. The FDIC acknowledged the unusual circumstances faced by institutions affected by the storms and encouraged institutions to work with impacted borrowers to, among other things: (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC will also consider regulatory relief from certain filing and publishing requirements and instructs institutions to contact the Dallas Regional Office for consideration. Earlier, on March 30, the FDIC issued FIL-12-2023 to provide similar regulatory relief to financial institutions and help facilitate recovery in areas of Mississippi affected by severe storms, straight-line winds, and tornadoes on March 24 and 25.
OCC establishes Office of Financial Technology
On March 30, the OCC announced the establishment of the Office of Financial Technology, and selected Prashant Bhardwaj to lead the office as Deputy Comptroller and Chief Financial Technology Officer beginning April 10. As previously covered by InfoBytes, last October the OCC said the new office will build on and incorporate the agency’s Office of Innovation (established in 2016 and covered by InfoBytes here), and will strengthen the OCC’s expertise and ability to adapt to a rapidly evolving banking landscape. The Office of Financial Technology will “enhance the OCC’s expertise on matters regarding digital assets, fintech partnerships, and other changing technologies and business models within and that affect OCC-supervised banks,” the OCC said in its announcement, noting that Bhardwaj will lead a team responsible for analyzing, evaluating, and discussing relevant fintech trends, emerging and potential risks, and the potential implications for OCC supervision.
FDIC orders neobank to stop fraudulent deposit insurance representations
On March 27, the FDIC sent a letter to a neobank demanding that it stop making false or misleading representations about FDIC deposit insurance and take immediate corrective action to address these statements. The FDIC maintained that the neobank and/or its officers made false and misleading statements in English and Spanish suggesting that it is FDIC-insured and that FDIC insurance will protect customers’ cryptocurrency assets. The FDIC explained in the letter that not only is the neobank not FDIC-insured, the FDIC does not insure crypto assets. “By not distinguishing between US-dollar deposits and crypto assets, the statements imply FDIC insurance coverage applies to all customer funds (including crypto assets),” the letter said. Moreover, the neobank also failed to “clearly and conspicuously identify an insured deposit institution for placement of deposits,” the FDIC said in its announcement. Under the Federal Deposit Insurance Act, the announcement added, persons are prohibited “from representing or implying that an uninsured product is FDIC-insured or from knowingly misrepresenting the extent and manner of deposit insurance.” The FDIC requested a response within 15 days.
OCC reaches $17 million settlement with former executive over account openings
On March 15, the OCC announced a $17 million civil money penalty and prohibition order against a former senior executive who served as head of a national bank’s community banking division for her role in the bank’s incentive compensation sales practices. As previously covered by InfoBytes, in January 2020, the OCC announced charges against the former general counsel and other executives, seeking a lifetime prohibition from participating in the banking industry, a personal cease and desist order, and/or civil money penalties. The 2020 announcement included settlements with three of the executives. The OCC settled with three others in September 2020, as well as with the bank’s former general counsel in January 2021 (covered by InfoBytes here and here). In addition to the $17 million penalty, the former senior executive entered a plea agreement admitting to one count of obstructing a bank examination.
OCC releases enforcement actions
On March 17, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. Included is a cease and desist order against a New York-based bank for allegedly engaging in unsafe or unsound practices related to its information technology security and controls, as well as its information technology risk governance and board of director/management oversight of its corporate risk governance processes. The OCC also found alleged deficiencies (including unsafe or unsound practices) in the bank’s Bank Secrecy Act (BSA)/anti-money laundering risk management controls in the following areas: “internal controls, BSA officer, customer identification program, customer due diligence, enhanced due diligence, [] beneficial ownership,” and suspicious activity monitoring and reporting. The order requires the bank to, among other things, maintain a compliance committee, develop a corporate governance program to ensure appropriate board oversight, establish a written strategic plan and conduct an internal audit to assess the sufficiency of the bank’s internal controls program, implement information technology governance and security programs, and adopt an automated clearing house risk management program. The bank is also required to appoint a BSA officer to ensure adherence to the bank’s BSA/AML internal controls, conduct a suspicious activity review lookback, implement a customer information program that is reasonably designed to identify and verify beneficial owners of legal entity customers, and develop and adopt a BSA/AML model risk management process.
Fed to launch FedNow in July
On March 15, the Federal Reserve Board announced a July launch date for its FedNow Service. (Covered by a Special Alert here.) Beginning the first week of April, the Fed will start formally certifying participants, with early adopters completing a customer testing and certification program in preparation for sending live transactions through the system. The certification process “encompasses a comprehensive testing curriculum with defined expectations for operational readiness and network experience,” the Fed explained. “We couldn’t be more excited about the forthcoming FedNow launch, which will enable every participating financial institution, the smallest to the largest and from all corners of the country, to offer a modern instant payment solution,” said Ken Montgomery, First Vice President of the Federal Reserve Bank of Boston and FedNow program executive. “With the launch drawing near, we urge financial institutions and their industry partners to move full steam ahead with preparations to join the FedNow Service,” Montgomery added.
In addition to certifying early adopters for the July launch, the Fed said it will continue to engage with financial institutions and service providers to complete the testing and certification program throughout 2023 and beyond. FedNow “will launch with a robust set of core clearing and settlement functionality and value-added features,” the agency said, explaining that “[m]ore features and enhancements will be added in future releases to continue supporting safety, resiliency and innovation in the industry as the FedNow network expands in the coming years.”
Fed governor says transparency is key for promoting innovation in the banking system
On March 14, Federal Reserve Governor Michelle W. Bowman presented thoughts on innovation trends within the U.S. financial system during a conference held by the Independent Community Bankers of America. Bowman commented that innovation has always been a priority for banks of all sizes and business models, and that regulators—often accused of “being hostile to innovation” within the regulated financial system—are continually trying to learn and adapt to new technologies, which often introduce new risks and vulnerabilities. In order to address these challenges, which are often amplified for community banks, Bowman said banks must be prepared to make improvements to risk management, cybersecurity, and consumer compliance measures, and regulators—playing a complementary role—must ensure rules are clear and transparent. She further stressed that “[i]t is absolutely critical that innovation not distract banks and regulators from the traditional risks that are omnipresent in the business of banking, particularly credit, liquidity, concentration, and interest rate risk.” Noting that these types of risks are present in all bank business models, Bowman said they “can be especially acute for banks engaging in novel activities or exposed to new markets, including crypto-assets.”
Explaining that transparency is important for promoting a safe, sound, and fair banking system, particularly when it comes to innovation, Bowman stated that insufficient clarity or transparency or disproportionately burdensome regulations may “cause new products and services to migrate to the shadow banking system.” Bowman went on to discuss ways bank regulation and supervision can support responsible innovation, and highlighted unique challenges facing smaller banks, as well as key actions taken by regulators to date relating to crypto assets, third-party risk management, cybersecurity, Community Reinvestment Act reform, bank mergers, and overdraft fees, among others.
Fed issues Bank Term Funding Program FAQs
On March 13, the Federal Reserve Board issued FAQs on its Bank Term Funding Program, which launched March 12, to provide additional funding to eligible depository institutions in order to meet depositors’ needs. The program will serve as an additional source of liquidity against high-quality securities, and will eliminate the need for an institution to quickly sell those securities in times of stress. Loans of up to one year in length will be made available to “banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.” The Fed said in its announcement that it “is closely monitoring conditions across the financial system and is prepared to use its full range of tools to support households and businesses, and will take additional steps as appropriate.”
Hsu presses for global supervision of crypto
On March 6, acting Comptroller of the Currency Michael J. Hsu commented that the collapse of a major cryptocurrency exchange has underscored a need for consolidated supervision of global cryptocurrency firms. Speaking before the Institute for International Banker’s Annual Washington Conference, Hsu offered thoughts on how to build and maintain trust in global banking. “To be trustworthy, global crypto firms need a lead regulator who has authority and responsibility over the enterprise as a whole,” Hsu said. “Until that is done, crypto firms with subsidiaries and operations in multiple jurisdictions will be able to arbitrage local regulations and potentially play shell games using inter-affiliate transactions to obfuscate and mask their true risk profile.” Hsu pointed out that in order to conduct business in the U.S. foreign banks must be supervised by a home country via “a lead regulator with visibility and authority over the entirety of the bank’s global activities.” In contrast, not a single crypto firm is currently subject to consolidated supervision, Hsu said.
Hsu drew comparisons between a now-defunct international bank that led to significant changes in how global banks are supervised and the collapsed crypto exchange, arguing that there are “striking similarities” between the two, including that both (i) “faced fragmented supervision by a combination of state, federal, and foreign authorities”; (ii) “lacked a lead or ‘home’ regulator with authority and responsibility for developing a consolidated and holistic view of the firms”; (iii) “operated across jurisdictions where there was no established framework for regulators to share information on the firms’ operations and risk controls”; and (iv) “used multiple auditors to ensure that no one could have a holistic view of their firms.” To close the gap in the crypto sector, Hsu said action “will have to take place outside of bank regulatory channels,” but noted that the Financial Stability Board and other international bodies have already “recognized the need for a comprehensive global supervisory and regulatory framework for crypto participants.”
FDIC issues January enforcement actions
On February 24, the FDIC released a list of administrative enforcement actions taken against banks and individuals in January. The FDIC made public 11 orders, including “four combined orders of prohibition and orders to pay civil money penalties, one 8(b) consent order, one order to pay civil money penalty, three orders of prohibition, one order terminating a Section 19 order, and one order terminating consent order.”
The actions include a civil money order against a Pennsylvania-based bank related to alleged violations of the Flood Disaster Protection Act (FDPA). The FDIC determined that the bank had engaged in a pattern or practice of violating the FDPA by failing to provide required notices of lender-placed flood insurance to borrowers in 16 instances.
Additionally, the FDIC issued a consent order against an Iowa-based bank alleging the bank engaged in “unsafe or unsound banking practices and violations of law or regulations” relating to, among other things, its process for testing a proposed debit/prepaid card program. The FDIC stipulated that before starting the testing phase of any new debit card program or similar program, the bank “must develop, adopt, and implement an effective program addressing anti-money laundering (AML) / combating the financing of terrorism (CFT) controls” for the new program and conduct an independent assessment. The bank is also ordered to revise its AML/CFT policy and conduct a review of its information security program to ensure it reflects current risks.