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FDIC releases NPRM for parent companies of industrial entities
On July 30, the FDIC released an NPRM to regulate parent companies of industrial banks and industrial loan companies (the industrial entities). The proposed rule would revise the definition of “Covered Company” to include conversions involving a proposed industrial bank or loan company under Section 5 of the Home Owners’ Loan Act, ensure that a parent company of an industrial entity would be subject to change of control under part 354, and give regulatory authority to the FDIC to apply part 354 to other situations where an industrial bank would become a subsidiary of a company not subject to Fed supervision. Part 354 took effect in April 2021 to govern parent companies of industrial banks and requires specific conditions for industrial banks to become a company’s subsidiary.
Under the Bank Holding Company Act (BHCA), industrial banks are currently exempted from the definition of “bank.” Due to this, the parent companies that oversee industrial banks were not subject to the Fed’s supervision and regulation. This led to concerns about an increased risk to the DIF where industrial banks may be overly dependent on their parent company or affiliates, leading to risk or financial distress. Comments on the NPRM must be received within 60 days of publication in the Federal Register.
FDIC issues NPRM on brokered deposits
On July 30, the FDIC released an NPRM that would provide restrictions, update definitions, and provide new exceptions to the rule on brokered deposits. The FDIC explained that these proposed amendments would simplify definitions, ensure uniform reporting, and strengthen the soundness of the banking system by ensuring lesser capitalized institutions will be “restricted from relying on brokered deposits to support risky, rapid growth.”
The proposed rule would amend the definition of “deposit broker” and revise the “primary purpose” exception to the “deposit broker” definition to consider the third party’s intent in placing funds at a particular institution. Additionally, the FDIC proposed eliminating the exclusive deposit placement arrangement exception and updating the application and notice processes for the primary purpose exception. Through the FDIC’s statistical analyses, the FDIC found a “general” correlation between a depository institution’s use of broker deposits and its probability of failure, resulting in what would be losses to the Deposit Insurance Fund. Comments on the NPRM must be received within 60 days of publication in the Federal Register.
FDIC’s Hill discusses banking challenges and FDIC proposals
On July 24, FDIC Vice Chairman Travis Hill addressed changes at the FDIC during the past 18 months. Hill discussed challenges the Federal Reserve faced in providing bank liquidity due to banks’ unwillingness or inability to use the discount window. Hill also discussed how the FDIC had taken steps to address bank runs, fund FDIC receivership, and amend bank liquidity issues by proposing operational improvements like electronic funding requests and expanded hours of operation.
Hill noted that the FDIC would also consider a discount window prepositioning rule requiring banks to maintain a minimum ratio of cash plus discount window borrowing capacity to uninsured deposits, stating that this consideration aimed to remove the first-mover advantage that could spark a bank run. Another suggestion cited by Hill was incorporating discount window capacity into the liquidity coverage ratio.
Concerning the FDIC’s receivership funding, Hill described the scrutiny the FDIC faced due to the unprecedented borrowings from the Fed to fund recent receiverships and questions about the FDIC’s contingency funding plans. In response, Hill noted that the FDIC could have accessed more cash than the Treasury provided and, in the event the Treasury could not have provided more cash, the FDIC and Treasury could have devised a plan for the Treasury to redeem the FDIC’s securities for cash and, on the same day, issue new securities into the market. Hill also stated that the FDIC should have unfettered access to funds in the Deposit Insurance Fund.
Hill stated that the existing brokered deposits framework, established in 1989, was “no longer fit for purpose.” Changes in the deposit landscape and the emergence of new deposit arrangements have highlighted flaws in the current regime. There are concerns about its effectiveness in assessing risks and its impact on bank funding. Finally, Hill discussed how the Basel III Endgame proposal has been criticized for its lack of appreciation for real-world impacts. Calls for a re-proposal and concerns about the proposed operational risk and market risk frameworks have been raised.
OCC issues interpretive letter regarding Special Purpose Vehicle exposure
Recently, the OCC issued a form interpretive letter concerning the regulatory capital treatment of a bank’s exposures to a Special Purpose Vehicle (SPV). The OCC clarified that, under its regulatory capital rule, the bank's exposures to the SPV do not qualify as securitization exposures. Instead, they should be treated as corporate exposures and subject to the general credit risk framework outlined in subparts D and E of the capital rule.
The letter elaborated on what constituted a securitization exposure. It stated that for an exposure to be considered a traditional securitization, certain criteria must be met, including that the underlying exposures must be financial, the performance of the securitization exposures must depend on the underlying exposures, and an operating company must not own the underlying exposures.
In the case of the company in question, which transferred a mix of assets, including service contracts, intellectual property, software, and physical assets into the SPV, these criteria were not met. In particular, the OCC found that the performance of the bank’s exposure to the SPV depends in part on the company’s ability to service contracts rather than solely depending on the customer’s creditworthiness. Therefore, the OCC concluded that the bank’s exposures to the SPV must be treated as corporate and wholesale exposures and assigned the appropriate risk weight.
Acting Comptroller Hsu discusses new trends in banking
On July 17, Acting Comptroller of the Currency Michael J. Hsu spoke at the Exchequer Club, highlighting three significant long-term trends that he believes will reshape the banking landscape. First, Hsu highlighted the notable expansion of large banks. Second, he emphasized the increasing complexity of relationships between banks and nonbank institutions, which introduces new risks and complicates current models of regulatory oversight. Finally, Hsu discussed the growing polarization trends within the banking sector, which can potentially weaken trust and stability.
Hsu warned that these trends might appear gradual and manageable but could lead to serious consequences if ignored, drawing parallels to the banking issues that contributed to the 2008 financial crisis after years of unnoticed development.
To address the expansion of large banks, the OCC will work on regulatory reforms to bolster the resilience of large banks by reinforcing capital and liquidity requirements, enhancing operational resilience, and ensuring comprehensive recovery planning. Hsu stressed that large banks need measures that enable them to fail in an orderly manner if necessary. Such measures include maintaining sufficient long-term debt to absorb outsized losses and strong resolution capabilities. The OCC will focus on ensuring that large banks are not “too-big-to-manage,” meaning they must be capable of managing their risks and adhering to regulations. Regulators can support this notion by taking enforcement actions, imposing civil penalties, restricting business activities, and other regulatory oversight actions to reinforce the importance of sound risk management practices.
To address the increasing interdependency between banks and nonbanks (particularly fintechs) and the subsequent potential for confusion amongst responsibilities among consumers, regulators, and market participants, Hsu proposed the need for more granular approaches to regulation and more engagement between the federal banking agencies and fintechs, such as federal oversight of state-licensed money transmitter entities.
Finally, to address polarization and a trend of fragmentation amongst banking law developments at the state level, Hsu emphasized the need for a renewed focus of the OCC to “vigorously defend preemption, as it is central to the dual banking system and cuts to the core of why we exist and who we are.”
FDIC, Fed, and OCC announce 2024 CRA-eligible distressed and underserved areas
On July 12, the FDIC, Fed, and OCC released a list of distressed or underserved nonmetropolitan middle-income areas eligible for CRA credit. The list identified regions where banks’ revitalization or stabilization activities can receive CRA consideration, reflecting local economic conditions like unemployment, poverty and population changes. The designations will be valid for 12 months, with a one-year lag period for areas previously included in 2023, but not in the current list. Past lists and criteria for designating these areas can be found here.
Fed’s 2024 stress test results show a robust banking system
Recently, the Fed released the 2024 Federal Reserve Stress Test Results and found that the tested banks have “sufficient capital” to absorb losses and weather a recession while staying above minimum capital requirements. The Fed tested 31 large banks this year and found those banks have enough capital to absorb a projected $685 billion in losses and remain above their minimum capital requirements. While the Fed found a 2.8 percent decline in the aggregate capital ratio (greater than last year’s decline of 2.5 percent), the decline was within the range of recent stress tests. The Fed attributed this 2024 change to three factors:
- The Fed projected greater credit card losses due to a substantial increase in banks’ credit card balances, along with higher delinquency rates. In the stress test, banks were projected to lose $175 billion on credit cards, which was 17.6 percent of credit card balances.
- The Fed projected higher corporate losses due to banks having riskier corporate credit portfolios.
- The Fed projected a decline in net revenue. The Fed found that noninterest expenses (compensation, real estate, etc.) continued to increase, while noninterest income sources (e.g., investment banking fees) declined significantly.
Despite these factors, the Fed concluded that large banks could still lend to households and businesses while remaining “well above” minimum capital requirements.
OCC releases June CRA evaluations for 21 institutions
Recently, the OCC released its Community Reinvestment Act (CRA) performance evaluations for June. The OCC evaluated 21 entities, including national banks, federal savings associations, and insured federal branches of foreign banks. The assessment framework has four possible ratings: Outstanding, Satisfactory, Needs to Improve, and Substantial Noncompliance. Of the 21 evaluations reported by the OCC, 14 entities were rated “Satisfactory,” six entities were rated “Outstanding,” and one was rated “Needs to Improve.” A full list of the bank evaluations is available here. In the CRA FAQ, the OCC details how it evaluates and rates financial institutions based two categories: first, the institution, examining factors such as capacity, constraints, business strategies, competitors, and peers, and second, the community it serves, analyzing its demographic particulars, economic data, and the availability of lending, investment, and service opportunities.
FDIC issues May 2024 enforcement actions
Recently, the FDIC released a list of administrative enforcement actions taken against banks and individuals in May 2024. During that month, the FDIC made public 15 orders consisting of: a combined personal consent order and order to pay a civil money penalty (CMP); “one combined order of prohibition from further participation, and compromise and waiver of order to pay a CMP; seven consent orders; three CMP orders; two orders terminating consent orders; and one order terminating deposit insurance.”
Included was a consent order with an Oklahoma-based bank alleging the bank engaged in “unsafe or unsound banking practices and violations of law or regulation.” Under the order, the bank must allow its board to participate more in the bank’s affairs, notify the FDIC if any directors or executives resign, and create a business plan and a capital plan, among others. Also included was a consent order with an Arkansas-based bank, alleging the bank engaged in “violations of law or regulation” relating to RESPA, as implemented by Regulation X; HMDA, as implemented by Regulation C; Section 5 of the FTC Act; and the FCRA and Section 1022.54 of Regulation V. The FDIC ordered the bank to pay a civil money penalty of $1.5 million. The banks neither admitted nor denied the allegations.
Fed enters into agreement with bank as part of an OCC enforcement
On June 25, the Fed announced the execution of a written agreement with a registered savings and loan holding company, and its affiliate banks, to oversee its consent order requirements deriving from an OCC consent order from October 2023. Under the agreement, the bank will have 60 days to prepare a written plan to the Fed to strengthen board oversight and must include actions to (i) maintain effective risk management programs, (ii) ensure those risk management programs will be managed appropriately, (iii) monitor adherence to applicable laws and regulations, (iv) improve supervision of, and maintain control over, operations and activities, and (v) improve the comprehensiveness and quality of reports reviewed by the board. The bank will also have 60 days to submit a written strategic plan and budget to the Fed that will outline the firm’s short- and long-term strategic goals, the firm’s financial condition, a budget for the remainder of 2024, and a budget review process. Additionally, the Fed will require the banks to submit a written statement on their planned uses of cash for the remainder of 2024.