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Fed solicits feedback on proposed climate-related risk principles
On December 2, the Federal Reserve Board issued a notice requesting public comments on proposed Principles for Climate-Related Financial Risk Management for Large Financial Institutions. The proposed principles would provide a high-level framework for the safe and sound management of exposures to climate-related financial risks for the largest financial institutions (those with over $100 billion in total consolidated assets), as well as address the physical and transition risks associated with climate change. Notably the notice acknowledged that all financial institutions, regardless of size, can have material exposures to climate-related financial risks. Intended to support large financial institutions’ efforts in addressing climate-related financial risk management, the proposed principles cover six major areas related to: (i) governance; (ii) policies, procedures, and limits; (iii) strategic planning; (iv) risk management; (v) data, risk measurement, and reporting; and (vi) scenario analysis. The Fed noted that the proposed principles are substantially similar to those issued by the OCC and FDIC (covered by InfoBytes here and here), and said that the agencies intend to issue final interagency guidance to promote consistency. Comments on the proposed principles are due 60 days after publication in the Federal Register.
Governor Bowman stated that while she voted in favor of seeking input on the proposed principles, she reserves the right to vote against its finalization. She also emphasized that excluding financial institution with less than $100 billion in assets from the guidance “is appropriate based not only on the size of such firms, but also in light of the robust risk management expectations already applicable to such firms.”
However, Governor Waller issued a dissenting statement: “Climate change is real, but I disagree with the premise that it poses a serious risk to the safety and soundness of large banks and the financial stability of the United States. The Federal Reserve conducts regular stress tests on large banks that impose extremely severe macroeconomic shocks and they show that the banks are resilient.”
Fed finalizes updates to policy on payment system risk
On December 2, the Federal Reserve Board finalized clarifying and technical updates to its Policy on Payment System Risk (PSR). The changes, which are adopted largely as proposed in May 2021 (covered by InfoBytes here), expand depository institutions’ eligibility to request collateralized intraday credit from the Federal Reserve Banks (FRBs), and ease the process for submitting such requests. The final updates also clarify eligibility standards for accessing uncollateralized intraday credit; modify the PSR policy to support the launch of the FedNow instant-payments platform, which is scheduled for mid-year 2023 (covered by InfoBytes here); and simplify and incorporate the related Overnight Overdrafts policy into the PSR policy. Updates related to FedNow and the Overnight Overdrafts policy will take effect once the FRBs start processing live transactions for FedNow. The remaining updates are effective 60 days following publication in the Federal Register.
Fed fines bank for flood insurance violations
On December 1, the Federal Reserve Board announced a civil money penalty against a New-York based bank. In its order, the Fed alleged that the bank violated the National Flood Insurance Act (NFIA) and Regulation H. The order assesses a $105,500 civil money penalty against the bank in connection with its “alleged pattern or practice of violations of Regulation H,” but does not specify the number or the precise nature of the alleged violations. The maximum civil money penalty under the NFIA for a pattern or practice of violations is $2,392 per violation.
OCC announces 2023 assessment schedule
On December 1, the OCC released its 2023 assessment schedule. Among other things, the OCC noted that it would reduce the rates in the general assessment fee schedule and maintain assessment rates from 2022 for the independent trust and independent credit card fee schedules. The changes include reductions by 40 percent for all banks on their first $200 million in total balance sheet assets, and a 20 percent reduction for balance-sheet assets above $200 million and up to $20 billion. The OCC also noted that it is not adjusting the assessment rates for inflation. Additionally, the OCC said that it will increase the hourly fee for special examinations from $155 to $161. The OCC also highlighted that assessments are due March 31 and September 30, based on Call Report information as of December 31 and June 30. The OCC further explained that the schedule continues to include a surcharge for national banks, federal savings associations, and federal branches and agencies of foreign banks that require increased supervisory resources.
OCC revises civil money penalty manual
On November 29, the OCC announced revisions to its civil money penalty (CMP) manual. Specifically, the OCC revised the CMP matrix, which is a tool used to guide the OCC’s decision making in assessing CMPs. The revised CMP matrix, applicable to OCC-regulated institutions, allows for sufficient differentiation among varying levels of misconduct or by institution size, and includes updated mitigating factors to provide a stronger incentive for banks to fully address underlying deficiencies. The OCC also announced a revised Policies and Procedures Manual (PPM) for assessing CMPs. This version replaces the November 13, 2018, version conveyed by OCC Bulletin 2018-41, “OCC Enforcement Actions: OCC Enforcement Action Policies and Procedures Manuals.” Highlights of the PPM include, among other things; (i) revised mitigating factors of self-identification, remediation or corrective action, and restitution: (ii) increased scoring weight of mitigating factors; and (iii) a revised table titled “Suggested Action Based on Total Matrix Score and Total Assets of Bank.” The OCC further noted that the CMP matrix is not a substitute for sound supervisory judgment, and said the OCC may depart from the matrix suggestions when appropriate and when based on the specific facts and circumstances of each matter. The OCC will begin using the revisions on January 1, 2023.
Senators demand answers on collapsed cryptocurrency exchange; NYDFS seeks tougher crypto approach
On November 16, Senator Elizabeth Warren (MA-D) and Senator Richard Durbin (IL-D) sent a letter to the ex-CEO and his successor of a cryptocurrency exchange that filed for bankruptcy. In the letter, the senators requested a series of files from the cryptocurrency exchange, including copies of internal policies and procedures regarding the relationship between the firm and its affiliated crypto hedge fund. The senators stated that the cryptocurrency exchange’s customers and Americans “fear that they will never get back the assets they trusted to [the cryptocurrency exchange] and its subsidiaries.” Additionally, the senators argued that “the apparent lack of due diligence by venture capital and other big investment funds eager to get rich off crypto, and the risk of broader contagion across the crypto market that could multiply retail investors’ losses, ‘call into question the promise of the industry.’” The senators emphasized that “the public is owed a complete and transparent accounting of the business practices and financial activities leading up to and following the cryptocurrency lending firm's collapse and the loss of billions of dollars of customer funds.” Among other things, the senators asked the cryptocurrency exchange to provide requested information by November 28, including: (i) complete copies of all the firm’s and its subsidiaries’ balance sheets, from 2019 to the present; (ii) an explanation of how “a poor internal labeling of bank-related accounts” resulted in the firm’s liquidity crisis; (iii) a list of all the firm’s transfers to its affiliated crypto hedge fund; (iv) copies of all written policies and procedures regarding the relationship between the firm and its affiliated crypto hedge fund; and (v) an explanation of the $1.7 billion in the firm’s customer funds that were allegedly reported missing.
The same day, NYDFS Superintendent Adrienne Harris participated in a “fireside chat” before the Brooking Institute’s event, Digital asset regulation: The state perspective - Effective regulatory design and implementation for virtual currency. During the chat, Harris expressed her support for a national framework similar to what New York has because she believes that “it is proving itself to be a very robust and sustainable regime.” Harris also discussed NYDFS priorities regarding digital assets for the future, stating that crypto companies can expect more guidance on a number of key regulatory issues. Specifically, Harris disclosed that NYDFS will “have more to say on capitalization,” and “on consumer protection, disclosures, advertising … [and] complaints, making sure these companies have an easy way for consumers to complain.” She also warned that NYDFS will “bolster and broaden” its authority, adding that there is “lots of work for us to do to make clear the expectations that we have already, and to make sure that the things we have on the books equip us well to keep up with this marketplace.”
Senators Warren and Sheldon Whitehouse (D-RI) also sent a letter to the DOJ asking that the former CEO and any complicit company executives be held personally accountability for wrongdoing following the cryptocurrency exchange’s collapse.
On December 13, the House Financial Services Committee will hold a hearing to discuss the cryptocurrency exchange’s collapse and the possible implications for other digital asset companies.
FDIC releases October enforcement actions
On November 25, the FDIC released a list of administrative enforcement actions taken against banks and individuals in October. During the month, the FDIC made public ten orders consisting of “one consent order; one amended and restated consent order; one personal cease and desist order; three orders to pay civil money penalties; two Section 19 orders; and two orders terminating consent orders.” Among the orders is an order to pay a civil money penalty imposed against a Mississippi-based bank related to 128 alleged violations of the Flood Disaster Protection Act. Among other things, the FDIC claimed that the bank failed to obtain the required flood insurance or obtain an adequate amount of insurance coverage, at or before loan origination, for all structures in a flood zone. The order requires the payment of a $320,500 civil money penalty.
The FDIC also issued a consent order to a New York-based bank, which alleged that the bank had unsafe or unsound banking practices relating to weaknesses in the Bank’s Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) Program. The bank neither admitted nor denied the alleged violations but agreed to, among other things, increase its supervision, direction, and oversight of AML/CFT personnel and its AML/CFT program.
OCC releases enforcement actions
On November 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 banking practices related to its board and management oversight and funds management practices, and for violating the bank’s October 2018 Formal Agreement with the OCC. According to the OCC, the bank’s board and management failed to address certain regulatory concerns outlined in the 2018 Formal Agreement. Among other things, the OCC asserted that the bank engaged “in unsafe or unsound practices, including those related to strategic planning and implementation, management and board oversight, audit, risk management, and mortgage banking activities.” The order requires the bank to, among other things, establish a compliance committee, develop a written strategic plan, and establish capital in accordance with 12 C.F.R. Part 3: (a) a total capital ratio at least equal to thirteen percent; and (b) a leverage ratio greater than nine percent.
OCC, SEC comment on digital assets
On November 17, acting Comptroller of the Currency Michael J. Hsu delivered remarks at the Financial Literacy and Education Commission’s public meeting, where he commended the “quiet trustworthiness of banks” amid the recent volatility in the cryptocurrency market. Hsu pointed to the OCC’s “careful and cautious” approach to crypto activities by national banks, and noted that this approach “helped mitigate the risk of contagion from crypto to the banking system.” Reforms stemming from the 2008 financial crisis have strengthened the banking system, Hsu added, which has made it “more resilient, more fair, and more trustworthy” and has “proven valuable with the rapid rise and fall of crypto this past year.”
Earlier in the week, SEC Commissioner Jaime Lizárraga spoke before the Brooklyn Law School where he issued a reminder that it does not fall on the SEC to provide legal advice or analysis to digital asset market participants, but rather the responsibility lays with the issuer or the intermediary and their attorneys “to determine whether their products, business practices, or assets require compliance with the federal securities laws.” Lizárraga refuted arguments that the SEC engages in “regulation by enforcement,” stating that the “laws are well-established, and the cases brought to date have clear applications, as has been apparent in court rulings on these issues.” He also challenged assertions that the SEC has not provided guidance to the industry on whether digital assets qualify as securities. “The reality is that there’s an abundance of guidance, from the DAO Report, to the SEC FinHub Framework for ‘Investment Contract’ Analysis of Digital Assets, and multiple no-action letters issued by the staff of the Division of Corporation Finance,” Lizárraga said, explaining that it is not so much “a lack of guidance but more that the existing guidance may not be what many market participants want to hear.” He warned anyone considering purchasing or investing in digital assets to be as informed as possible about potential risks.
OCC senior deputy comptroller discusses fair lending
On November 14, Senior Deputy Comptroller for Bank Supervision Policy Grovetta Gardineer delivered remarks on behalf of acting Comptroller Michael J. Hsu before the CRA & Fair Lending Colloquium to discuss the agency’s ongoing efforts to ensure its regulated institutions provide fair and equitable credit services. Among other topics, Gardineer mentioned the agency’s initiatives to identify and address discriminatory lending practices, including addressing fair lending in advanced analytics and reducing barriers to financial inclusion. Noting that the banking industry has evolved “rapidly,” Gardineer stated that the OCC has “remained focused on the solid foundation of our mission,” and identified “three strategic goals: (1) agility and learning; (2) credibility and trust; and (3) leadership in supervision.”
She also said that the OCC is enhancing its risk-based supervisory approach by, among other things, “[r]ecognizing our strategic goal for ‘agility and learning,’” and by “conducting fair lending risk assessments during every supervisory cycle for each bank that engages in retail lending.” Regarding the agency’s efforts to reduce inequality in banking, Gardineer stated that the OCC has taken an active role on the Interagency Task Force on Property Appraisal and Valuation Equity, or PAVE, which is an initiative to evaluate the causes, extent, and consequences of appraisal bias. As previously covered by InfoBytes in March, the thirteen member agencies and offices of the PAVE Task Force came together in an extraordinary interagency effort to issue the Action Plan to Advance Property Appraisal and Valuation Equity, which represents “the most wide-ranging set of reforms ever put forward to advance equity in the home appraisal process.”
Gardineer also disclosed that the OCC is developing other internal measures to enhance credibility and trust, including measures to “improv[e] supervisory methods for identifying potential discrimination in property valuations.” In regard to addressing fair lending in advanced analytics, Gardineer warned that “the growing use of advanced analytics such as artificial intelligence or machine learning offers both the opportunity to help reduce inequality and to address safety, soundness, and fairness risks,” and emphasized that the agency “supports fair, ethical, responsible, and transparent adoption of advanced analytics, including artificial intelligence and machine learning, in the financial sector.”
In terms of the future, she highlighted that “the OCC is focused on strengthening our supervision processes and resources devoted to compliance with fair lending laws, while enhancing our ability to remain agile and successfully execute our mission to ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations..”