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FDIC issues advisory on crypto companies’ deposit insurance claims
On July 29, the FDIC announced an advisory addressing certain misrepresentations about FDIC deposit insurance made by some crypto companies. The advisory, among other things, reminded insured banks that they must be aware of how FDIC insurance operates as well as the need to assess, manage, and control risks arising from third-party relationships, including those with crypto companies. The advisory noted that recently “some crypto companies have suspended withdrawals or halted operations," and that in certain cases, "these companies have represented to their customers that their products are eligible for FDIC deposit insurance coverage, which may lead customers to believe, mistakenly, that their money or investments are safe.” In dealing with crypto companies, the agency cautioned that “FDIC-insured banks should confirm and monitor that these companies do not misrepresent the availability of deposit insurance.” The FDIC also issued a Fact Sheet reminding the public that the FDIC only insures deposits held in insured banks and savings associations and only in the event of an insured bank’s failure. The FDIC does not insure assets issued by non-bank entities, such as crypto companies.
FDIC releases June enforcement actions
On July 29, the FDIC released a list of administrative enforcement actions taken against banks and individuals in June. During the month, the FDIC made public twelve orders consisting of “three consent orders, one order to pay civil money penalty, four orders of prohibition, one section 19 order, one order terminating consent order, two orders of termination of insurance, one Notice of Intention to Prohibit from Further Participation, Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, Order to Pay, Notice of Hearing, and Prayer for Relief.” The FDIC imposed a civil money penalty against a Missouri-based bank for alleged violations of the Flood Disaster Protection Act. Among other things, the FDIC claimed that the bank “made, increased, extended or renewed a loan secured by a building or mobile home located or to be located in a special flood hazard area without providing timely notice to the borrower and/or the servicer as to whether flood insurance was available for the collateral.” The bank must pay a $7,000 civil money penalty.
The actions also include a consent order with a Georgia-based bank, which alleged that the bank violated “law or regulation related to weaknesses in the Bank’s compliance with the Bank Secrecy Act.” According to the consent order, the bank must, among other things: (i) “enhance its oversight of the Bank’s BSA/AML Compliance Program and assume full responsibility for the approval of sound BSA/AML policies, procedures, and processes”; (ii) “revise, adopt, and implement a written BSA/AML Compliance Program, including policies and procedures”; and (iii) “review and revise as appropriate its written policies, procedures, and processes for assessing the money laundering, terrorist financing, and other illicit financial activities risk profile of the Bank.”
OCC updates statement on MDIs
On July 27, the OCC announced the revision of its 2013 policy statement for minority depository institutions (MDI) to update and streamline descriptions of its policies, procedures, and programs. According to the announcement, the OCC observed an increase in interest from banks and other stakeholders in working with MDIs and the MDI designation process after Project REACh was formed in 2020, and after the Emergency Capital Investment Program was established by Congress for Covid-19 relief. These events prompted the OCC to review its 2013 policy statement on MDIs, and the revised policy statement is a result of that review. The OCC also released a Fact Sheet regarding the agency’s support for MDIs.
FDIC issues QBP for 1Q 2022
On July 21, the FDIC released FDIC Quarterly, 2022, Volume 16, Number 3, which analyzes loan performance at community banks in five manufacturing-concentrated states: Indiana, Kentucky, Louisiana, Michigan and Wisconsin. The featured article, Community Bank Performance in Manufacturing-Concentrated States, noted that community banks in these states support their local economies “through a higher share of commercial loans relative to community banks in other states,” including commercial and industrial loans, commercial real estate loans, and construction and development loans. The FDIC also noted that “the manufacturing industry is sensitive to business cycles and recessions, which has direct implications on community banks and has weighed on their profitability through both direct credit exposure to manufacturing firms and indirectly through the manufacturing industry’s impact on the local economy.” Though the agency acknowledged that the manufacturing sector recovered more quickly than expected from the Covid-19 pandemic, credit risks remain for banks in manufacturing-heavy states. The Quarterly further stated that “[t]he manufacturing industry remains susceptible to the risks of plant closure due to the evolving nature of the pandemic, or relocation of firms due to global market pressures as production and demand normalize.”
FDIC proposes new standards TDRs
On July 20, the FDIC issued a notice of proposed rulemaking (NPR) to incorporate updated accounting standards in the risk-based deposit insurance assessment system applicable to all large and highly complex insured depository institutions (IDIs). The NPR is in response to the Financial Accounting Standards Board’s elimination of accounting guidance for troubled debt restructurings (TDR) for adopters of the current expected credit loss standard. The NPR noted that the “FDIC calculates deposit insurance assessment rates for large and highly complex IDIs based on supervisory ratings and financial measures, including the underperforming assets ratio and the higher-risk assets ratio, both of which are determined, in part, using restructured loans or [TDRs].” Both of these measures, the underperforming assets ratio and higher-risk assets ratio, are used to determine deposit insurance assessments for large and highly complex [IDIs]. According to the FDIC, the NPR “would amend the assessment regulations to include a new term, ‘modifications to borrowers experiencing financial difficulty’” for the underperforming assets ratio and higher-risk assets ratio. The NPR does not apply to FDIC-insured and/or FDIC- supervised institutions with less than $10 billion in total consolidated assets. Comments are due 30 days after publication the Federal Register.
Brainard discusses CRA reforms in Native American lands
On July 19, Federal Reserve Vice Chair Lael Brainard spoke before the National Native Coalition Virtual Series regarding the Community Reinvestment Act (CRA) Notice of Proposed Rulemaking (NPRM). During her remarks, Brainard noted that in May, the Fed, FDIC, and OCC issued a joint notice of proposed rulemaking modernizing CRA regulations to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated (covered by InfoBytes here). Brainard called this a “once-in-a-generation opportunity to strengthen the CRA to bring greater credit, investment, and banking services to the communities that have faced the greatest challenges.” She further noted that “the CRA will provide powerful incentives for banks to make investments in communities that do not have access to branches, such as in Native lands.” Her speech then focused on several aspects of the proposal that are beneficial for Native communities. She stated that the NPRM “provides greater incentives for community investments in Native Land Areas by providing enhanced clarity and specificity about what activities qualify for CRA credit.” Noting that Native community development financial institutions and minority depository institutions “are critical players in supporting credit access and investment in Native communities,” Brainard explained that the proposal provides additional certainty that activities with Treasury-certified CDFIs will qualify for CRA consideration and provides greater clarity to banks on receiving credit for activities with MDIs. She also described “another important change” of the NPRM, which is that the proposal “would result in greater CRA activity outside of where banks have branches and physical locations in order to address unmet needs in communities that have more limited access to bank branches.” Brainard concluded her remarks by reminding the audience that comments on the NPRM are due August 5.
Fed issues NPRM for default rules on certain LIBOR contracts
On July 19, the Federal Reserve Board announced in a notice of proposed rulemaking (NPRM) that it is soliciting comments on a proposal that provides default rules for certain contracts that use LIBOR, which would implement the Adjustable Interest Rate (LIBOR) Act. As previously covered by InfoBytes, LIBOR will be discontinued after June 30, 2023. The NPRM would establish benchmark replacements for the one-, three-, six-, and 12-month “tenors” of LIBOR where a given contract does not have terms that provide for the use of any substitute for the specified LIBOR rate. According to the NPRM, “[o]f particular concern are so-called ‘tough legacy contracts,’ which are contracts that reference USD LIBOR and will not mature by June 30, 2023, but which lack adequate fallback provisions providing for a clearly defined or practicable replacement benchmark following the cessation of USD LIBOR.” The proposal identifies separate Fed-selected replacement rates for derivatives transactions, contracts where a government-sponsored enterprise is a party, and all other affected contracts. As required by the law, each proposed replacement rate is based on the Secured Overnight Financing Rate. Comments on the proposal are due 30 days after publication in the Federal Register.
Find continuing InfoBytes coverage on LIBOR here.
Fed updates Regulation O FAQs
On July 8, the Fed updated its frequently asked questions (FAQs) regarding Regulation O, Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks (12 CFR Part 215). The Fed clarified that a bank’s payment of premiums as part of a split dollar life insurance arrangement does not constitute as an extension of credit to an insider, provided that certain conditions are met. The agency noted that, “under a split dollar life insurance arrangement, a bank pays the premiums on a policy insuring the life of an employee of the bank. Split dollar life insurance arrangements can take many forms. For example, the insurance policy can be owned by the bank, the employee, or a third party (typically a trust).” The Fed further explained that “[r]egardless of form, the bank is entitled to receive from the proceeds of the insurance policy a pre-negotiated amount upon the death of the insured or when the insured surrenders the policy.”
Hsu highlights financial health for consumers
On July 14, acting Comptroller of the Currency Michael J. Hsu delivered remarks before the U.S. Department of the Treasury’s Financial Literacy Education Commission (FLEC) discussing financial health for consumers. Hsu began by emphasizing that those who are invested in crypto-assets “are disproportionately young, diverse, and underbanked.” He noted the need “to take a careful and cautious approach” to crypto-assets, and then described the agency’s November 2021 reminder to national banks that their crypto activities must “be done in a safe, sound, and fair manner and that they need to obtain supervisory non-objections from us before engaging in new activities.” Hsu also mentioned that the OCC staff joined the FLEC Digital Assets working group to develop consumer materials clearly explaining new products in the cryptocurrency arena. Additionally, Hsu discussed the OCC’s “Financial Health: Vital Signs” discussion series, which explores issues affecting consumer financial health and well-being (covered by InfoBytes here). He further explained that a “financial health lens focused on individuals and communities, rather than solely on products or services, should enable a more sophisticated and effective approach to balancing the financial empowerment and protection of consumers.” Hsu concluded by noting the second anniversary of “Project REACh,” an initiative to promote greater financial inclusion of underserved populations, as previously covered by InfoBytes.
FDIC announces Oklahoma, Montana disaster relief
On July 15, the FDIC issued guidance (see FIL-31-2022 and see FIL-32-2022) to provide regulatory relief to financial institutions and help facilitate recovery in areas of Oklahoma affected by a severe storm, tornadoes, and flooding that occurred between May 2 and 8 and in areas of Montana affected by a severe storm and flooding that occurred from June 10 and continuing. The FDIC writes that, in supervising impacted institutions, it will consider the unusual circumstances those institutions face. The guidance suggests that institutions work with borrowers impacted by the severe weather to extend repayment terms, restructure existing loans, or ease terms for new loans “in a manner consistent with sound banking practices.” The FDIC notes that institutions may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery. The agency will also consider relief from certain reporting and publishing requirements.