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Agencies adjust civil money penalties for 2024
Recently, the CFPB, NCUA, FDIC, FTC, and OCC provided notice in the Federal Register of adjustments to the maximum civil money penalties due to inflation pursuant to the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended by the Debt Collection Improvement Act of 1996 and further amended by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. Each notice or final rule (see CFPB here, FDIC here, OCC here, FTC here, and NCUA here) adjusts the maximum civil money penalties available and documents the inflation-adjusted maximum amounts associated with the penalty tiers for each type of violation within a regulator’s jurisdiction. For violations occurring on or after November 2, 2015, the OCC’s adjusted maximum penalties go into effect as of January 8; the CFPB and FDIC’s adjustments go into effect January 15; and the FTC and NCUA’s adjustments go into effect January 10.
FDIC releases November enforcement actions
On December 29, the FDIC released a list of administrative enforcement actions taken against banks and individuals in November. The FDIC made 12 orders public including, “five consent orders, three prohibition orders, two orders terminating consent orders, one order to pay a civil money penalty (CMP), and one order dismissing both a notice of assessment of CMPs and an order to pay.” Included is a stipulated order and written agreement with a Tennessee-based bank (the Bank) to resolve alleged violations of the Bank Secrecy Act (BSA) and weaknesses in board and management oversight of its information technology function. The Bank agreed to the conditions of the consent order which requires the Bank to, among other things (i) establish an action plan to correct the bank’s Anti-Money Laundering/Countering the Financing for Terrorism (AML/CFT) program deficiencies and alleged violations; (ii) retain qualified IT management; (iii) perform a cybersecurity assessment; and (iv) designate someone responsible for coordinating and monitoring day-to-day compliance with the BSA.
Agencies update the Uniform Rules of Practice and Procedure
On December 28, 2023, the Fed, OCC, FDIC, and NCUA published a final rule amending the Uniform Rules of Practice and Procedure to recognize the use of electronic communications and enhance the efficiency and equity of administrative hearings. The agencies have implemented measures recognizing the role of electronic communications across all facets of administrative proceedings. Among other things, the final rule (i) defines “electronic signature” in the Uniform Rules; (ii) codifies permitting electronic service and filings for administrative actions; (iii) allows for remote depositions; (iv) includes Equal Access to Justice Act procedures based on the 2019 Administrative Conference of the United States Model Rule; (v) adds provisions on when parties must pay civil money penalties; (vi) adds specific provisions pertaining to the forfeiture of a national bank, federal savings association, or federal branch or agency charter or franchise due to certain money laundering or cash transaction violations; (vii) modifies the discovery rules to recognize electronic documents and allow for electronic production; (viii) establishes new rules for expert and hybrid fact-expert witnesses; and (ix) consolidates the Uniform Rules and Local Rules for national banks and federal savings associations.
Additionally, the OCC has revised its specific administrative practice and procedure regulations to harmonize rules for national banks and federal savings associations. Furthermore, adjustments were made to the OCC’s regulations on organization and operations to encompass service of process considerations.
The rule is effective April 1, 2024.
OCC announces CRA bank asset-size threshold adjustments for 2024
On December 26, 2023, the OCC announced revisions to the asset-size thresholds used to define small and intermediate small banks and savings associations under the Community Reinvestment Act (CRA). Effective January 1, 2024, a small bank or savings association will mean an institution that, as of December 31 of either of the past two years, had assets of less than $1.564 billion. An intermediate small bank or savings association will mean an institution with assets of at least $391 million as of December 31 of both of the prior two years, and less than $1.564 billion as of December 31 of either of the prior two years. As previously covered by InfoBytes, the Fed and the FDIC also announced joint annual adjustments to the CRA asset-size thresholds used to define “small bank” and “intermediate small bank.”
FDIC proposes revisions to call reports
On December 27, 2023, the FDIC published its proposed revisions to the reporting forms and instructions for Call Reports and the FFIEC 002 report in a financial institution letter under the auspices of the FFIEC. Call Reports are also known as Consolidated Reports of Condition and Income, a set of financial reporting standards that banks in the U.S. must file with a regulatory agency. The proposed revisions are currently open for public comment until February 26, 2024.
The changes affect Call Reports FFIEC 031, FFIEC 041, and FFIEC 051, as well as the Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks (FFIEC 002). The FFIEC’s proposed changes encompass reporting on (i) loans to non-depository financial institutions, (ii) structured financial products, and (iii) long-term debt requirements. The proposed changes are found in more detail in the Federal Register, and state detailed revisions for each FFIEC form. The changes will go into effect on June 30, 2024.
Banking regulators update “small bank” definitions
On December 20, the Fed and the FDIC announced changes to the 2024 asset-size thresholds used to define “intermediate small bank” and “small bank” under the CRA. To qualify as an “intermediate small bank,” a bank must have assets of at least $391 million as of December 31 in both prior two calendar years, and less than $1.564 billion as of December 31 in either of the prior two calendar years. To qualify as a “small bank,” a bank must have had assets of less than $1.564 billion as of December 31 in either of the prior two calendar years. These increases are based on a 4.06% increase in the applicable consumer price index and the thresholds will take effect beginning January 1, 2024.
FDIC issues advisory on managing commercial real estate concentrations
On December 18, the FDIC issued an advisory to institutions with commercial real estate (CRE) concentrations. The advisory, among other things, reminds insured state non-member banks and savings associations (FDIC-supervised institutions) of the importance of “strong capital, appropriate credit loss allowance levels, and robust credit risk-management practices” when managing CRE concentrations. The advisory notes that “[r]ecent weaknesses in the economic environment and fundamentals related to various CRE sectors have increased the FDIC’s overall concern for state nonmember institutions with concentrations of CRE loans.” The FDIC said that “CRE investment property capitalization rates have not kept pace with recent rapid increases in long-term interest rates, which leads to concerns about general over-valuation of underlying collateral.” For institutions with concentrated CRE exposures, the agency “strongly recommended” that “as market conditions warrant, institutions with CRE concentrations (particularly in office lending) increase capital to provide ample protection from unexpected losses if market conditions deteriorate further.” The agency also outlined key risk-management measures for financial institutions with significant concentrations in CRE and real estate construction and development (C&D) to manage through changing market conditions: (i) “maintain strong capital levels;” (ii) “ensure that credit loss allowances are appropriate;” (iii) “manage C&D and CRE loan portfolios closely;” (iv) “maintain updated financial and analytical information;” (v) “bolster the loan workout infrastructure;” and (vi) “maintain adequate liquidity and diverse funding sources.”
Agencies extend Regulation O relief for some companies controlled by funds
On December 15, the Fed, FDIC, and the OCC announced the issuance of an interagency statement to further extend the “Extension of the Revised Statement Regarding Status of Certain Investment Funds and their Portfolio Investments for Purposes of Regulation O and Reporting Requirements under Part 363 of FDIC Regulations.” The original statement was issued on December 22, 2022, with an expiration of January 1, 2024. The new interagency statement effectively extends the prior no-action position (covered by InfoBytes here) until either January 1, 2025 or the effective date of amendments to Regulation O that addresses the treatment of extensions of credit by a bank to fund complex–controlled portfolio companies that are bank insiders.
The agencies noted that they will refrain from acting against banks extending credit to complex-controlled portfolio companies that would otherwise violate Regulation O, provided the company controls (directly or indirectly) less than 15 percent of the bank’s voting securities (or 20 percent under certain circumstances) and does not plan to place representatives or exercise a controlling influence over the bank. Additionally, the agencies will not pursue action against insured depository institutions for failing to report credit extensions that would violate Regulation O but fall under the interagency statement’s coverage. The agencies explained how credit extensions must be on “substantially the same terms as those prevailing for comparable transactions with unaffiliated third parties” and may not “involve more than normal risk of repayment or present other unfavorable features.”
Basel Committee publishes report on recalibration of shocks for interest rate risk
On December 12, the Basel Committee released a report on the “Recalibration of shocks for interest rate risk in the banking book,” as an adjustment to the Committee’s 2016 commitment to recalibrate the interest rate shock parameters.
The Committee began its calibration of interest rate shocks before the March 2023 banking issues transpired and is now following up on fundamental shortcomings in traditional risk management of banks, including interest rate risks. The report is brief and focuses on specified topics: for the first topic, the current calibration and methodology outlining current interest rate shocks (measured in basis points), the calculation of average interest rates from 2000 to 2015, the application of three tiers for shock parameters, and problems with the methodology; for the second topic, a proposal of a new methodology and calibration using a formula with outlined steps for countries to adopt, a comparison between the existing and new methodology, and a recalibration table; and, the third and final topic emphasizes additional issues and next steps, including caps, non-parallel shocks, and impact assessment.
The Committee noted in its press release that these changes “are needed to address problems with how the current methodology captures interest rate changes during periods when interest rates are close to zero.” Comments can be submitted to the Committee until March 28, 2024.
FDIC Director McKernan suggests phasing ‘underdeveloped’ parts of Basel III
On December 12, a member of the FDIC Board of Directors, Jonathan McKernan, expressed concerns about its Endgame proposal’s reliance on Basel Committee decisions. In his speech at a conference on trading book capital, he highlighted the lack of explanation behind design choices, leaving banking regulators unable to justify or comprehend certain reform aspects. The board member added that the absence of rationale hindered public feedback and raised doubts about the reform’s legitimacy.
McKernan suggested an approach to defer less developed areas of the reforms while implementing uncontested aspects—acknowledging the proposal’s goal to address weaknesses in the trading book framework and citing concerns about specific design decisions. McKernan notes certain design decisions like the profit-and-loss attribution test and non-modellable risk factors. McKernan explained that the PLA attribution test assesses the alignment between a bank’s risk management and front office models. McKernan said that for both designs, there is very little public information on the Basel Committee’s threshold formulation and that they are based on simulated data, which is viewed as a preliminary estimate still under development. Finally, McKernan supported enhancing the regulatory capital framework but stressed the need to validate the rationale behind key design decisions in the Basel reforms.