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Comptroller Curry Discusses Importance of Effective Supervision Before Clearing House Annual Conference
In prepared remarks delivered on November 30 before The Clearing House Annual Conference in New York City, Comptroller of the Currency Thomas J. Curry discussed lessons from the 2008 financial crisis. Curry noted that he was “often disappointed how quickly some forget the lessons of more recent events, particularly what brought the financial system to the cliff in 2008 and what has put our banks and our economy on much firmer ground since.” His remarks emphasized the value of strong capital, the need for ample liquidity, and the importance of effective supervision.
In discussing capital, Curry noted that since the beginning of 2009, there has been a $700 billion increase in common equity capital. Such levels would allow the 33 largest bank holding companies to be well capitalized and continue lending even under the most severe scenario used by the banking agencies’ stress tests. He cautioned, however, that “[w]eakening the ratio through special exclusions only undermines our original intent and weakens the protection against excessive leverage.” Comptroller Curry similarly noted that the Liquidity Coverage Ratio and the proposed Net Stable Funding Ratio complement each other to push covered banks to hold ready resources to meet short-term cash outflows and to shift to more stable, longer-term funding.
On the subject of supervision, Curry noted the importance of “holistic supervision based on the CAMELS rating system.” He also added that while a periodic reassessment of banking laws and regulations is appropriate, “we must never settle for ‘light-touch’ supervision.” And, in concluding, Curry stressed that community banks and their examiners, in order to “remain strong and healthy,” need to “focus on strategic risk, rising credit risk from stretching for yield while relaxing underwriting standards, expansion of new technologies, and compliance issues.”
GAO Report Recommends Additional Actions to Help Achieve Dodd-Frank Stress Test Goals
On November 15, the GAO released its report entitled Federal Reserve: Additional Actions Could Help Ensure the Achievement of Stress Test Goals. The report had been requested in September 2014 by House Financial Services Committee Chairman Jeb Hensarling in order to determine the costs, benefits, effectiveness and transparency of the Fed’s stress tests. Highlights of the Report can be found here.
The GAO was asked to review and assess the effectiveness of each of the Fed’s two stress test programs for certain banking institutions. Accordingly, the GAO analyzed Fed rules, guidance, and internal policies and procedures and assessed practices against federal internal control standards and other criteria. The GAO also interviewed Federal Reserve staff and officials at 19 banking institutions. The report sets forth 15 recommendations that the GAO believes will help improve the effectiveness of the Fed’s stress test programs. The recommendations include, among other things, improving disclosures and communications to firms, expanding model risk management, and reconsidering potential consequences of the Fed’s scenario design choices. The GAO has reported that the Fed “generally agreed with the recommendations and highlighted select ongoing and future efforts.”
In a November 15 press release, House Financial Services Committee Chairman Jeb Hensarling used the GAO report to critique the Fed’s lack of transparency with regard to certain activities under the Dodd-Frank Act. Among other things, Rep. Hensarling stated, “[t]he GAO report confirms the secrecy surrounding the stress tests makes it almost impossible to measure the effectiveness of the Fed’s regulatory oversight or the integrity of the tests’ findings. When it comes to the Fed’s stress tests, not only are they not transparent, they are often duplicative and impose unnecessary costs and burdens on financial institutions that are ultimately passed on to consumers.” Rep Hensarling cautioned further that “[t]he changes recently proposed by the Federal Reserve to its stress testing process are inadequate,” and the GAO report “demonstrates the absolute need for the new President to designate a Vice-Chairman for Supervision at the Federal Reserve who will have the power to ‘oversee the supervision and regulation’ of financial firms supervised by the Federal Reserve.”
OCC Proposes Revisions to Stress Test Information Collection
On November 15, the OCC published a notice and request for comment on proposed changes to its rules requiring certain covered financial institutions, including national banks and federal savings associations with assets over $50 billion, to report certain financial information as part of stress testing. The proposed revisions to the OCC’s reporting requirements are “intended to promote consistency with” the Fed’s proposed changes to its form FR Y-14A, and consist generally of clarifying instructions, shifting the “as-of date”, adding data items, deleting data items, and redefining existing data items—including an expansion of the information collected in the scenario schedule. The proposed revisions also reflect the implementation of the final Basel III regulatory capital rule, which is set to revise and replace the OCC’s risk-based and leverage capital requirements to be consistent with agreements reached by the Basel Committee on Banking Supervision in ‘‘Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems’’ (Basel III). All comments must be received by January 19, 2017.
Financial Stability Oversight Council will hold its first post-election meetings on November 16
On November 16, Treasury Secretary Jack Lew will preside over a meeting of the Financial Stability Oversight Council (FSOC). The agenda will include both an open and an executive session. The preliminary agenda for the open session includes an update on the work of the Alternative Reference Rates Committee, an update on the council's review of the asset management industry and revisions to the council's regulations under the Freedom of Information Act. The preliminary agenda for the executive session includes a presentation on stress tests of central counterparties conducted by the CFTC, a discussion of confidential data related to the Council’s review of asset management products and activities, and an update on the annual re-evaluation of the designation of a non-bank financial company.
Open session Council meetings are made available to the public via live webcast and also can be viewed after they occur here. Meeting minutes for the most recent Council meeting are generally approved at the next Council meeting and posted online soon afterwards. Meeting minutes for past Council meetings are available here. Readouts for past Council meetings are available here.
OCC Updates Community Bank Supervision Comptroller's Handbook
On November 3, the OCC announced an update to the “asset quality core assessment procedures” in its Community Bank Supervision Comptroller’s Handbook (Handbook). Among other things, the revised Handbook: (i) updates concentration risk management procedures and stress testing guidance for community banks; (ii) incorporates procedures for credit underwriting assessments; (iii) enhances appraisal, evaluation, allowance, and credit review examination procedures; and (iv) updates the asset quality references and standard request letter.
Fed Proposal Would Modify Stress Tests for Large, Noncomplex Bank Holding Companies
On September 26, the Federal Reserve released a proposed rule that would essentially remove bank holding companies defined to be “large and noncomplex” from the qualitative portion of annual Comprehensive Capital Analysis and Review (CCAR) assessment process (“stress tests”). Under the proposed rule, large and noncomplex bank holding companies are those with total consolidated assets of at least $50 billion, but less than $250 billion, less than $10 billion in foreign exposure, and less than $75 billion in average nonbank assets. Currently, the Fed applies the CCAR process to bank holding companies with more than $50 billion in total consolidated assets. Fed Governor Daniel Tarullo indicated that the Fed was also considering adoption of a “stress capital buffer” approach for larger, global systemically important banks (GSIB). The new approach would replace the uniform 2.5-percent capital conservation buffer, and would instead require GSIBs to retain capital “equal to the maximum decline in a firm's common equity tier 1 capital ratio under the severely adverse scenario of the supervisory stress test before the inclusion of the firm's planned capital distributions.”
OCC Lays Out Supervision Plan for 2017
On September 14, the OCC released its bank supervision operating plan for fiscal year 2017. The plan identifies the OCC’s priority objectives, which include: (i) commercial and retail loan underwriting; (ii) business model sustainability and viability; (iii) operational resiliency; (iv) BSA/AML compliance; and (v) processes to address regulatory changes. Moreover, the plan affirms that the OCC will look at each individual bank’s key risks, and will continue the process of stress testing, both for large banks and for midsize and community banks.
Federal Reserve Chair Discusses Supervision of Largest Institutions In Post-Crisis Era
On March 3, Federal Reserve Chair Janet Yellen delivered remarks to the Citizens Budget Commission regarding actions that the Federal Reserve has taken to strengthen its supervision of large financial institutions in the wake of the recent financial crisis. In her remarks, Chairwoman Yellen highlighted five regulatory changes, including (i) higher capital standards, (ii) higher liquidity requirements, (iii) implementation of stress tests, (iv) required submission of living wills, and (v) in cooperation with the FSOC, the Fed’s enhanced authority to promote the resiliency and stability of the financial system in addition to the safety and soundness of individual institutions.
Prudential Regulators Propose Changes To Timing Of Stress Tests
On June 12, the Federal Reserve Board and the OCC separately released proposed rules that would push back by 90 days the start date of the stress test cycles and the deadlines for submitting stress test results. The regulators propose making the new schedules effective beginning with the 2015-2016 cycles. On June 13, the FDIC proposed a rule to similarly shift the stress test cycles. In addition, the Federal Reserve’s proposed rule would (i) modify the capital plan rule to limit a large bank holding company’s ability to make capital distributions to the extent that its actual capital issuances were less than the amount indicated in its capital plan; (ii) clarify the application of the capital plan rule to a large bank holding company that is a subsidiary of a U.S. intermediate holding company of a foreign banking organization; and (iii) make other technical clarifying changes. Comments on the Federal Reserve’s proposal are due by August 11, 2014. Comments on the OCC’s and the FDIC’s proposals are due 60 days after their publication in the Federal register.
Prudential Regulators Finalize Midsize Bank Stress Test Guidance
On March 5, the Federal Reserve Board, the OCC, and the FDIC issued final guidance for stress tests conducted by banking institutions with more than $10 billion but less than $50 billion in total consolidated assets. Under Dodd-Frank Act-mandated regulations adopted in October 2012, such firms are required to conduct annual stress tests. The guidance discusses (i) supervisory expectations for stress test practices, (ii) provides examples of practices that would be consistent with those expectations, and (iii) offers additional details about stress test methodologies. Covered institutions are required to perform their first stress tests under the Dodd-Frank Act by March 31, 2014.