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Bank regulators share living will expectations with foreign banks operating in the U.S.
On January 29, the Federal Reserve Board and the FDIC sent letters to 19 foreign banks operating in the United States to outline and clarify resolution plan expectations. According to a joint release issued by the regulators, Dodd-Frank-mandated resolution plans—commonly known as living wills—require certain foreign banks to detail strategic plans for their U.S. operations “for rapid and orderly resolution under bankruptcy” should the banks fail or fall under material financial distress. Requested in the letters, among other things, are specifics on resolution strategies, capital calculations, management of liquidity, stress testing, and organizational structures. Banks are required to submit 2018 resolution plans no later than December 31, 2018. Refer here to access a list of banks and letters.
Federal Reserve vice chairman evaluates post-crisis regulations
On January 19, Federal Reserve Vice Chairman for Supervision Randal Quarles spoke at the American Bar Association Banking Law Committee Annual Meeting to discuss his initial observations on the post-crisis regulation regime and provide a status update on the Fed’s key areas of focus for improving the “efficiency, transparency, and simplicity of regulation.” Quarles emphasized that there are a variety of means to improve efficiency, such as (i) addressing unintended adverse consequences of a regulation, or (ii) calibrating a regulation “more precisely to the risks in need of mitigation.” Transparency around rulemaking encourages a variety of perspectives, and simplifying regulations “promotes public understanding of regulation, promotes meaningful compliance by the industry with regulation, and reduces unexpected negative synergies among regulations,” he added.
According to Quarles, “small bank capital simplification, burden reduction in resolution planning, enhancements to stress testing, leverage ratio recalibration, and Volcker rule simplification” are common ground areas for improvement, efforts have progressed, and regulations have been proposed for changes, including extending the resolution planning cycle to reduce the reporting burden. Quarles also noted that the Fed expects to release a proposal on leverage ratio recalibration in the near future, and has started working with five banking agencies on a proposal to streamline the Volcker rule.
Another area of focus Quarles highlighted is the Fed’s plan to revisit the “advanced approaches” thresholds used to identify internationally active banks, including risk-based capital requirements as well as the supplementary leverage ratio. Quarles further noted that the current $250 billion-asset or $10 billion in on-balance-sheet foreign exposures thresholds were formulated more than a decade ago “and have not been refined since then.” Additionally, Quarles announced plans to work with his Fed colleagues to simplify the framework for loss absorbency requirements. According to Quarles, candidates for simplification include (i) eliminating the advanced approaches risk-based capital requirements; (ii) eliminating one or more stress testing ratios; and (iii) modifying the total loss-absorbing capacity requirements. The framework for making determinations of control under the Bank Holding Company Act—while not a post-crisis regulation—could also be improved to be less “burdensome and time-consuming,” Quarles added.
Finally, as previously covered in InfoBytes, Quarles commented on the Fed’s requests for comments issued last December on three proposals designed to increase stress testing transparency while also testing the resiliency of large, complex banks. “I believe that the disclosure we have provided does not go far enough to provide visibility into the supervisory models that often deliver a firm's binding capital constraint,” Quarles noted.
Federal Reserve Publishes Stress Test, CCAR FAQs
On January 8, the Federal Reserve Board (Fed) published an updated set of questions and answers to assist financial institutions in complying with the Dodd-Frank Act-mandated stress tests (DFAST) and Comprehensive Capital Analysis and Review (CCAR). According to the Fed, the FAQs are designed to provide answers concerning DFAST and CCAR reporting requirements and related guidance, and generally cover applicable questions that have been asked by covered financial institutions since August 1, 2017. The Fed instructs financial institutions that CCAR projections should only reflect new accounting standards if the standards were implemented prior to December 31 of the previous calendar year. For material business changes occurring in the fourth quarter of a year, financial institutions should discuss any changes that may materially impact the institution’s capital adequacy and funding profile in their CCAR filings. The Fed will review the information when making modelling projections and may request additional information. The Fed also explains the circumstances in which a bank is required to issue replacement capital to stay in compliance with its capital plan.
Federal Reserve Requests Comments on Proposals Seeking Transparency Increases in Stress Testing Programs
The Federal Reserve Board (Fed) issued a request for comments on three proposals designed to increase stress testing transparency while also testing the resiliency of large, complex banks. Earlier in June, Fed Chair Janet Yellen underscored the Fed’s understanding of the need to provide transparency in its Comprehensive Capital Analysis and Review (CCAR) process and stress test scenarios. (See previous InfoBytes coverage here.) The first December 7 proposal, “Enhanced Disclosure of the Models Used in the Federal Reserve’s Supervisory Stress Test,” announces the Fed’s plans to publicly release, for the first time, information concerning the models and methodologies used during supervisory stress tests, including those applied in the CCAR, including:
- “enhanced descriptions of supervisory models, including key variables;”
- “modeled loss rates on loans grouped by important risk characteristics and summary statistics associated with the loans in each group;” and,
- “portfolios of hypothetical loans and the estimated loss rates associated with the loans in each portfolio.”
The information will offer banks expanded details as to how the Fed’s models treat different types of loans under stress, along with insight into the determination of annual stress test results.
The second request for comments concerns the “Stress Testing Policy Statement,” which elaborates on prior disclosures and outlines details on the principles and policies that govern the Fed’s development, implementation, and validation of its stress testing models.
Finally, the Fed issued a proposed policy statement to request comments on introduced amendments to the design of its annual hypothetical economic scenarios framework. The “Amendments to Policy Statement on the Scenario Design Framework for Stress Testing” is intended to enhance transparency and provide clarification on hypothetical economic scenarios, including the direction of housing prices, as well as the Fed’s commitment to exploring additional variables to test for funding risks.
All comments must be received by January 22, 2018.
NCUA Issues Final Rules Regarding Appeals Procedures; Proposes Rule Regarding Capital Planning and Stress Testing
On October 30, the National Credit Union Administration (NCUA) issued a final rule expanding the number of material supervisory determinations that can be appealed to the NCUA Supervisory Review Committee (SRC). Under the rule, federally insured credit unions (FICUs) may appeal examination-related determinations that may significantly affect capital, earnings, operating flexibility, or level of supervisory oversight. The effective date for the final rule is January 1, 2018.
On October 30, the NCUA also proposed changes to rules covering capital planning and stress testing requirements for covered credit unions (see previously InfoBytes coverage on proposed changes to stress tests by other federal agencies). The proposal would allow FICUs with over $10 billion in assets to conduct their own stress tests in accordance with NCUA requirements and report the results in their capital plan submissions. The specific testing requirements are tiered and dependent on various asset size and capital planning cycles. Comments about the NCUA proposed rule must be received on or before December 29.
OCC Proposes Changes to Annual Stress Test Rule
On October 27, the Office of the Comptroller of Currency (OCC) issued proposed changes to its “stress test” rules for covered financial institutions required by the Dodd-Frank Act. Specifically, the proposal would, (i) extend the window by three months to allow the OCC to choose an appropriate “as-of” date in the trading and counterparty default component of the stress test (intended to conform with recent rule changes by the Federal Reserve); and (ii) extend the transition process for certain banks and savings associations that cross the $50 billion asset threshold before stress testing requirements are applicable.
Comments for the proposed changes must be received on or before December 26.
In addition to this proposal, on October 6, the Fed, FDIC, and the OCC, issued a joint notice and request for comment, which proposes to combine the agencies’ three separate, identical stress test report forms into a single new Federal Financial Institutional Examination Council (FFIEC) report (FFIEC 016) under the Dodd-Frank Act (previously covered by InfoBytes here).
OCC Acting Comptroller Shares Thoughts on Opportunities to Reduce Regulatory Burdens
On October 5, OCC Acting Comptroller of the Currency Keith Noreika spoke before the 2017 Midsize Bank Coalition of America Chief Risk Officer Meeting to discuss opportunities for regulatory reform.
According to Noreika, one area of concern relates to the adverse effect arbitrary asset thresholds pose to the annual stress test requirements required under the Dodd-Frank Act because the burden “is not commensurate with the systemic risks presented by an institution.” Given the amount of diversity in the business models of banks who have around $10 billion in assets, “regulators need the ability and authority to tailor their supervision to the unique risks presented by individual banks.” Noreika suggested an approach that would give federal banking agencies the authority to tailor statutory stress testing requirements without an asset threshold, thus reducing the risk of banks growing beyond the threshold to offset increased costs or staying below the threshold to avoid unwelcome scrutiny.
Noreika also urged for interagency harmonization of guidance and policies to avoid conflicting regulatory guidance when addressing cybersecurity issues.
Additionally, Noreika addressed the CFPB’s arbitration rule as an example of the need to work “to ensure regulation is balanced and appropriate by speaking up when we see proposed rules that may adversely affect the business of banking, have systemic effects, or result in perverse unintended consequences.” Noreika stated that prior to the publication of the final arbitration rule, the OCC requested access to the data the CFPB used to develop and support the rule in order to conduct an independent review. However, it was not until after the rule was published that the CFPB made the data available. According to OCC findings, the rule will adversely impact consumers by increasing costs. Community banks, Noreika noted, will also bear the burden of increased legal costs from defending lawsuits.
Finally, Noreika commented that banks continue to face challenges when trying to implement Bank Secrecy Act compliance programs and adapt to new requirements under TRID, HMDA, and the Military Lending Act.
Federal Banking Agencies Issue Request for Comment on Proposed Combined Dodd-Frank Stress Test Report
On October 6, the Federal Reserve Board (Fed), the FDIC, and the OCC (agencies)—all members of the Federal Financial Institutions Examination Council (FFIEC)—issued a joint notice and request for comment on a proposal to combine the agencies’ three separate, identical stress test report forms into a single new FFIEC report (FFIEC 016) under the Dodd-Frank Act. In addition to replacing the Fed’s FR Y–16, the FDIC’s DFAST 10–50, and the OCC’s DFAST 10–50B, a limited number of revisions would be made to align FFIEC 016 with “recent burden-reducing changes to the FFIEC 031 and FFIEC 041 Consolidated Reports of Condition and Income and the Fed’s FR Y–9C Consolidated Financial Statements for Holding Companies.” Under the proposal, institutions who have a Legal Entity Identifier will also be asked to include it on the report form.
FFIEC 016 respondents are depository institutions and holding companies with at least $10 billion but less than $50 billion in total consolidated assets. The proposed FFIEC 016 will impact stress test reports with an as-of date of December 31, 2017, and have a submission deadline of July 31, 2018. Comments on the joint notice and request for comment must be received by December 5, 2017.
NCUA Seeks Comments on Comprehensive Regulatory Reform Agenda
On August 16, the National Credit Union Association (NCUA) announced plans to publish in the Federal Register a notice requesting comments on its four-year regulatory reform agenda. As an independent agency, the NCUA is not required to comply with President Trump’s Executive Order 13777, which compels agencies to review and carry out regulatory reform, but it chose to voluntarily comply with the spirit of this Order by forming an internal regulatory reform task force to determine if any of the agency’s existing regulations should be eliminated, revised, improved, or clarified. The Task Force Report outlines its initial findings and recommendations for the amendment or repeal of regulatory requirements that it has determined are outdated, ineffective, or excessively burdensome. The report provides a three-tiered prioritization approach to regulatory reform based on “degree of impact and degree of effort” covering a four-year period, where “impact” focuses on the “magnitude of the benefit that would result from the change, and how broadly the stakeholder community would be impacted”, and “effort” considers the time and energy required to make the change.
Tier 1 recommendations, assigned the highest level of priority with a two year target time frame, address the following key recommendations: (i) revisions to the “loans to members and lines of credit to members” rules, which govern federal credit union loan maturity limits, single borrower limits, third-party servicing of indirect vehicle loans and executive compensation plans; (ii) modernization of the federal credit union bylaws; (iii) revisions to the agency’s chartering and field of membership manual; (iv) potential changes to capital planning and stress test threshold requirements; and (v) implementation of certain fidelity bond and insurance coverage requirements.
Tier 2 recommendations, which provide a three-year target time frame, address the following key recommendations: (i) revisions to aggregate loan participation limits; (ii) conducting a review to determine whether prior NCUA approval is required to purchase and assume liabilities from market participants other than federal credit unions; and (iii) easing restrictions on investment activities not required by the Federal Credit Union Act.
Tier 3 recommendations, which provide a four-year target time frame, address the following key recommendations: (i) enhanced third-party due diligence rules; (ii) changes concerning loans and credit lines to members to “[e]nhance Federal preemption where possible and appropriate” in an effort to reduce overlap with state laws and regulatory burden; and (ii) conducting a review of the regulation pertaining to security programs, suspected crimes and transactions reporting, catastrophic acts, and Bank Secrecy Act compliance.
Comments on the proposed plan are due 90 days after publication in the Federal Register.
FHFA Reports Results of Fannie Mae, Freddie Mac Annual Stress Tests
One August 7, the Federal Housing Finance Agency (FHFA) published a report providing the results of the fourth annual stress tests conducted by government-sponsored enterprises Fannie Mae and Freddie Mac (GSEs). In March 2017, the FHFA issued orders directing the GSEs to report the results of the required Dodd-Frank Act stress test to enable financial regulators to determine whether the companies have sufficient capital to support operations in adverse or severely adverse economic conditions. (See previous InfoBytes coverage here.) According to the report, Dodd-Frank Act Stress Tests Results – Severely Adverse Scenario—which provides modeled projections on possible ranges of future financial results and does not define the entirety of possible outcomes—the GSEs will need to draw between $34.8 billion and $99.6 billion in incremental Treasury aid under a “severely adverse” economic crisis, depending on how deferred tax assets are treated. The losses would leave $158.4 billion to $223.2 billion available to the companies under their current funding commitment agreements. Notably, the projected bailout need is lower than what the FHFA reported last year, which ranged between $49.2 billion and $125.8 billion.