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Financial Services Law Insights and Observations


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  • OCC discusses credit risk management, diversity and inclusion

    On December 5, acting Comptroller of the Currency Michael J. Hsu delivered remarks at the RMA Risk Management and Internal Audit Virtual Conference, where he spoke about the current expected credit losses standard (CECL) and the importance of workforce diversity and inclusion. Hsu started by discussing CECL and mentioning that though loan portfolios have generally remained resilient and widespread, “deterioration isn’t currently evident in credit quality metrics, the effects of high inflation, rising interest rates, lagging wage growth, supply chain disruptions, and stress from geopolitical events threaten the unexpectedly strong credit performance observed over the past few years.” He further pointed out that the longer-term effects of the Covid-19 pandemic, such as the shift in preferences toward online shopping and remote work, and other circumstances, can erode business profit margins, debt service capacity, and collateral valuations, in addition to adversely affecting credit risk levels at financial institutions. When speaking about sound practice, Hsu stated that maintaining safe and sound credit risk management practices through this period of economic uncertainty is critical. He also noted that “timely risk identification and ratings, increased focus on concentrated portfolios and vulnerable borrowers, and stress testing and sensitivity analysis are particularly critical risk management activities at this time.” He further warned that the “flexibility” provided by CECL must ensure safety and soundness, arguing that there needs to be “appropriate support and documentation of management’s judgments,” as well as management’s assumptions, decisions, expectations, and qualitative adjustments. He emphasized that the first step to improving diversity, equity, and inclusion requires more transparency from the financial services industry regarding the diversity of their boards and executive leadership, and organizations need to develop diversity plans and monitor outcomes. He also emphasized that financial institutions should actively “foster a true sense of belonging for everyone.” In closing, Hsu stated that “improving diversity and inclusion is a ‘need to have’ for [the OCC] to achieve our mission of assuring safety and soundness, fair access to financial services, and fair treatment of customers.”

    Bank Regulatory Federal Issues OCC Diversity Credit Risk Risk Management CECL Covid-19

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  • Barr suggests stress test changes may be coming

    On December 1, Federal Reserve Board Vice Chair for Supervision Michael S. Barr signaled changes may be coming to the supervisory stress test standards for large banks, as the Fed evaluates whether the test used to set capital requirements reflects an appropriately wide range of risks. Speaking during an American Enterprise Institute event, Barr commented that the Fed is also “considering the potential for stress testing to be a tool to explore different sources of financial stress and uncover channels for contagion that lead to unanticipated consequences.” He added that the use of “multiple scenarios or adapting the stress test in other ways to better account for the high degree of interconnectedness between banks and other financial entities could allow supervisors and banks to identify those conditions and take action to address them.” Financial stability risks posed by the nonbank sector are also a strong concern for regulators, Barr said, commenting that many of these firms are undercapitalized and engage in high-risk activities. He stressed that the migration of activities from banks to nonbanks should be monitored carefully, and cautioned against lowering bank capital requirements “in a race to the bottom,” particularly since nonbank financial market stress is often directly and indirectly transmitted to the banking system. Banks must have sufficient capital to remain resilient to those stresses, Barr said.

    Bank Regulatory Federal Issues Federal Reserve Supervision Stress Test Nonbank

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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.”

    Bank Regulatory Federal Issues Agency Rule-Making & Guidance Federal Reserve Climate-Related Financial Risks Risk Management Supervision

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  • 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.

    Bank Regulatory Federal Issues Agency Rule-Making & Guidance Federal Reserve Federal Reserve Banks Payments FedNow Risk Management

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  • 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.

    Bank Regulatory Federal Issues Enforcement Federal Reserve Regulation H National Flood Insurance Act Flood Insurance

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  • 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.

    Bank Regulatory Federal Issues OCC Assessments

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  • 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.

    Bank Regulatory Federal Issues OCC Civil Money Penalties Enforcement

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  • Senators demand answers on collapsed cryptocurrency exchange; NYDFS seeks tougher crypto approach

    Federal Issues

    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.

    Federal Issues Digital Assets State Issues Fintech Cryptocurrency NYDFS Bank Regulatory U.S. Senate DOJ House Financial Services Committee

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  • 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.

    Bank Regulatory Federal Issues Financial Crimes FDIC Enforcement Flood Disaster Protection Act Mortgages Anti-Money Laundering Combating the Financing of Terrorism Bank Secrecy Act

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  • 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.

    Bank Regulatory Federal Issues OCC Enforcement

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