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OCC releases September CRA Evaluations
On October 1, the OCC released its CRA performance evaluations for September. The OCC evaluated 21 entities, including national banks, federal savings associations and insured federal branches of foreign banks. The assessment framework has four ratings: Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance. Of the 21 evaluations reported by the OCC, 16 entities were rated “Satisfactory,” five entities were rated “Outstanding,” and none were rated either “Needs to Improve” or “Substantial Noncompliance.”
Fed’s Cook delivers remarks regarding artificial intelligence
On October 1, Fed Board of Governors Member Lisa D. Cook delivered remarks titled “Artificial Intelligence, Big Data, and the Path Ahead for Productivity” at a conference organized by the Federal Reserve Banks of Atlanta, Boston, and Richmond. She addressed the implications of new technologies on productivity by emphasizing the uncertainty surrounding AI’s impact on labor markets and productivity. While AI adoption is becoming more widespread, Cook stated that its effect on productivity and employment remains unclear.
Cook highlighted that AI and generative AI could drive significant productivity gains across industries. She cited a study from the Federal Reserve Bank of St. Louis finding that generative AI was being adopted faster than previous technologies like the internet and personal computers. Despite its potential, Cook noted that recent productivity gains have been modest. AI productivity improvements depend on firms, workers and policymakers. She mentioned that adapting AI to specific business contexts can be complex and time-consuming, requiring significant investments and organizational changes.
Banks each pay $1M to FDIC for unspecified rewards program issue
Recently, the FDIC ordered two affiliated state nonmember banks to each pay a $1,000,000 civil monetary penalty (orders here and here). These penalties resolve claims of unfair practices related to their rewards programs and the processing of automatic payments. According to the orders, which were devoid of detail, the FDIC determined that the two banks engaged in unfair acts and practices prohibited under the FTC Act when they converted from an internal core system to an external core system that affected the processing of automatic payments related to their respective awards programs.
FDIC releases seven enforcement actions for August 2024
On September 27, the FDIC released a list of eight administrative enforcement actions, like cease and desist orders or stipulated orders, taken against banks and individuals in August. The public orders comprised of seven stipulated orders and written agreements (and one termination of action); three of which assessed civil money penalties, three were removal and prohibition orders, and two were cease and desist orders.
Acting Comptroller discusses financial inclusion and Vital Signs initiative
On September 25, Acting Comptroller of the Currency Michael J. Hsu delivered remarks at the “Inclusive Finance for Development: 15 Years of Impact” event hosted by the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development. Hsu cautioned that financial inclusion alone is insufficient to uplift people noting that access to certain financial products can cause more harm than opportunity. To address this, Hsu advocated for a broader focus on financial health, which encompasses not only access to financial services but also the quality and impact of those services on individuals’ lives.
Hsu promoted the OCC’s Financial Health Vital Signs initiative, which advocated for banks to use financial health measures to assess and support customers in improving their financial health. Hsu then noted that the OCC needs stakeholders to pilot and test these ideas, because “[w]hat gets measured gets managed.”
FHFA reproposes amendments to its Suspended Counterparty Program
On September 18, the FHFA issued a second proposed rule to amend its Suspended Counterparty Program (SCP) regulation, following a review of comments on the initial proposal (covered by InfoBytes here). The SCP requires regulated entities, including Freddie Mac, Fannie Mae and the FHLBanks to report misconduct by individuals or institutions they do business with. The second proposed rule would expand the categories of covered misconduct to include the receipt of prohibition orders and civil monetary penalty orders from specific federal agencies. These changes address concerns that the initial proposal was overly broad and granted “undue discretion” to the FHFA. The proposal also included a $1 million threshold for civil money penalty orders to avoid capturing relatively minor misconduct. The FHFA invited public comments on the second proposed rule 60 days after publication to the Federal Register.
FHFA publishes credit risk management guidance
On September 27, the FHFA published Advisory Bulletin AB 2024-03 which provided guidance to FHLBanks on establishing and maintaining a member credit risk management framework. The bulletin highlighted the importance of FHLBanks’ underwriting and credit decisions being based on a member’s financial condition rather than relying on the collateral securing the member’s credit obligations. The guidance was divided into four key components to ensure sound credit risk management practices.
Credit risk governance: Requires the board of directors or a designated board-level committee to approve policies that ensure staff appropriately assess and manage member creditworthiness. The FHFA suggested these policies must emphasize that a member’s financial health and capacity to repay are the primary determinants for extending credit.
Member credit assessment: Involves a process of risk identification, measurement and methodologies to generate credit scores complemented by risk-based credit reviews. Quantitative factors for depositories should address all Uniform Financial Institutions Rating System (UFIRS) components, including, among other things, capital position, asset quality, income performance, liquidity and financial trends. Qualitative factors should include management character, corporate structure complexity, business models with concentrations in high-risk products, and industry conditions.
Monitoring credit conditions: Emphasizes that ongoing monitoring is critical to track member performance and industry conditions and allows FHLBanks to adjust ratings, mitigate risk and make informed credit decisions. Among other things, FHLBanks should monitor market indicators (e.g., member equity price volatility), changes in the market environment, changes in borrowing behavior, asset growth and regulatory examination reports. FHLBanks should periodically reevaluate its processes to ensure they remain valid as conditions change.
Oversight of “troubled members”: Outlines that all FHLBanks must have escalation policies and procedures to address risks associated with “troubled members.” The guidance also emphasized the importance of (i) coordination with prudential regulators, Federal Reserve Banks, and deposit insurers, and (ii) establishing default and failure management policies.
House Financial Services Com. scrutinizes Basel III Endgame proposal
On September 25, the U.S. House Financial Services Committee held a hearing to scrutinize the Basel III Endgame proposal, which has faced significant criticism from various stakeholders. Rep. Andy Barr (R-KY) opened the hearing by highlighting that 97 percent of the comments on the proposal were negative, with 86 percent coming from outside the banking system. He emphasized that the proposal, initially a reaction to the March 2023 bank issues, could harm mortgage markets and tax credits.
Rep. Bill Foster (D-IL) countered by recalling the 2008 financial crisis and the importance of adequate capital requirements to prevent systemic failures. He noted that the Basel III recommendations need to balance capital requirements to ensure financial stability without stifling economic growth. Foster expressed concerns about the premature nature of the hearing, given that the committee and the public had not yet seen the text of the updated proposal.
The Fed’s Vice Chair for Supervision, Michael Barr, discussed a few changes to the Basel III Endgame proposal in a speech earlier this month. As previously covered by InfoBytes, Barr focused on how the rules may no longer apply to banks with assets between $100 billion and $250 billion. Proposed revisions to the globally-systematically important bank surcharge aim to address issues such as “window dressing” and “cliff effects.”
Lawmakers and witnesses debated the adequacy of current capital requirements, the potential impact of the Basel III Endgame proposal on various sectors, and the need for a more data-driven and transparent approach to rulemaking. Concerns were raised about potential negative effects on small businesses and consumers, and the importance of maintaining U.S. competitiveness in global markets. The hearing underscored the need for a careful and measured approach to regulatory changes.
GOP Reps urge efficient review of credit-linked note transactions
On September 16, several GOP lawmakers signed a letter urging the Fed to expedite its review process for approving regulated entities’ applications for risk adjusted treatment for the direct issuance of credit-linked notes. The lawmakers emphasized that banks use credit-linked notes to diversify bank balance sheets and enhance financial resiliency and argued that use of such notes could lead to a more efficient allocation of capital, enabling banks to redeploy capital for lending activities, benefiting consumers and corporations by freeing up more capital for lending needs.
The Fed’s approval of directly issued credit-linked note transactions falls under Subpart D of Regulation Q. The Fed reviews these transactions to ensure they transfer risk and to evaluate a bank’s capital adequacy. The lawmakers stressed that an efficient review process was vital as banks prepare for increased capital requirements from the Basel III Endgame standards.
The letter urged the Fed to allocate sufficient resources to review proposed credit-linked note transactions and requested transparent timelines for reviewing and reaching final decisions on bank applications. The letter was signed by seventeen GOP representatives.
OCC highlights recent enforcement actions
On September 19, 2024, the OCC released a list of recent enforcement actions against a federal savings bank, a national bank, and an individual affiliated with a national bank (an institution-affiliated party, or IAP).
In the action against the federal savings bank, the OCC determined the bank had engaged in unsafe or unsound practices associated with strategic planning, budgeting, succession planning, liquidity risk management, and interest rate risk management. The bank’s agreement with the OCC addressing these findings requires the bank to, among others, submit a strategic plan, a succession plan, and revised program documents addressing the bank’s liquidity risk management and interest rate risk management practices. In the action against the national bank, the OCC found deficiencies with the bank’s financial crimes risk management practices and anti-money laundering internal controls and requires the bank to take comprehensive corrective actions to enhance its BSA/AML compliance program, including, among others, establishing a compliance committee and submitting an action plan. In the consent order with the IAP, the OCC found that a former associate at a national bank was involved in a scheme to steal bank funds. The order prohibits the IAP from “participat[ing] in any manner in the conduct of [federal financial institutions].”