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Fed proposes changes to its Policy on Payment System Risk governing intraday credit
On May 28, the Federal Reserve Board issued a notice and request for comments on proposed changes to its Policy on Payments System Risk (PSR Policy) to expand access to collateralized intraday credit from Federal Reserve Banks (Reserve Banks) and clarify eligibility standards for accessing uncollateralized intraday credit from the Reserve Banks. Specifically, the Fed is proposing changes to part II of its PSR Policy, which was previously revised and implemented in 2011 to “improve intraday liquidity management and payment flows for the banking system while helping to mitigate the credit exposures of the Reserve Banks from daylight overdrafts.” The proposed changes would also align the Fed’s payments system risk and overnight overdraft policies with the deployment of the FedNow Service (covered by InfoBytes here) and the Fed’s 24x7x365 payment environment. Relatedly, the Fed noted it is also proposing to incorporate its policy on overnight overdrafts into the PSR Policy. Comments on the proposed changes are due 60 days after publication in the Federal Register.
Agencies extend CRA credit period for certain disaster relief efforts
On May 27, the FDIC, OCC, and the Fed (collectively, “Agencies”) issued an interagency statement on granting a 36-month extension of the original period provided for Community Reinvestment Act (CRA) consideration for bank activities that help to revitalize or stabilize Puerto Rico and the U.S. Virgin Islands in response to Hurricane Maria. As previously covered by Infobytes, the Agencies issued an interagency statement on the availability of CRA credit for financial institution activities that “help revitalize or stabilize the U.S. Virgin Islands and Puerto Rico, which were designated as major disaster areas by the President because of Hurricane Maria” in January 2018. Provided financial institutions continue to be responsive to the community needs of their own CRA assessment areas, the Agencies will now give “favorable consideration” to community development activities, such as assistance to displaced people, in the areas impacted by Hurricane Maria. In addition, the Agencies state that they may give greater weight to activities aimed at assisting the low and moderate income affected areas, but that general consideration will be given regardless of median or personal income. The Agencies have determined that the ongoing impact of Hurricane Maria in Puerto Rico and the U.S. Virgin Islands warrants an extension through September 20, 2023.
OCC modifies exception to CIF withdrawal period extensions
On May 27, the OCC announced the publication of a final rule that adopts one change to the interim final rule published last August. As previously covered by InfoBytes, the interim final rule clarified, among other things, that under the OCC’s fiduciary activities regulation (12 CFR 9.18 (b)(5)(iii)), a bank that is administering a collective investment fund (CIF) invested “primarily in real estate or other assets that are not readily marketable” may require a prior notice period of up to one year for withdrawals. The interim final rule codified the OCC’s interpretation of the notice requirement as “requiring the bank to withdraw an account within the prior notice period or, if permissible under the CIF’s written plan, within one year after prior notice was required” (known as “the standard withdrawal period”). An exception allows banks to extend the withdrawal period (with opportunities for further extensions) under certain conditions and with OCC approval. While the final rule adopts the interim final rule’s framework, it revises one of the criteria necessary for OCC approval of an extension. Specifically, in order to qualify for an extension, a “bank must ‘represent’ rather than ‘commit’ that it will act upon the withdrawal request as soon as practicable.” The final rule took effect May 26.
FDIC releases April enforcement actions
On May 28, the FDIC released a list of administrative enforcement actions taken against banks and individuals in April. During the month, the FDIC issued 10 orders consisting of “two Orders to Pay Civil Money Penalties, one Section 19 Application, one Order Terminating Consent Order, and one Order of Prohibition from Further Participation.” Among the orders is a civil money penalty imposed against a Washington-based bank related to alleged violations of the Flood Disaster Protection Act (FDPA) for “failing to obtain adequate flood insurance on buildings and/or the buildings’ contents securing designated loans at the time the Bank made, increased, extended, or renewed the loans.” The order requires the payment of a $17,000 civil money penalty.
The FDIC also imposed a civil money penalty against a California-based bank related to alleged violations of the FDPA. Among other things, the FDIC claims that the bank (i) failed to notify the borrower to obtain flood insurance; and (ii) failed to purchase flood insurance on the borrower’s behalf. The order requires the payment of a $281,000 civil money penalty.
OCC to host compliance risk management workshops
On May 26, the OCC announced a series of examiner-led virtual workshops for the boards of directors of community national banks and federal savings associations. The workshops will focus on emerging issues regarding compliance risk, and will provide training and guidance on implementing effective compliance risk management programs, as well as guidance on regulations such as the Bank Secrecy Act and ECOA. A schedule of the upcoming workshops is available here.
Senate launches Financial Innovation Caucus
On May 25, Senators Cynthia Lummis (R-WY) and Kyrsten Sinema (D-AZ), along with several other bipartisan Senators, announced the creation of the U.S. Senate Financial Innovation Caucus to highlight “responsible innovation in the United States financial system, and how financial technologies can improve markets to be more inclusive, safe and prosperous for all Americans.” The Senate will use the caucus “to discuss domestic and global financial technology issues, and to launch legislation to empower innovators, protect consumers and guide regulators, while driving U.S. financial leadership on the international stage.” The press release notes that the caucus is timely because of the “growing regulatory focus on digital assets,” which includes efforts by the Federal Reserve Board, SEC, and other foreign governments to create digital currencies. The caucus will focus on critical issues pertaining to the future of banking and U.S. competitiveness on the global stage, including: (i) distributed ledger technology (blockchain); (ii) artificial intelligence and machine learning; (iii) data management; (iv) consumer protection; (v) anti-money laundering; (vi) faster payments; (vii) central bank digital currencies; and (viii) financial inclusion and opportunity for all.
Fed approves establishment of federally-licensed branch of Dutch payment company
On May 24, the Federal Reserve Board announced its approval of the application of a Dutch- based payment company to establish a federally-licensed branch in San Francisco. According to the order, since the company currently does not have a U.S. banking presence, its U.S. payment processing business will rely on third-party banks. Upon establishment of the San Francisco branch, the company’s operations would be transferred to the branch, and it would be eligible to engage in a wide range of payments processing and related banking activities in the U.S., thus reducing its dependence on third-party banks. Through the establishment of the branch, “the company proposes to bring its U.S. activities and operations in line with those conducted under its European Central Bank (ECB) license,” the Fed noted. The order also pointed out that “managerial and other financial resources of the company are considered consistent with approval, and the company appears to have the experience and capacity to support the proposed branch.” In addition, the company has initiated controls and procedures for its proposed branch to guarantee compliance with U.S. law and for its operations in general.
U.S.-UK financial regulators discuss bilateral issues
On May 24, the U.S. Treasury Department issued a joint statement covering the recently held fourth meeting of the U.S.-UK Financial Regulatory Working Group (Working Group). Participants included officials and senior staff from both countries’ treasury departments, as well as regulatory agencies including the Federal Reserve Board, CFTC, FDIC, OCC, SEC, the Bank of England, and the Financial Conduct Authority. The Working Group discussed, among other things, (i) financial sector implications of the UK’s withdrawal from the EU; (ii) “cooperative efforts to promote the free flow of cross-border financial services data crucial for effective financial sector regulation and supervision”; (iii) regulatory fragmentation and data localization risks; (iv) the Financial Stability Board’s work on non-bank financial intermediation, which involves active engagement from both U.S. and UK authorities; and (v) the management of climate-related financial risks and other sustainable finance issues. Working Group participants will continue to engage bilaterally on these issues and others ahead of the next meeting planned for this fall.
FDIC counters states’ challenge to “valid-when made” rule
On May 20, the FDIC filed a motion for summary judgment in response to a challenge brought by eight state attorneys general to the FDIC’s valid-when-made rule. As previously covered by InfoBytes, the FDIC’s final rule clarifies that, under the Federal Deposit Insurance Act (FDIA), whether interest on a loan is permissible is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan. The AGs filed a lawsuit last year (covered by InfoBytes here) arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that while the FDIC has the power to issue “‘regulations to carry out’ the provisions of the FDIA,” it cannot issue regulations that would apply to nonbanks. The AGs also claimed that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling ‘rent-a-bank’ schemes,” and that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans.”
The FDIC countered that the AGs’ arguments “misconstrue” the rule, which “does not regulate non-banks, does not interpret state law, and does not preempt state law.” Rather, the FDIC argued that the rule clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority. “The rule, which enjoys widespread support from the banking industry, represents a reasonable interpretation of [the FDIA], and should be upheld under Chevron’s familiar two-step framework,” the FDIC stated. Moreover, the FDIC contended, among other things, that the rule is appropriate because the FDIA does not address at what point in time the validity of a loan’s interest rate should be determined and is “silent” about what effect a loan’s transfer has on the validity of the interest rate. The FDIC also challenged the AGs’ argument that it is improperly trying to regulate non-banks, pointing out that the rule “regulates the conduct and rights of banks when they sell, assign, or transfer loans” and that “any indirect effects the rule has on non-banks do[es] not place the rule outside the agency’s authority.”
Brainard provides update on central bank-issued digital currencies
On May 24, Federal Reserve Governor Lael Brainard spoke at the Consensus by CoinDesk 2021 Conference about the Fed’s exploration of central bank digital currencies (CBDCs) and cross-border payments. Brainard noted that a CBDC may address concerns regarding the lack of federal deposit insurance and banking supervision for nonbank issuers of digital assets, and that “new forms of private money may introduce counterparty risk into the payments system in new ways that could lead to consumer protection threats or, at large scale, broader financial stability risks.” She highlighted that “introducing a safe and accessible central bank money to households and businesses in digital payments systems. . .would reduce counterparty risk and the associated consumer protection and financial stability risks.” Brainard noted that a Fed-backed digital currency could cause payment transactions to be cheaper, faster, and more efficient by improving processes for sending and receiving money internationally, encouraging private-sector competition in retail payments, and increasing financial inclusion.
Brainard discussed how CBDCs could affect central banks’ ability to manage the economy, saying a digital dollar would need to be designed with safeguards to “protect against disintermediation of banks and to preserve monetary policy transmission more broadly.” She cautioned that the design should complement, not replace, existing currency and bank deposits and emphasized the need for regulators to work together “to ensure that banks are appropriately identifying, monitoring, and managing risks associated with digital assets.”
As previously covered by InfoBytes, last week Chairman Jerome Powell stated that an important step in engaging the public about CBDCs involves “publishing [a] paper this summer to lay out the Fed’s current thinking on digital payments, with a particular focus on the benefits and risks associated with CBDC in the U.S. context.”