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Financial Services Law Insights and Observations


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  • Regulators address concerns at Senate Banking Committee hearing, receive written concerns regarding Basel III

    Federal Issues

    On November 14, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing where regulators, Fed Vice Chair for Supervision Michael Barr, FDIC Chair Martin Gruenberg, NCUA Chair Todd Harper, and acting Comptroller of Currency Michael Hsu, testified regarding the Basel III Endgame proposal. Gruenberg’s prepared remarks noted that Basel III reforms are a “continuation of the federal banking agencies’ efforts to revise the regulatory capital framework for our nation’s largest financial institutions, which were found to be undercapitalized and over-leveraged during the Global Financial Crisis of 2008.” The proposal would raise capital requirements for large banks (covered by InfoBytes here).

    Concerning Basel III, Senator Tester (D-MO) mentioned he has “some concerns about the proposed changes and how its impact will be on workers’ and households’ and small businesses’ access to credit and overall vibrancy of our capital markets.” “These rules don’t affect any banks in Montana, but they do affect the big guys that affect Montana,” he noted.

    Among other testimonies, Senator Warner (D-VA) expressed concerns regarding the timeline of the comment period and potential changes to the proposal. Specifically, Sen. Warner mentioned that comments may not be received until after the rule is close to finalization. Fed Vice Chair Barr noted that the regulators have yet to evaluate comments on the proposal, as most are expected to come through mid-January, and that depending on the substance of some comments, they are open to making appropriate changes to the proposal. Acting Comptroller of the Currency Hsu’s written testimony echoed Barr’s remarks, stating “[w]e will consider all comments, including alternative approaches.”

    Moreover, on November 12, a group of Republican lawmakers of the committee also sent a letter to the OCC, FDIC, and the Fed. In the letter, the senators argued that the proposal would restrict billions of dollars in capital, resulting in costlier and more limited access to credit for millions of consumers, impacting affordable housing, mortgage lending, small business lending, and consumer access to credit cards and home equity lines. The proposal was also criticized for its potential to disadvantage U.S. companies globally and harm middle-market private entities and small businesses. Moreover, the letter suggested that the proposal could negatively impact pension funds, increase fees for risk hedging, and decrease returns for retirees.

    Also on November 12, several banking industry groups sent a letter to the Fed, FDIC, and the OCC requesting them to issue a revised proposal. The letter alleges violations of the Administrative Procedures Act because the data used to inform the interagency proposal is not publicly available. The groups also argued that the proposed rule repeatedly utilizes non-public analyses based on the agencies’ “supervisory experience” to support different aspects of the rule. Regarding sensitive data, the groups say, “Nothing prevents the agencies from releasing such data and analyses in a manner that is anonymized or aggregated to the extent necessary to protect bank or other party confidentiality.” The senators also believe the proposal would impose “significant harm” throughout the economy “particularly in the face of current economic headwinds and tightening credit conditions.”

    Federal Issues OCC FDIC Federal Reserve Bank Supervision Capital Requirements Consumer Finance CRA Administrative Procedures Act

  • Request for GAO examination of agencies’ role in Basel III endgame proposal

    Federal Issues

    The Chairman of the Financial Services Committee, Patrick McHenry (R-NC), and Representative Andy Barr (R-KY), Chairman of the Subcommittee on Financial Institutions and Monetary Policy, sent a letter to the U.S. Government Accountability Office (GAO) requesting the GAO to “examine the role U.S. federal banking agencies played in work at the Basel Committee on Banking Supervision to develop the recent Basel III Endgame proposal, which calls for massive increases in capital requirements for already well-capitalized U.S. financial institutions.”

    As previously covered by InfoBytes, the federal banking agencies issued a notice of proposed rulemaking that would substantially revise the capital requirements of large U.S. banking organizations. According to the letter, Congress has very little insight into the basis of such policy changes that “would fundamentally change the policy of the U.S. banking system.”

    The letter requests the GAO to evaluate each federal banking agency’s participation in the development of Basel III Endgame. GAO’s evaluation should include: (i) a summary of each material proposal submitted by a federal banking agency to the Basel Committee; and (ii) a summary of concerns raised by a federal banking agency with respect to a consultative document or other proposal considered by the Basel Committee.

    Further, the letter requests the GAO prioritize each proposal or concern from the federal banking agencies related to:

    • Any proposals or concerns from the federal banking agencies that did not receive a fulsome response by the Basel Committee.
    • Any evidence or rationale supporting the requirement that a “corporate entity (or parent) must have securities outstanding on a recognized securities exchange for an exposure to that entity (or parent) to be eligible for the reduced risk weight for investment-grade corporate exposures;”
    • The absence of a tailored approach to “high-fee revenue banks under the Basel III Endgame business-indicator approach to operational risk capital”;
    • The calibration of the “scaling factor, multiplier, dampener, and other coefficients for that business-indicator approach”; and
    • The calibration of the “correlation factors and the profit-and-loss attribution test thresholds for the models-based measure of market risk capital.”

    Federal Issues GAO Congress Capital Requirements FDIC OCC Compliance Basel Committee

  • Agencies extend comment period on proposed rules to strengthen large bank capital requirements

    On October 20, the Fed issued a joint press release with the FDIC and the OCC announcing the extension of the comment period on proposed rules to expand large bank capital requirements. Earlier this year, the agencies announced the proposed rule which would implement the final components of the Basel III Agreement. The components would revise capital requirements for large banking organizations, among other things. (Covered by InfoBytes here.) Adding an additional six weeks (from the original 120-day comment period set to expire on November 30), the new comment period deadline is by January 16, 2024.

    Bank Regulatory Agency Rule-Making & Guidance Federal Issues Federal Reserve FDIC OCC Capital Requirements Compliance Basel Committee

  • Agencies issue final rule to modernize Community Reinvestment Act regulations

    Agency Rule-Making & Guidance

    On October 24, the Fed, FDIC, and OCC issued an interagency announcement regarding the modernization of their rules under the Community Reinvestment Act (CRA), a law enacted in 1977 to encourage banks to help meet the credit needs of their communities, especially low- and moderate-income (LMI) neighborhoods, in a safe and sound manner. The new rule overhauls the existing regulatory scheme that was first implemented in the mid-1990s.

    For banks with assets of at least $2 billion (Large Banks), the final rule adds a new category of assessment area to the existing facility based assessment area (FBAA). Large Banks that do more than 20 percent of their CRA-related lending outside their FBAAs will have that lending evaluated in retail lending assessment areas, i.e., MSAs or states where it originated at least 150 closed-end home mortgage loans or 400 small business loans in both of the previous two years. All Large Banks will be subject to two new lending and two new community development tests, with lending and community development activities each counting for half a bank’s overall CRA rating. Banks with assets between $600 million and $2 billion will be subject to a new lending test. Large Banks with assets greater than $10 billion will also have special reporting requirements.

    Additionally, the rule (i) implements a standardized scoring system for performance ratings; (ii) revises community development definitions and creates a list of community development activities eligible for CRA consideration, regardless of location; (iii) permits regulators to evaluate “impact and responsiveness factors” of community development activities; (iii) continues to make strategic plans available as an alternative option for evaluation; (iv) revises the definition of limited purpose bank so that it includes both existing limited purpose and wholesale banks and subjects those banks to a new community development financing test; and (v) considers online banking in the bank’s evaluations.

    Most of the rule’s requirements will be effective January 1, 2026. The remaining requirements, including the data reporting requirements, will apply on January 1, 2027.

    Agency Rule-Making & Guidance Federal Issues OCC Federal Reserve CRA Supervision Capital Requirements Consumer Finance Redlining

  • EBA report recommends environmental and social risk enhancements for financial sector

    On October 12, the European Banking Authority (EBA) announced the publication of a report on the role of environmental and social risks in the prudential framework of credit institutions and investment firms. The report recommends risk-based enhancements to the risk categories of the Pillar 1 framework, which sets capital requirements, noting that environmental and social risks are “changing the risk picture for the financial sector” and are expected to be more prominent over time. The report puts forward recommendations for actions over the next three years as part of the revised capital requirements regulations. Specifically, the EBA is proposing to: (i) include environmental risks as part of stress testing programs; (ii) encourage the inclusion of environmental and social factors as part of external credit assessments by credit rating agencies; (iii) encourage the inclusion of environmental and social factors as part of due diligence requirements and valuation of immovable property collateral; (iv) require institutions to identify whether environmental and social factors constitute triggers of operational risk losses; and (v) develop environment-related concentration risk metrics as part of supervisory reporting. With respect to revisions to the Pillar 1 framework, the report proposes: (i) the possible use of scenario analysis to enhance the forward-looking elements of the prudential framework; (ii) changes to the role that transition plans could play in the future; (iii) reassessing the appropriateness of revising the internal ratings-based supervisory formula and the corresponding standardized approach for credit risk to better reflect environmental risk elements; and (iv) the introduction of environment-related concentration risk metrics under the Pillar 1 framework.

    Bank Regulatory EU Of Interest to Non-US Persons ESG Capital Requirements Stress Test

  • Fed finalizes rule establishing capital requirements for supervised insurers

    Federal Issues

    On October 6, the Fed approved a final rule to implement a rule establishing capital requirements for insurers it supervises. The final rule includes the Building Block Approach (BBA) framework, which is a regulatory framework for assessing capital requirements for insurance companies, tailored to their specific risks by leveraging state-based requirements. It sets a minimum standard comparable to the 8 percent minimum total capital ratio for insured depository institutions (IDIs).

    Specifically, the rule requires a Fed-supervised insurance organization (SIO) to aggregate the available capital and required capital of its top-tier company with its subsidiaries to determine whether the aggregate ratio meets the Board’s minimum requirement and “capital conservation buffer.” Among other things, the final rule gives SIOs two options to show compliance with Section 171(b) of Dodd-Frank: (i) demonstrate that it meets, on a fully consolidated basis, the minimum risk-based capital requirements that apply to IDIs; or (ii) demonstrate that it meets the minimum IDI risk-based capital requirements on a partially consolidated basis, excluding the assets and liabilities of certain subsidiary insurers. Should SIOs choose the second option, there are two possible treatments for unconsolidated insurance subsidiaries: (i) “a deduction from qualifying capital of the aggregate amount of the outstanding equity investment in the subsidiary, including retained earnings”; or (ii) “inclusion of the net investment in the subsidiary as an asset subject to a risk weight of 400 percent, consistent with the current treatment of certain equity exposures under the regulatory capital rules applicable to IDIs.”

    Governor Michelle Bowman commented that although she supports the final rule, she cannot support the delegation of authority to staff within the current package. Concerned that the package grants broad authority to staff to make various determinations regarding the rule’s application, Bowman argues that the Board should have the opportunity to review specific cases where such authority would be exercised and suggests that it would be more appropriate to establish clear guidelines for the use of delegated authority in the context of actual determinations.

    The Fed noted that the final rule is “substantially similar” to the 2019 proposed rule. The final rule is effective on January 1, 2024.

    Federal Issues Agency Rule-Making & Guidance Federal Reserve Supervision Capital Requirements

  • Warren urges Fed to finalize capital requirements for large banks

    Federal Issues

    On August 29, Senator Elizabeth Warren (D-MA) sent a letter to the Fed regarding its recent notice of proposed rulemaking, urging them to “finalize the rules as quickly as possible.” In July, the Fed announced amendments to the regulatory capital requirements for large banking organizations that would implement the final components of the Basel III agreement (previously covered by InfoBytes here). Warren noted that she is concerned about the Fed’s intent to seek potential modifications as it could result in weakening the proposed rule. Warren also warned that big bank lobbyists has been “engaging in a full-court press to fend off higher capital requirements” before the release of the proposed rule, and that big banks lobbying expenditures were up 20 percent compared to the same period of time in the previous year, indicating a “clear effort to fend off stronger rules” following recent bank failures. The senator finally noted that the capital bank requirements are a threat to bank’s “massive payouts for executives and shareholders.”

    Federal Issues Federal Reserve U.S. Senate Basel Committee Compliance Capital Requirements

  • Agencies propose new capital requirements for biggest banks

    On July 27, the FDIC’s Board of Directors unveiled proposed interagency amendments to the regulatory capital requirements for the largest and most complex banks in the United States. The notice of proposed rulemaking (NPRM), issued jointly by the FDIC, OCC, and the Federal Reserve Board (and passed by an FDIC Board vote of 3-2 and a Fed vote of 4-2), would revise capital requirements for large banking organizations with at least $100 billion in assets, as well as certain banking organizations with significant trading activity. (See also FDIC fact sheet here.) The proposed changes would implement the final components of the Basel III agreement—recent changes made to international capital standards issued by the Basel Committee on Banking Supervision—as well as modifications made in response to recent bank failures in March, the agencies said.

    Specifically, the NPRM would implement standardized approaches for market risk and credit valuation adjustment risk by amending the way banks calculate their risk-weighted assets. According to FDIC FIL-38-2023, the new “expanded risk-based approach” would incorporate a standardized approach for credit risk and operational risk, a revised internal models-based approach, a new standardized measure for market risk, and a new revised approach for credit valuation adjustment. Banks subject to Category III and IV standards would also be required “to calculate their regulatory capital in the same manner as banking organizations subject to Category I and II standards, including the treatment of accumulated other comprehensive income, capital deductions, and rules for minority interest.” Additionally, the supplementary leverage ratio and the countercyclical capital buffer would be applied to banks subject to Category IV standards.

    The agencies said the proposed modifications are intended to:

    • Better reflect banks’ underlying risks;
    • Increase transparency and consistency by revising the capital framework in four main areas: credit, market, operational, and credit valuation adjustment risk;
    • Strengthen the banking system, by applying consistent capital requirements across large banks by requiring institutions to (i) include unrealized gains and losses from certain securities in capital ratios; (ii) comply with the supplementary leverage ratio requirement; and (iii) comply with the countercyclical capital buffer, if activated.

    The agencies predict that these changes will “result in an aggregate 16 percent increase in common equity tier 1 capital requirements for affected bank holding companies, with the increase principally affecting the largest and most complex banks.” The impact would vary by bank based on activities and risk profiles, the agencies stated, noting that most banks currently have enough capital to meet the proposed requirements. The NPRM would not amend capital requirements for smaller, less complex banks or for community banks. The agencies propose a three-year phased-in transition process beginning July 1, 2025, to provide banks sufficient time to accommodate the changes and minimize potentially adverse impacts. The changes would be fully phased in on July 1, 2028.

    Separately, the Fed also issued an NPRM on a proposal that would modify certain provisions relating to the calculation of the capital surcharge for the largest and most complex banks in order to “better align the surcharge to each bank’s systemic risk profile. . .by measuring a bank’s systemic importance averaged over the entire year, instead of only at the year-end value.”

    Comments on both NPRMs are due November 30.

    FDIC Chairman Martin Gruenberg stressed that “[e]nhanced resilience of the banking sector supports more stable lending through the economic cycle and diminishes the likelihood of financial crises and their associated costs.” Also voting in favor of the NPRM was CFPB Chairman and FDIC Board Member Rohit Chopra who expressed interest in feedback from the public on ways to simplify the methodologies used to calculate the requirements. Acting Comptroller of the Currency Michael also voted in favor and encouraged commenters “to include assumptions about capital distributions and competition from banks and other financial institutions in their analyses of the impacts of the proposal on lending and economic growth.”

    Voting against the new standards, FDIC Vice Chairman Travis Hill argued that while he supports strong capital requirements, he has several “concerns with the impact of excessive gold plating of international standards.” He stressed that the “proposal rejects the notion of capital neutrality and takes a starkly different path, ‘gold plating’ the new Basel standard in a number of ways and dramatically increasing capital requirements for banks with certain business models.”

    Bank Regulatory Agency Rule-Making & Guidance Federal Issues Federal Reserve FDIC OCC Capital Requirements Compliance Basel Committee

  • Fed announces individual capital requirements for all large banks

    On August 4, the Federal Reserve Board announced the individual capital requirements for all large banks, which are in part determined by the Board’s stress test results that provide a risk-sensitive and forward-looking assessment of capital needs. According to the Fed, the total common equity tier 1 (CETI) capital requirement for each bank is made up of several components, including a minimum CET1 capital requirement for all banks of 4.5 percent; a stress capital buffer that is determined from the supervisory stress test results and is at least 2.5 percent; and, if applicable, a capital surcharge for global systemically important banks (G-SIB) of at least 1 percent. The requirements are effective October 1.

    Bank Regulatory Federal Issues Federal Reserve Capital Requirements

  • FHFA seeks comments on regulatory capital framework

    Agency Rule-Making & Guidance

    On September 15, FHFA issued a notice requesting public comment on a proposed rule that would amend the regulatory capital framework for Fannie Mae and Freddie Mac (collectively, “GSEs”). The proposed rule would amend the prescribed leverage buffer amount (PLBA) and the capital treatment of credit risk transfers (CRT) to encourage more distribution of credit risk between the GSEs and private investors. Specifically, FHFA is proposing to: (i) change the fixed PLBA equal to 1.5 percent of a GSE’s adjusted total assets to a dynamic PLBA of 50 percent of the GSE’s stability capital buffer; (ii) “replace the prudential floor of 10 percent on the risk weight assigned to any retained CRT exposure with a prudential floor of 5 percent on the risk weight assigned to any retained CRT exposure”; and (iii) eliminate the requirement that a GSE is required to apply an overall effectiveness adjustment to its retained CRT exposures in line with the framework’s securitization framework. Comments on the proposal must be submitted within 60 days of publication in the Federal Register.

    Agency Rule-Making & Guidance FHFA Fannie Mae Freddie Mac GSE Capital Requirements Federal Register


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