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Financial Services Law Insights and Observations


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  • FDIC issues QBP for 3Q 2023

    On November 29, the FDIC released the Third Quarter 2023 Quarterly Banking Profile for FDIC-insured community banks, reporting an aggregate net income of $68.4 billion in the third quarter of 2023, which is down $2.4 billion (3.4 percent) from the previous quarter. The FDIC said higher realized losses on securities and lower noninterest income were among the causes of the decreased net income for the quarter. The FDIC emphasized, among other things, that the banking industry is still facing significant effects from current economic conditions, especially regarding commercial real estate values and other downside risks. According to the remarks provided by FDIC Chairman Gruenberg, such issues will remain areas of attention by the FDIC.

    Bank Regulatory Federal Issues FDIC Community Banks

  • OCC releases strategic plan

    On September 6, the OCC released its draft FY 2023-2027 strategic plan, which focuses on “the agency’s approach to achieve three strategic goals and fulfill its mission to ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.” The OCC noted that it will invest in its people, operations, processes, and technology to meet strategic goals for FY 2023-2027 that focus on (i) agility and learning; (ii) credibility and trust; and (iii) leading on supervision in an evolving banking system. Other priorities outlined in the strategic plan include promoting an organizational culture that seeks workforce diversity inclusive of thought, experiences, and knowledge, bringing multiple perspectives on issues, and enhancing an adaptive mindset and culture of continuous learning. The OCC noted that the strategic plan will promote the strengthening and modernizing of community banks, with a focus on small businesses and underserved communities. In particular, the plan directs the agency to develop guidance and outreach to facilitate community banks’ digital transition, minimize the regulatory burden on banks as much as possible, and facilitate de novo community bank activity to reach unbanked and underbanked customers.

    Bank Regulatory Federal Issues OCC Community Banks

  • Hsu discusses challenges facing community banks

    On September 1, acting Comptroller of the Currency Michael J. Hsu delivered remarks before the Texas Bankers Association in Dallas focusing on the importance of community banks and the challenges and opportunities of digitalization. In his remarks, Hsu emphasized the OCC’s commitment to community banks, noting that more than 85 percent of the charters that the OCC supervises are community banks, which total nearly 900 individual institutions. He said that the OCC seeks to support community banks in five areas: (i) assessments; (ii) de novo licensing; (iii) risk-based supervision; (iv) local presence and national perspective; and (v) regulation. In particular, Hsu said the OCC is working to provide increased support for community banks by streamlining the licensing process for de novo banks and updating its approach to risk-based supervision. Hsu noted that the recent reduction in assessments is part of an effort by regulators to encourage community banks to invest in digital technologies. He stated that his “experiences in the 2008 financial crisis taught [him] about the disastrous consequences that can result from an unlevel playing field where regulatory arbitrage and races to the bottom are allowed to fester.” He added that while he has been at the OCC, the agency has been “requiring fintechs seeking a bank charter to be subject to the same requirements as all national banks and we are engaging with our peer agencies to limit regulatory arbitrage.” Hsu also noted that in order to “level the playing field,” the OCC will make a 40 percent reduction in assessment fees on a bank's first $200 million in assets and a 20 percent reduction on bank assets between $200 million and $20 billion. Hsu said that the cuts will result in a $41.3 million reduction in assessments for community banks in 2023. Hsu explained that “[t]he purpose of this adjustment is to level the playing field with the cost of supervision compared to state community bank charters, and that “[t]he recalibration will not reduce the quality of OCC supervision or the resources available to community banks.” Hsu mentioned that he is “hopeful” that the reduction gives community banks “extra breathing space and capacity to invest and seize opportunities related to digitalization, compliance, cybersecurity, and personnel.”

    Bank Regulatory Federal Issues OCC Community Banks Assessments Fintech Digitalization

  • FDIC issues QBP for 1Q 2022

    On July 21, the FDIC released FDIC Quarterly, 2022, Volume 16, Number 3, which analyzes loan performance at community banks in five manufacturing-concentrated states: Indiana, Kentucky, Louisiana, Michigan and Wisconsin. The featured article, Community Bank Performance in Manufacturing-Concentrated States, noted that community banks in these states support their local economies “through a higher share of commercial loans relative to community banks in other states,” including commercial and industrial loans, commercial real estate loans, and construction and development loans. The FDIC also noted that “the manufacturing industry is sensitive to business cycles and recessions, which has direct implications on community banks and has weighed on their profitability through both direct credit exposure to manufacturing firms and indirectly through the manufacturing industry’s impact on the local economy.” Though the agency acknowledged that the manufacturing sector recovered more quickly than expected from the Covid-19 pandemic, credit risks remain for banks in manufacturing-heavy states. The Quarterly further stated that “[t]he manufacturing industry remains susceptible to the risks of plant closure due to the evolving nature of the pandemic, or relocation of firms due to global market pressures as production and demand normalize.”

    Bank Regulatory FDIC Community Banks Federal Issues Fintech

  • Chopra offers warning on core service providers

    Federal Issues

    On April 7, CFPB Director Rohit Chopra expressed concerns that “contracts written by the major core services providers are making it harder for local financial institutions to switch providers or use add-ons from outside technology providers.” In remarks to the CFPB’s Community Bank and Credit Union Advisory Councils, Chopra discussed downstream effects created by the heavily consolidated core services provider market on relationship banking and consumers. Chopra explained that these contracts “come with costly and unnecessary extra non-core banking services, longer contract periods, and stiff penalties and fees for ending contracts early or making other contract changes,” discourage smaller financial institutions from quickly adapting their own products and services to fit within the ever-evolving banking tech landscape, and overall make it more difficult for smaller financial institutions to compete with larger companies. Chopra announced that Bureau staff will work with core service providers and other federal agencies to examine the concentrated core platform marketplace’s impact on consumers and banks, and respond to questions related to banks’ collective bargaining on core services’ contracts. The Bureau also plans to collaborate with other agencies to examine third-party service providers and the potential referral of complaints.

    Federal Issues CFPB Community Banks Credit Union Third-Party Service Providers Consumer Finance

  • FDIC issues 2021 annual report

    On February 17, the FDIC released its 2021 Annual Report, providing an overview of the agency’s goals and agenda over the past year, and describing the financial health of the agency, its funds, and insured financial institutions. The report highlighted areas of focus for the FDIC over the past year, such as:

    • Financial inclusion. According to the report, the FDIC “has seen meaningful improvements in recent years in reaching the ‘last mile’ of unbanked households in this country. Based on the results of our biennial survey of households, the proportion of U.S. households that were banked in 2019 – 94.6 percent – was the highest since the survey began in 2009.” The report noted several FDIC-led initiatives related to inclusive banking. In June 2021, the FDIC’s technology lab, FDiTechannounced a tech sprint, Breaking Down Barriers: Reaching the Last Mile of Unbanked U.S. Households, which challenged participants to “explore new technologies and techniques that would help expand the capabilities of banks to meet the needs of unbanked individuals and households.” (Covered by InfoBytes here.) The FDIC also expanded its #GetBanked public awareness campaign into the Los Angeles, Dallas, and Detroit metropolitan areas in continuation of the agency’s efforts to increase financial inclusion to the unbanked population. (Covered by InfoBytes here.)
    • Mission-Driven Banks. According to the report, the FDIC increased Minority Depository Institutions (MDI) representation on the agency’s Community Bank Advisory Committee (CBAC), which “established a new MDI subcommittee of the CBAC to highlight the work of MDIs in their communities and to provide a platform for MDIs to exchange best practices, and enabled MDIs to review potential purchases of a failing MDI before non-MDI institutions are given this opportunity.” As previously covered by InfoBytes, these efforts were incorporated in a Statement of Policy.
    • Competitiveness of Community Banking. According to the report, the FDIC held a “rapid phased prototyping competition” where more than 30 technology firms were invited to participate in the competition "to develop tools for providing more timely and granular data to the FDIC on the health of the banking sector while also making such reporting less burdensome for banks. Of those 30 firms, we asked four participants to move forward in the competition by proposing a proof of concept for their technologies – either independently or jointly.” The FDIC also facilitated the development of “a public/private standard-development organization to establish standards for due diligence of vendors and for the technologies they develop.”
    • Deposit Insurance Fund (DIF). According to the report, the DIF balance increased to a record $123.1 billion in 2021–a $5.2 billion increase from the year-end 2020 balance. No insured financial institutions failed in 2021 and “contingent liability for anticipated failures declined to $20.8 million as of December 31, 2021, compared to $78.9 million as of December 31, 2020.”

    Bank Regulatory Federal Issues FDIC Minority Depository Institution Diversity Community Banks Deposit Insurance

  • FFIEC issues final update for Examination Modernization Project

    On January 21, the Federal Financial Institutions Examination Council (FFIEC) issued a statement presenting the results of the final phase of its Examination Modernization Project. The project, which was initiated to identify and assess measures to improve the community bank safety and soundness examination process, sought feedback on examination processes from select supervised institutions and examiners. FFIEC released previous project updates, which focused on meaningful supervisory burden reduction and tailoring examination plans and procedures based on risk (covered by InfoBytes here). The final phase addressed feedback related to examination requests and authentication requirements for FFIEC members’ supervision systems. Identified best practices include that: (i) information requests should be risk-focused and relevant to an examination; (ii) supervised institutions should be allowed sufficient time to produce requested information; (iii) examiners should coordinate information requests among the exam team to avoid duplication and redundancy; (iv) requests should be made through an institution’s designated regulatory examination point-of-contact; and (v) requests should be clearly articulated in writing. With respect to feedback received related to authentication requirements, FFIEC noted that its Task Force on Supervision has approved a common authentication solution to allow member agencies and supervised institutions “to securely authenticate to supervision systems, while eliminating the need for multiple credentials to access regulator systems.”

    Bank Regulatory Federal Issues Agency Rule-Making & Guidance FFIEC Examination Community Banks Supervision

  • Agencies release statement on the community bank leverage ratio framework

    On December 21, the Federal Reserve Board, the OCC, and the FDIC released an interagency statement regarding the optional community bank leverage ratio (CBLR) framework. According to the announcement, temporary relief measures affecting the framework are set to expire on December 31, 2021, and the CBLR requirement will revert to greater than 9 percent, as established under the 2019 final rule, starting January 1, 2022. The announcement further noted that “[t]he community bank leverage ratio framework includes a two-quarter grace period that allows a qualifying community bank to continue reporting under the framework and be considered ‘well capitalized’ as long as its leverage ratio falls no more than 1 percentage point below the applicable community bank leverage ratio requirement.” Other highlights of the announcement include, among other things: (i) if a banking organization elects the CBLR framework when submitting its March 31, 2022 Call Report, it will be subject to the greater than 9 percent CBLR requirement and must utilize total consolidated assets as of the report date to determine eligibility; and (ii) starting January 1, 2022, “a banking organization in the CBLR framework must report a leverage ratio greater than 8 percent to use the two-quarter grace period.”

    Bank Regulatory Federal Reserve OCC FDIC Community Banks CBLR

  • OCC warns of key cybersecurity and climate-related banking risks

    Agency Rule-Making & Guidance

    On December 6, the OCC reported in its Semiannual Risk Perspective for Fall 2021 the key issues facing national banks and federal savings associations and the effects of Covid-19 on the federal banking industry. The agency reported that although banks showed resilience in the current environment with satisfactory credit quality and strong earnings, weak loan demand and low net interest margins continue to affect performance.

    The OCC identified elevated operational risk as banks continue to face increasingly complex cyberattacks, pointing to an increase in ransomware attacks across financial services. While innovation and technological advances can help counter such risks, the OCC warned they also come with additional concerns given the expansion of remote financial services offered through personally owned computers and mobile devices, remote work options due to the Covid-19 pandemic, and the reliance on third-party providers and cloud-based environments. “The adoption of innovative technologies to facilitate financial services can offer many benefits to both banks and their customers,” the report stated. “However, innovation may present risks. Risk management and control environments should keep pace with innovation and emerging trends and a comprehensive understanding of risk should be achieved to preserve effective controls. Examiners will continue to assess how banks are managing risks related to changes in operating environments driven by innovative products, services, and delivery channels.”

    The report calls on banks to “adopt robust threat and vulnerability monitoring processes and implement stringent and adaptive security measures such as multi-factor authentication or equivalent controls” to mitigate against cyber risks, adding that critical systems and records must be backed up and stored in “immutable formats that are isolated from ransomware or other destructive malware attacks.”

    The report further highlighted heightened compliance risks associated with the changing environment where banks serve consumers in the end stages of various assistance programs, such as the CARES Act’s PPP program and federal, state, and bank-initiated forbearance and deferred payment programs, which create “increased compliance responsibilities, high transaction volumes, and new types of fraud.”

    The report also discussed credit risks, strategic risk challenges facing community banks, and climate-related financial risks. The OCC stated it intends to request comments on its yet-to-be-published climate risk management framework for large banks (covered by InfoBytes here) and will “develop more detailed expectations by risk area” in 2022.

    Agency Rule-Making & Guidance Federal Issues OCC Bank Regulatory Covid-19 Risk Management Community Banks Climate-Related Financial Risks Privacy/Cyber Risk & Data Security Third-Party Risk Management

  • FDIC finalizes rule amending real estate lending

    Agency Rule-Making & Guidance

    On October 22, the FDIC adopted a final rule amending the Interagency Guidelines for Real Estate Lending Policies to include consideration of the capital framework established in the community bank leverage ratio (CBLR) rule into the method of calculating the ratio of loans in excess of the supervisory loan-to-value limits (LTV limits), which applies to all FDIC-supervised financial institutions. As previously covered by InfoBytes, the FDIC issued the proposed rule to amend the Interagency Guidelines for Real Estate Lending Policies in June by proposing to establish supervisory LTV criteria for certain real estate lending transaction types and allowing exceptions to the supervisory LTV limits. Among other things, the final rule: (i) “revises the Appendix so that all FDIC-supervised institutions calculate the ratio of loans in excess of the supervisory LTV limits using tier 1 capital plus the appropriate allowance for credit losses in the denominator, regardless of an institution’s CBLR election status”; and (ii) “provides a consistent approach for calculating the ratio of loans in excess of the supervisory LTV limits at all FDIC-supervised institutions,” and “would approximate the historical methodology . . . for calculating the ratio of loans in excess of the supervisory LTV limits.” The final rule is effective 30 days after publication in the Federal Register.

    Agency Rule-Making & Guidance FDIC Federal Register LTV Ratio Community Banks Real Estate Bank Regulatory


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