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Fed governor discusses modernizing payment systems for community banks
On February 27, Federal Reserve (Fed) Governor Michelle W. Bowman spoke before the Banking Outlook Conference held at the Federal Reserve Bank of Atlanta on ways the Fed can increase transparency and modernize payment services for community banks. Bowman stated that the Fed is “uniquely positioned as a provider of payment services and as a supervisor of banks to ensure that our nation’s evolving financial system works for community banks.” Bowman discussed how the Fed can achieve this objective by, among other things, (i) adopting an additional same-day automated clearinghouse (ACH) window, which “will allow banks and their customers, particularly those located outside the eastern time zone, to use same-day ACH services during a greater portion of the business day”; (ii) implementing FedNow, which would, as previously covered by InfoBytes, “facilitate end-to-end faster payment services, increase competition, and ensure equitable and ubiquitous access to banks of all sizes nationwide”; and (iii) encouraging partnerships between community banks and fintech firms to “leverage the latest technology to provide customer-first, community-focused financial services and provide customers with efficiencies, such as easy-to-use online applications or rapid loan decisionmaking.” Bowman highlighted the Fed’s fintech innovation office hours, as well as the Fed’s recently launched fintech innovation webpage (covered by InfoBytes here), and emphasized the Fed’s desire to hear directly from banks and fintech companies on innovation challenges.
With respect to third-party service providers, Bowman proposed several important initiatives for the Fed to help community banks effectively manage their third-party relationships and access innovative new technology. These include providing clear, consistent due diligence guidance on third-party relationships to provide uniform standards that are aligned with guidance issued by the OCC and other banking agencies. Bowman also suggested increasing the transparency of its third-party supervisory program by releasing information that may be useful about key service providers to community banks, and tailoring regulatory burdens for community banks with assets under $1 billion.
FDIC introduces deposit insurance application for nonbanks
On February 10, the FDIC issued FIL-8-2020, which incorporates Procedures for Deposit Insurance Applications from Applicants that are Not Traditional Community Banks into its Deposit Insurance Application Procedures Manual (manual). In addition to the updating the manual, the agency also issued a handbook, entitled Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions (handbook), advising that the updated manual together with the handbook provide comprehensive instructions for completing deposit insurance applications. According to the letter, the updated manual and the handbook contain mostly “technical edits and clarifications” and are meant to “provide transparency and clarity” for applicants. The letter also supplies the definitions of “non-bank” and “non-community bank.”
Fed governor identifies community banks' fintech challenges
On February 10, Federal Reserve (Fed) Governor Michelle W. Bowman spoke before the Conference for Community Bankers on the interaction between innovation and regulation for community banks. In discussing her “vision for creating pathways to responsible community bank innovation,” Bowman identified particular challenges facing smaller banks when identifying and integrating new technologies and offered suggestions for ways the Fed can assist these banks in managing relationships with third-party service providers. Acknowledging that responsible innovation requires community banks to identify goals and pinpoint products and services to implement their strategies, Bowman recognized that compliance costs can create an outsized and undue burden on smaller banks and stated that federal regulations should be tailored to bank size, risk, and complexity. Among other things, Bowman stated that the Fed could align its third-party service provider guidance with the OCC and other banking agencies to provide uniform standards to banks. “It is incredibly inefficient to have banks and their potential fintech partners and other vendors try to navigate unnecessary differences and inconsistencies in guidance across agencies,” Bowman noted. Regulators and supervisors have a role in easing the burden for community banks, she added, noting that third-party guidance should allow banks to conduct shared due diligence on potential partners and pool resources to avoid duplicating work. In addition, Bowman commented that the Fed could help banks make this choice by publishing a list of service providers subject to regulatory supervision and increasing transparency around “who and what” the Fed evaluates. Bowman further stated that any guidance should also explain what due diligence looks like for potential fintech partners, since standards applied to other third parties may not be universally applicable. Giving community banks a better vision of what success in due diligence looks like, Bowman stated, will require releasing more information on its necessary elements.
Bowman also highlighted the Fed’s upcoming fintech innovation office hours, as well as the Fed’s recently launched fintech website section, (both covered by InfoBytes here), which are designed to help provide access to Fed staff, highlight supervisory observations regarding fintech, provide a hub of information for interested stakeholders on innovation-related matters, and deliver practical tips for banks and other companies interested in engaging in fintech activity.
FHFA raises annual CFI cap
On January 22, the Federal Housing Finance Agency published its annual adjustment to the cap on average total assets used to determine whether a Federal Home Loan Bank member qualifies as a community financial institution (CFI). The new cap is $1,224,000,000. Under the Federal Home Loan Bank Act, insured depository institutions that qualify as a CFI receive certain advantages in qualifying for bank membership and the ability to receive and collateralize long-term advances. The adjustment took effect January 1.
FDIC extends deadline for comments on innovation pilot programs
On January 14, the FDIC again published a notice and request for comments in the Federal Register on innovation pilot programs. The FDIC first solicited comments on innovation pilot programs in November, with comments due by January 6. As no comments were submitted, the agency is once again requesting comments on the programs, which, as previously covered by InfoBytes, it hopes will spur collaboration “with innovators in the financial, non-financial, and technology sectors to, among other things, identify, develop, and promote technology-driven innovations among community and other banks in a manner that ensures the safety and soundness of FDIC-supervised and insured institutions.”
Comments must be received by February 13.
Agencies simplify capital calculation for community banks
On October 29, the Federal Reserve Board, the FDIC, and the OCC (agencies) issued a final rule to simplify capital rule compliance requirements and reduce the regulatory burden for community banks in accordance with the Economic Growth, Regulatory Relief, and Consumer Protection Act. Among other things, the final rule allows qualifying community banks to adopt a simple community bank leverage ratio to measure capital adequacy, removing requirements for calculating and reporting risk-based capital ratios. Qualifying community banks must have less than $10 billion in total consolidated assets and meet additional criteria such as a leverage ratio greater than 9 percent. The agencies estimate that approximately 85 percent of community banks will qualify. The final rule also grants a community bank that temporarily fails to comply with the framework a two-quarter grace period to come back into full compliance, as long as its leverage ratio remains above 8 percent. According to the agencies, banking organizations will be permitted to use the community bank leverage ratio framework in their March 31, 2020 Call Report or Form FR Y-9C, as applicable. The final rule will take effect January 1, 2020.
McWilliams highlights upcoming CRA examination updates for MDIs, encourages partnerships between community banks and fintechs
On October 2, FDIC Chairman Jelena McWilliams spoke at the National Bankers Association’s annual convention to discuss the agency’s objectives regarding minority depository institutions (MDIs). McWilliams highlighted recent FDIC initiatives, including past and future roundtable discussions between large and minority banks regarding potential partnership opportunities. McWilliams noted that many large banks are unaware of how these partnerships can count for Community Reinvestment Act (CRA) credit. Therefore, the FDIC is updating its examiner instructions for CRA performance evaluations to identify activities involving MDIs. McWilliams also reminded attendees about the upcoming inaugural meeting of the agency’s new MDI Subcommittee to its Advisory Committee on Community Banking, which will focus on issues, tools, and resources unique to MDIs. One of the subcommittee’s goals, she noted, is to “identify additional opportunities to provide regulatory relief for MDIs with less-complex balance sheets while maintaining safety and soundness.” Concerning the FDIC’s franchise-marketing process for failing MDIs, McWilliams commented that “[g]oing forward, when a new marketing initiative begins, we will provide a two-week window exclusively for MDIs,” and will also contact all qualified MDIs on the bid list and provide technical assistance.
Earlier, on October 1, McWilliams delivered keynote remarks at the Federal Reserve Bank in St. Louis, in which she warned community banks that their ability to survive and thrive depends on their ability to innovate and adapt to changing technology. Specifically, McWilliams discussed the growth of digitization, open banking, machine learning/artificial intelligence, and personalization, stressing that banking technology is advancing at a “relentless pace.” Consequently, “we all must challenge ourselves to think about what that means for the future of the banking industry, and community banks in particular.” McWilliams noted, however, that community banks’ inability to keep pace with innovation is due to both cost and regulatory uncertainty. “The cost to innovate is in many cases prohibitively high for community banks. They often lack the expertise, the information technology, and research and development budgets to independently develop and deploy their own technology.” She suggested that community banks partner with fintech firms that have already developed, tested, and rolled out new technology, and emphasized that her goal is for the FDIC to lay “the foundation for the next chapter of banking by encouraging innovation that meets consumer demand, promotes community banking, reduces compliance burdens, and modernizes our supervision.”
FDIC updates Affordable Mortgage Lending Guide
On December 6, the FDIC issued FIL-84-2018 announcing updates to the Affordable Mortgage Lending Guide, Part I: Federal Agencies and Government Sponsored Enterprises (Guide), which reflect current information available about mortgage products offered through Fannie Mae and Freddie Mac. The Guide covers federal programs targeted to a variety of communities and individuals including rural, Native American, low- and moderate-income, and veterans, and is designed to provide community banks resources “to gain an overview of a variety of products, compare different products, and identify next steps to expand or initiate a mortgage lending program.” Updates to the Guide include, among other things, (i) revisions to the Program Matrix; (ii) changes to student loan debt in FHA, Fannie Mae, and Freddie Mac programs; and (iii) updates to certain FHA loan insurance products, USDA single family housing programs, and various Fannie Mae and Freddie Mac products.
FFIEC issues second Examination Modernization Project update
On November 27, the Federal Financial Institutions Examination Council (FFIEC) issued the second update on the status of its Examination Modernization Project. The project’s objective is to identify and assess measures to improve the community bank safety and soundness examination process, pursuant to the Economic Growth and Regulatory Paperwork Reduction Act’s review of regulations. As previously covered by InfoBytes, in March, the FFIEC released the first update, which identified four areas with potential for the most “meaningful supervisory burden reduction.” The second update focuses on tailoring examination plans and procedures based on risk in order to reduce burden. Specifically, after a review of risk-based procedures and processes, the Federal Reserve Board, the FDIC, the NCUA, the OCC, and the State Liaison Committee have committed to issue reinforcing and clarifying examiner guidance to their examination staffs on risk-focused examination principles for community financial institutions, if necessary. The guidance covers, among other things, the following practices (i) consideration of the unique risk profile, complexity, and business model of the institution when developing the exam plan; (ii) tailoring of the document request list based on the financial institution’s business model, complexity, risk profile and planned scope of review; and (iii) applying examination procedures in a way that reduces the level of review of low risk institutions or low risk areas.
The FFIEC noted it may take further action to improve the examination process as the project progresses.
Agencies issue joint proposal on community bank leverage ratio for qualifying organizations
On November 21, the Federal Reserve Board, FDIC, and OCC jointly announced a proposed rule to simplify capital requirements for qualifying community banking organizations that opt into the community bank leverage ratio framework. Among other criteria, qualifying organizations must have “less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9 percent.” FDIC FIL-77-2018 provides an overview of the proposed regulation amendments—required under Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act—which would allow qualifying organizations to satisfy (i) generally applicable leverage and risk-based capital requirements; (ii) the prompt corrective action framework’s well-capitalized ratio requirements; and (iii) any other generally applicable capital and leverage requirements. Comments will be due 60 days after publication in the Federal Register.