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On December 10, the Federal Reserve Board announced SR Letter 21-19, which reiterates the Fed’s supervisory expectations for large banks’ risk management practices related to investment funds. The letter applies to institutions supervised by the Fed that have large derivatives portfolios and relationships with investment funds, and follows a review by the Fed of the high-profile default and failure of one investment firm, which resulted in losses of more than $10 billion for several large banks. Among other things, the Fed warned firms that poor communication frameworks and inadequate risk management functions hinder their potential to identify and address risk, and that “[r]isk management and control functions should have the experience and stature to effectively control risks associated with investment funds.”
The Fed also reminded firms that, consistent with the guidance in Interagency Supervisory Guidance on Counterparty Credit Risk Management, they should: (i) “[r]eceive adequate information with appropriate frequency to understand the risks of the investment fund, including position and counterparty concentrations, and either reconsider the relationship or set sufficiently conservative terms for the relationship if the client does not meet appropriate levels of transparency; (ii) “[e]nsure the risk-management and governance approach applied to the investment fund is capable of identifying the fund's risk initially and monitoring it throughout the relationship, and ensure applicable areas of the firm – including the business line and the oversight function – are aware of the risk their investment fund clients pose to the firm and have tools to manage that risk”; and (iii) “[e]nsure that margin practices remain appropriate to the fund's risk profile as it evolves, avoiding inflexible and risk-insensitive margin terms or extended close-out periods with their investment fund clients.”
Recently, the Federal Reserve Board’s Division of Supervision and Regulation released Supplement 55 of the Bank Holding Company Supervision Manual. Among other things, the updates reflect new regulatory provisions, guidance, and instructions since the last update in February 2020. The revisions include additional sections, removal of several sections, and revised sections. The revised sections include, among others: (i) Internal Credit-Risk Ratings at Large Firms; (ii) Risk-Focused Supervision Framework for Large Complex Banking Organizations; and (iii) Supervision Standards for De Novo State Member Banks of Bank Holding Companies.
On November 16, acting Comptroller of the Currency Michael J. Hsu told attendees at the Federal Reserve Bank of Philadelphia’s Fifth Annual Fintech Conference that the federal banking agencies are “approaching crypto activities very carefully and with a high degree of caution” and “expect banks to do the same.” Hsu pointed out what while changes to the financial regulatory perimeter generally occur as a response to crises and failures, regulatory agencies need to take proactive modernization measures given the astounding growth and expansion of fintechs and cryptocurrencies. Hsu highlighted several important questions that agencies must consider, including whether fintech and crypto firms will start to function like banks and whether bringing them into the bank regulatory perimeter would be the proper solution. He also stated that regulatory agencies must consider whether the risks faced by banks and fintech/crypto firms are the same and, subsequently, whether agencies need to modernize or maintain their status quo. Hsu focused on two specific areas of concern: (i) synthetic banking, or fintechs, operating outside the bank regulatory perimeter but that offer a range of services, including extending various forms of credit and offering interest on cash held in accounts (emphasizing the importance of fintech-bank partnerships); and (ii) the fragmented supervision of universal crypto firms, where Hsu asserted that gaps in supervision are driven by the fact that crypto firms are not subject to comprehensive consolidated supervision.
Hsu announced that the agencies will soon issue a statement conveying results from a recent interagency “crypto sprint,” and that the OCC will also provide clarity on its recently concluded review of crypto-related interpretive letters. Hsu explained that “safety and soundness is paramount” when banks engage in crypto activities and that the agencies’ clarifications “should not be interpreted as a green light or a solid red light, but rather as reflective of a disciplined, deliberative, and diligent approach to a novel and risky area.”
On November 8, acting Comptroller of the Currency Michael J. Hsu discussed climate change risk at the OCC headquarters, highlighting areas for large bank boards of directors to consider when promoting and accelerating improvements in climate risk management practices. According to Hsu, bank boards play a “pivotal role” in actions against climate change, which poses significant risks to the financial system. Hsu compared credit risk management and climate risk management, stating that “strong credit risk management capabilities can provide the assurance and confidence needed for a bank to make risky credit decisions prudently, strong climate risk management capabilities can enable the same prudent risk taking with regards to climate-related business opportunities.” Additionally, Hsu noted that, by the end of this year, the OCC will issue a high-level framework guidance for large banks regarding climate risk management. Hsu also outlined several areas for board members to consider, including evaluating an institution’s overall exposure to climate change, estimating the exposure to a carbon tax, and assessing an institution’s most acute vulnerabilities to climate change events. Hsu stated that “now is the time” to identify and understand vulnerabilities impacting continuity and disaster recovery planning.
On September 29, Federal Reserve Governor Michelle W. Bowman spoke at the Community Banking in the 21st Century Research and Policy Conference held in St. Louis, Missouri on creating a new model for the future of supervision in banking. Bowman stated that the Fed has “actively explored ways to reduce regulatory burden and provide greater transparency into the work of bank supervisors,” including a reassessment of disproportionate regulatory burdens on small institutions. Bowman noted there was a systematic movement to FDIC-insured deposits in state or nationally chartered banks during the Covid-19 pandemic. For example, total deposits at all FDIC-insured institutions increased by 22 percent in comparison to deposit data from 2019 to 2020, and small business lending increased significantly. Bowman pointed out that community banks played a large role in allocating credit through the Paycheck Protection Program during the pandemic. She also discussed ways the Fed has evolved since the start of the pandemic, such as utilizing technology that enabled the opportunity to remotely supervise the safety and soundness of institutions and adjusting supervisory practices, among other things.
For the future of supervision, Bowman announced an initiative to investigate the implications of banking evolutions for the Fed’s supervision function, which will ensure the Fed’s supervisory approaches “accommodate a much broader range of activities” while also ensuring it does not “create an unlevel playing field with unfair advantages, or unfair disadvantages, for some types of firms versus others.” Bowman said that when there is significant uncertainty around a new regulation, supervisory expectation, or practice, the Fed “will look beyond [its] traditional communications tools to find innovative ways to reduce that uncertainty.” She also shared some underlying principles, among other things, that she believes will guide future supervisory approaches, such as (i) committing to preserving the stability, integrity, functionality, and diversity of the banking system; (ii) maintaining consumer protection and ensuring banks can safely offer financial products and services; (iii) avoiding adding new burdens on banks; (iv) enhancing transparency around supervisory expectations for safety and soundness and consumer compliance matters; (v) providing timelier feedback to banks; and (vi) having the ability to adjust supervisory expectations effectively and efficiently to enable banks to be more flexible in serving different communities.
Recently, the FDIC, Federal Reserve Board, NCUA, OCC, and the Conference of State Bank Supervisors issued joint statements covering supervisory practices for financial institutions affected by Hurricane Ida and the California wildfires (see here and here). Among other things, the agencies informed institutions facing operational challenges that the regulators will expedite requests for temporary facilities, noting that in most cases, “a telephone notice to the primary federal and/or state regulator will suffice initially to start the approval process, with necessary written notification being submitted shortly thereafter.” The agencies also called on financial institutions to “work constructively” with affected borrowers, noting that “prudent efforts” to adjust or alter loan terms in affected areas “should not be subject to examiner criticism.” Institutions facing difficulties in complying with any publishing and reporting requirements should contact their primary federal and/or state regulator. Additionally, the agencies noted that institutions may receive Community Reinvestment Act consideration for community development loans, investments, and services that revitalize or stabilize federally designated disaster areas. Institutions are also encouraged to monitor municipal securities and loans impacted by Hurricane Ida and the California wildfires.
On March 31, the FDIC released the spring 2021 edition of the Consumer Compliance Supervisory Highlights, intended to provide information and observations related to the FDIC’s consumer compliance supervision of state non-member banks and thrifts in 2020. Topics include:
- A summary of the FDIC’s supervisory approach in response to the Covid-19 pandemic, including efforts made by banks to meet the needs of consumers and communities;
- An overview of the most frequently cited violations (approximately 74 percent of total violations involved TILA, Truth in Savings Act, Flood Disaster Protection Act, EFTA, and RESPA), as well as other consumer compliance examination observations related to RESPA, TRID, and fair lending;
- Information on regulatory developments, such as Community Reinvestment Act and flood insurance rulemaking and small-dollar loan programs;
- A summary of consumer compliance resources available to financial institutions; and
- Examples of practices that may be useful to institutions in mitigating risks.
On August 18, the Financial Crimes Enforcement Network, which has overall responsibility for administering the Bank Secrecy Act, issued a short statement that, for the first time, publicly outlined its approach to BSA enforcement. Of note, FinCEN indicated that it will not base enforcement actions on an institution’s failure to comply with standards announced solely in a guidance document. Additionally, for the first time, FinCEN listed a nonexhaustive set of factors it will use to determine what enforcement steps should be taken. The statement leaves FinCEN with considerable flexibility in enforcing the BSA, and raises a number of questions for legal and compliance professionals.
The statement will be of most interest to “financial institutions,” which under the BSA include a wide swath of financial services companies, that are not subject to supervision by a federal prudential regulator authorized to enforce compliance with the BSA; most prudential regulators have their own enforcement guidelines, and the federal banking agencies recently issued a joint statement on BSA enforcement. Companies subject to FinCEN’s BSA enforcement authority, particularly those such as money services businesses without federal prudential regulators, may wish to familiarize themselves with FinCEN’s enforcement factors and tailor their compliance efforts accordingly. The statement also provides implicit guidance on what actions institutions should take upon identification of a potential violation.
On April 6, federal regulators issued two interim final regulatory capital rules that will modify the framework of the Community Bank Leverage Ratio (CBLR) in order to enable qualifying community banking organizations (banks) to support lending during the Covid-19 pandemic. The first rule implements Section 4012 of the CARES Act, making temporary changes to the framework of the CBLR so that banks with a leverage ratio of at least eight percent starting in the second quarter of 2020 “may elect to use the community bank leverage ratio framework.” The rule also provides a two-quarter grace period for community banks whose leverage ratios fall below the eight percent requirement, provided that the bank’s leverage ratio does not fall below seven percent. The second interim final rule allows for the temporary CBLR gradually to transition to eight and one-half percent in 2021, and then back to nine percent at the beginning of 2022.
On March 26, the FDIC released a letter detailing temporary alternative procedures for sending supervision-related mail and email to the FDIC. The letter applies to all FDIC-supervised institutions with total assets under $1 billion. The letter provides that the FDIC will use its Secure Email portal to send outgoing official supervisory correspondence, and encourages third parties (including for official business purposes related to supervisory matters) to send mail through the FDIC's Secure Email portal or Enterprise File Exchange within FDICconnect.
- Buckley Webcast: Privacy and cybersecurity outlook for 2022
- Jonice Gray Tucker to discuss “Be Your Compliance Best in 2022” at the California Mortgage Bankers Association webinar
- Hank Asbill to discuss white collar ethics issues at the Stetson Law Review Symposium
- Lauren R. Randell to discuss “Significant legal developments in the Northeast” at the 37th Annual National Institute on White Collar Crime
- Jonice Gray Tucker to discuss “Small business & regulation: How fair lending has evolved & where it is heading?” at the Consumer Bankers Association Live program
- Jonice Gray Tucker to discuss “Regulators always ring twice: Responding to a government request” at ALM Legalweek
- Max Bonici to discuss “Fintech-bank partnerships and potential enforcement” at the 2022 ABA Spring Meetings
- Jonice Gray Tucker and Kari Hall to discuss “Equity, equality, regulation and enforcement – The evolving regulatory landscape of fair lending, redlining, and UDAAP” at the ABA Business Law Committee Hybrid Spring Meeting