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OCC Proposes Revisions to Stress Test Information Collection
On November 15, the OCC published a notice and request for comment on proposed changes to its rules requiring certain covered financial institutions, including national banks and federal savings associations with assets over $50 billion, to report certain financial information as part of stress testing. The proposed revisions to the OCC’s reporting requirements are “intended to promote consistency with” the Fed’s proposed changes to its form FR Y-14A, and consist generally of clarifying instructions, shifting the “as-of date”, adding data items, deleting data items, and redefining existing data items—including an expansion of the information collected in the scenario schedule. The proposed revisions also reflect the implementation of the final Basel III regulatory capital rule, which is set to revise and replace the OCC’s risk-based and leverage capital requirements to be consistent with agreements reached by the Basel Committee on Banking Supervision in ‘‘Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems’’ (Basel III). All comments must be received by January 19, 2017.
Bank Regulators Signal Changes to Capital Holding Requirements
On September 8, the Federal Reserve Board (FRB) released a policy statement providing details regarding its Countercyclical Capital Buffer Framework (Framework). The FRB explained that the Framework is designed to implement requirements under the Basel III International bank capital rules, and will generally raise capital holding requirements for internationally active banks when there is an elevated risk of systemic credit losses. In responding to comments, the FRB used the policy statement to clarify that when the systemic threat is reduced, banks would be allowed to release excess capital into the economy to further create financial stability. Meanwhile, the Group of Central Bank Governors and Heads of Supervision (Group) that oversees the Basel Committee on Banking Supervision (Committee) cautioned the Committee to avoid significant increases in overall bank capital requirements as the Committee creates a final rule to address excessive variability in risk-weighted assets. The Group expressed its desire that the Committee focus on improving and harmonizing the methods through which banks determine their own risks. The Committee’s final rule is due by year’s end.
GAO Releases Report on Mortgage Servicing
On July 25, the GAO released a report titled “Mortgage Servicing: Community Lenders Remain Active under New Rules, but CFPB Needs More Complete Plans for Reviewing Rules.” At the request of the House Committee on Financial Services, the GAO report outlines and analyzes the effect of the CFPB’s 2013 mortgage-servicing rules and the banking regulators’ implementation of the Basel III framework on credit unions and community banks’ (collectively, community lenders) mortgage servicing activities. Specifically, the GAO report examines (i) community lenders’ participation in the mortgage servicing market, as well as the potential effect of the new mortgage servicing rules on them; (ii) the potential impact that the Basel III framework could have on community lenders’ decisions to hold or sell Mortgage Servicing Rights (MSR); and (iii) regulators’ processes for estimating the impact of the new regulations.
Overall, the GAO report suggests that community lenders’ decisions to sell or hold MSRs likely will not be affected by the new capital treatment of MSRs under the Basel III framework because their concentration of MSRs is limited: “Most representatives of community banks said that regulatory changes to the capital treatment of MSRs did not require them to sell MSRs or raise additional capital.” Although officials from two community banks with larger concentrations of MSRs suggested that “the rules would prevent the bank from growing as much as it would like,” the GAO concludes that community lenders’ participation in MSR sales is based on several factors other than MSR capital treatment, including volatility in the value of MSRs, compliance risk, and interest rates and prepayments.
According to the report, the new mortgage servicing regulations increased compliance costs for community lenders, but have yet to affect adversely their participation in the mortgage servicing market. In fact, the GAO found that, between 2008 and 2015, the share of mortgages serviced by community lenders doubled. The report states that community lenders continue to service mortgage loans held in portfolio or hold MSRs, despite the increase in regulatory requirements and compliance costs, because such activities generate income and help them to maintain strong customer relationships. Regarding profitability, representatives from one credit union noted that “servicing mortgages provides it with the opportunity to develop borrowers into full members with checking and savings accounts and car loans.” Community lenders further highlighted the significance of working directly with customers encountering errors or difficulty during the loss mitigation process: “Representatives at several industry associations and community lenders [told the GAO] that community banks and credit unions preferred to retain MSRs even if they sold the mortgages in the secondary market because they were able to maintain close customer contact should issues arise.” The report recognizes that, for community lenders servicing 5,000 or fewer mortgages, the CFPB’s exemptions for small servicers and creditors were helpful to their businesses and customers. Still, some community lenders reported having to adjust their business practices to manage increased compliance costs, highlighting increases in fees and interest rates, as well as changes to product offerings.
Pursuant to the Dodd-Frank Act, the CFPB must retrospectively review the effectiveness of its mortgage servicing rules by January 2019. According to the report, as of April 2016, the CFPB’s plans for retrospective review are incomplete because agency officials determined that, among other things, it was “too soon to identify the relevant data and because the agency wanted the flexibility to design the most effective method to analyze the rules.” The report states that, without having finalized a review plan, including outlining its proposed methodologies for seeking public input, the CFPB risks not having sufficient time to complete an effective review. As such, the GAO recommends that the CFPB “complete a plan to identify the outcomes [it] will examine to measure the effects of the regulations, including the specific metrics, baselines, and analytical methods to be used.”
Financial Stability Board Updates List of Global Systemically Important Banks
On November 6, the Financial Stability Board published its annual update of global systemically important banks (G-SIBs). Included in its annual update is the addition of one international bank bringing the total number of institutions on the list to 30. Eight U.S. G-SIBs remain on the list. Coinciding with the updated list, the Basel Committee on Banking Supervision also published updated information regarding denominators and capital thresholds used to calculate bank scores and allocate capital requirements of G-SIBs.
Basel III Releases Final Standard On Net Stable Funding Ratio
On October 31, the Basel III Committee on Banking Supervision released its final standard for the net stable funding ratio (NSFR), which requires that banks maintain stable funding sources to mitigate liquidity risk. The standard will complement the liquidity coverage ratio finalized earlier this year. The NSFR will ensure banks have enough cash or assets that can reliably be converted into cash to cover their expected outflows on a one-year horizon. In 2010, the Basel III Committee established a rigorous review process of the financial market and economy, and revised that standard in January 2014 to “focus on the riskier types of funding profile employed by banks while improving alignment with the LCR and reducing cliff effects in the measurement of available and required stable funding.” The most recent revisions cover the required stable funding for: (i) short-term exposures to financial institutions, including but not limited to banks; (ii) derivatives exposures; and (iii) assets posted as initial margin for derivatives contracts. The NSFR will become a minimum standard by January 1, 2018.
Federal Reserve Announces Quantitative Impact Study for Insurance Holding Companies
On September 30, the Federal Reserve Board announced that it will begin a quantitative impact study (QIS) in order to better understand the potential effects of its revised regulatory capital framework. The study will focus on the effects on savings and loan holding companies, as well as nonbank financial companies that are supervised by the Federal Reserve and significantly engaged in insurance underwriting activity. In July 2013, the Federal Reserve finalized its revised regulatory capital framework in order to implement the Basel III capital rules for bank holding companies, certain savings and loan holding companies, and state member banks. In order to give the Federal Reserve time to adapt the capital rules for savings and loan holding companies substantially engaged in insurance underwriting activity, such entities were excluded from the 2013 framework. The QIS is being conducted in order to provide the Federal Reserve with a better understanding of how to design a capital framework for the insurance holding companies that is consistent with safety and sounds principles and the requirements of section 171 of Dodd-Frank (the Collins Amendment). The results of the QIS will allow the Federal Reserve to explore and address areas of concern raised by commenters during the proposal stage of the revised regulatory capital framework rulemaking. The Federal Reserve has contacted the insurance holding companies subject to its supervision and has requested their participation in the QIS. The requested information should be submitted by December 31, 2014.
Interagency Final Rule On Regulatory Capital, Revisions To The Supplementary Leverage Ratio
On September 26, the OCC, the FDIC, and the Federal Reserve Board released a final rule that revises the calculation of total leverage exposure to make it more consistent with the January 2014 revisions to the international leverage ratio framework published by the Basel Committee on Banking Supervision. Like the proposed rule, the final rule directs the total leverage exposure calculation to include a bank’s on-balance-sheet assets (less tier 1 capital) and a potential future exposure amount calculated for each derivative contract. The final rule on total leverage exposure differs from the proposed rule in that it: (i) includes in the calculation the amount of cash collateral received for derivative contracts and the notional amount of each credit derivative for which the bank acts as the credit protection provider; (ii) adjusts the treatment of certain repo-style transactions; and (iii) allows the use of the credit conversion factors set forth in the 2013 revised capital rule to calculate some off-balance-sheet exposures. This rule does not apply to community banks. Total leverage exposure is the denominator for the supplementary leverage ratio calculation, which divides a bank’s tier 1 capital against its total leverage exposure. Banks must comply with the new supplementary ratio requirements by January 1, 2018, but they must calculate and publicly report their supplementary ratios beginning January 1, 2015.
FDIC Proposes Changes to Assessments
On July 23, the FDIC proposed a rule to revise its assessments regulation. Specifically, the FDIC proposes changing the ratios and ratio thresholds for capital evaluations used in its risk-based deposit insurance assessment system to conform the assessments to the prompt corrective action capital ratios and ratio thresholds adopted by the prudential regulators. The proposal also would (i) revise the assessment base calculation for custodial banks to conform to the asset risk weights adopted by the prudential regulations; and (ii) require all highly complex institutions to measure counterparty exposure for deposit insurance assessment purposes using the Basel III standardized approach credit equivalent amount for derivatives and the Basel III standardized approach exposure amount for other securities financing transactions. The FDIC explains the changes are intended to accommodate recent changes to the federal banking agencies' capital rules that are referenced in portions of the assessments regulation.Comments are due by September 22, 2014.
Basel Committee Finalizes AML/CFT Risk Management Guidance
On January 15, the Basel Committee on Banking Supervision issued final guidance regarding anti-money laundering/combating the financing of terrorism (AML/CFT) risk management. The Committee states that the guidelines are consistent with and supplement the 2012 International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation issued by the Financial Action Task Force. The guidelines supersede two previously-issued Basel Committee publications: Customer due diligence for banks (October 2001) and Consolidated KYC management (October 2004). The final guidelines detail the “essential elements” of sound AML/CFT risk management, including those related to (i) assessing and understanding risks; (ii) customer acceptance policies; (iii) customer and beneficial owner identification; (v) ongoing monitoring; (vi) information management and record keeping; and (vii) reporting suspicious transactions and asset freezing. The guidelines also address AML/CTF in the group-wide and cross-border context, and outlines expectations for banking supervisors.
Prudential Regulators Propose Large Institution Liquidity Rule
On October 24, the Federal Reserve Board issued a proposed rule it developed with the OCC and the FDIC to establish a minimum liquidity coverage ratio (LCR) consistent with the Basel III LCR, with some modifications to reflect characteristics and risks of specific aspects of the U.S. market and U.S. regulatory framework. The proposal would create for the first time a minimum liquidity requirement for certain large or systemically important financial institutions. The covered institutions would be required to hold (i) minimum amounts of high-quality, liquid assets such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash, and (ii) liquidity in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a short-term stress period. The requirements would apply to all internationally active banking organizations—i.e., those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure—and to systemically important, non-bank financial institutions designated by the FSOC. The proposal also would apply a less stringent, modified LCR to bank holding companies and savings and loan holding companies that are not internationally active, but have more than $50 billion in total assets. The regulators propose various categories of high quality, liquid assets and also specify how a firm's projected net cash outflows over the stress period would be calculated using common, standardized assumptions about the outflows and inflows associated with specific liabilities, assets, and off-balance-sheet obligations. Comments on the proposed rule must be submitted by January 31, 2013.