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Financial Services Law Insights and Observations

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  • OCC discusses credit risk management, diversity and inclusion

    On December 5, acting Comptroller of the Currency Michael J. Hsu delivered remarks at the RMA Risk Management and Internal Audit Virtual Conference, where he spoke about the current expected credit losses standard (CECL) and the importance of workforce diversity and inclusion. Hsu started by discussing CECL and mentioning that though loan portfolios have generally remained resilient and widespread, “deterioration isn’t currently evident in credit quality metrics, the effects of high inflation, rising interest rates, lagging wage growth, supply chain disruptions, and stress from geopolitical events threaten the unexpectedly strong credit performance observed over the past few years.” He further pointed out that the longer-term effects of the Covid-19 pandemic, such as the shift in preferences toward online shopping and remote work, and other circumstances, can erode business profit margins, debt service capacity, and collateral valuations, in addition to adversely affecting credit risk levels at financial institutions. When speaking about sound practice, Hsu stated that maintaining safe and sound credit risk management practices through this period of economic uncertainty is critical. He also noted that “timely risk identification and ratings, increased focus on concentrated portfolios and vulnerable borrowers, and stress testing and sensitivity analysis are particularly critical risk management activities at this time.” He further warned that the “flexibility” provided by CECL must ensure safety and soundness, arguing that there needs to be “appropriate support and documentation of management’s judgments,” as well as management’s assumptions, decisions, expectations, and qualitative adjustments. He emphasized that the first step to improving diversity, equity, and inclusion requires more transparency from the financial services industry regarding the diversity of their boards and executive leadership, and organizations need to develop diversity plans and monitor outcomes. He also emphasized that financial institutions should actively “foster a true sense of belonging for everyone.” In closing, Hsu stated that “improving diversity and inclusion is a ‘need to have’ for [the OCC] to achieve our mission of assuring safety and soundness, fair access to financial services, and fair treatment of customers.”

    Bank Regulatory Federal Issues OCC Diversity Credit Risk Risk Management CECL Covid-19

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  • Fed to launch CECL tool for community banks

    Agency Rule-Making & Guidance

    On July 1, the Federal Reserve Board announced plans to launch a new tool to assist community banks with assets of less than $1 billion implement the Current Expected Credit Losses (CECL) accounting standard. The new spreadsheet-based tool, known as the “Scaled CECL Allowance for Losses Estimator” (or SCALE) will use publicly available regulatory and industry data and is intended to simplify CECL compliance for community banks. The SCALE tool will be launched during an “Ask the Fed” webinar on July 15.

    Agency Rule-Making & Guidance Federal Reserve Community Banks CECL Bank Regulatory

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  • OCC updates Credit Card Lending booklet

    Agency Rule-Making & Guidance

    On April 29, the OCC issued Bulletin 2021-22 announcing the revision of the Credit Card Lending booklet of the Comptroller’s Handbook. The booklet rescinds OCC Bulletin 2015-14 and replaces version 1.2 of the “Credit Card Lending” booklet that was issued on January 6, 2017. Among other things, the revised booklet (i) discusses the adoption of current expected credit loss methodology and the increased use of such modeling in credit card origination and risk management; (ii) reflects changes to OCC issuances; (iii) includes refining edits regarding supervisory guidance, sound risk management practices, and legal language; and (iv) includes revisions for clarity.

    Agency Rule-Making & Guidance OCC Comptroller's Handbook Credit Cards CECL Bank Regulatory

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  • OCC issues Concentrations of Credit booklet updating Comptroller’s Handbook

    Agency Rule-Making & Guidance

    On October 26, the OCC issued Bulletin 2020-90 announcing the revision of the Concentrations of Credit booklet of the Comptroller’s Handbook. Among other things, the revised booklet (i) changes the supervisory calculation for credit concentration ratios for banks that have implemented the current expected credit loss (CECL) transition rule; (ii) replaces the term “criticized” with “special mention” for consistency with Banking Bulletin (BB) 1993-35, “Interagency Definition of Special Mention Assets”; and (iii) reflects relevant OCC issuances and changes to laws and regulations since the booklet was last published in 2011.

    Agency Rule-Making & Guidance OCC Comptroller's Handbook CECL

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  • Agencies finalize three pandemic-related rules

    Federal Issues

    On August 26, the Federal Reserve Board, FDIC, and OCC finalized three rules that were temporarily issued in March and April to assist financial institutions during the Covid-19 pandemic. Highlights of the three rules include:

    • Community Bank Leverage Ratio (CBLR). The agencies adopted, without change, two interim final rules issued in April (covered by InfoBytes here) that temporarily lower the CBLR threshold and provide a gradual transition back to the prior level in order to enable qualifying community banking organizations to support lending during the Covid-19 pandemic. Effective October 1, the final rule, among other things, lowers the leverage ratio to eight percent through 2020 and increases the ratio to 8.5 percent in 2021 and nine percent in 2022.
    • Current Expected Credit Losses (CECL). The agencies adopted, without substantial change, an interim final rule issued in March (covered by InfoBytes here), which provides an additional two years to the three-year transition period that is already available to “mitigate the estimated cumulative regulatory capital effects” of CECL. The final rule expands the pool of eligible institutions to include any institution adopting CECL in 2020 and is effective upon publication in the Federal Register.
    • Capital distributions. The agencies adopted, without change, an interim final rule issued in March revising the definition of “eligible retained income” to allow for a more gradual application of any automatic limitations on capital distributions if an institution’s capital levels decline below certain levels. Additionally, the final rule includes the adoption of a Federal Reserve-only interim final rule (covered by InfoBytes here), similarly revising the definition of “eligible retained income” for purposes of the total loss-absorbing capacity rule. The final rule is effective January 1, 2021.

    Federal Issues Agency Rule-Making & Guidance FDIC OCC CECL Federal Reserve Capital Covid-19

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  • Agencies finalize policy changes to CECL

    Agency Rule-Making & Guidance

    On May 8, the FDIC, Federal Reserve Board, OCC, and NCUA finalized an interagency policy statement on allowances for credit losses and interagency guidance on credit risk review systems. As previously covered by InfoBytes, the proposed policy statement and interagency guidance were released in October 2019.

    The final policy statement describes the measurement of expected credit losses under the current expected credit losses (CECL) methodology. The CECL methodology determines allowances for credit losses applicable to financial assets measured at amortized cost, loans held-for-investment, net investments in leases, held-to-maturity debt securities, and certain off-balance-sheet credit exposures. The policy statement also stipulates financial assets for which the CECL methodology is not applicable, and includes supervisory expectations for designing, documenting, and validating expected credit loss estimation processes. The final policy statement becomes applicable to an institution upon that institution’s adoption of a CECL methodology.

    The interagency credit risk review systems guidance—which is relevant to all institutions supervised by the agencies—updates the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses to reflect the CECL methodology. The guidance “discusses sound management of credit risk, a system of independent, ongoing credit review, and appropriate communication regarding the performance of the institution's loan portfolio to its management and board of directors.” Furthermore, the guidance stresses that financial institution employees involved with assessing credit risk should be independent from an institution’s lending function.

    See also FDIC FIL-54-2020 and FIL-55-2020 and OCC 2020-49 Bulletin and 2020-50 Bulletin.

    Agency Rule-Making & Guidance OCC Federal Reserve FDIC NCUA CECL

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  • Fed extends initial compliance dates for certain parts of SCCL

    Agency Rule-Making & Guidance

    On May 1, the Federal Reserve Board (Fed) announced it would extend the initial compliance dates for certain parts of its single-counterparty credit limit rule (SCLL), which was approved in 2018 and limits a U.S. bank holding company’s or foreign banking organization’s credit exposure to another counterparty. As previously covered by InfoBytes, the Fed initially proposed the extension last November. Under the extension, the largest foreign banks subject to the single-counterparty credit limit rule will have until July 1, 2021 to comply, while smaller foreign banks will not be required to comply until January 1, 2022.

    Agency Rule-Making & Guidance Federal Reserve CECL GSIBs Dodd-Frank Of Interest to Non-US Persons Compliance

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  • NCUA issues summary of CARES Act provisions impacting credit unions

    Federal Issues

    In April, the NCUA issued guidance to federally insured credit unions providing a summary of provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that impact credit unions. Such provisions touch upon the Central Liquidity Facility, insured deposits thresholds, temporary relief from troubled debt restructurings, the Paycheck Protection Program, optional temporary relief from current expected credit losses, credit protection during Covid-19, and foreclosures of certain mortgages.

    Federal Issues NCUA CARES Act SBA Covid-19 Credit Union CECL

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  • Federal agencies announce measures to encourage consumer and business lending

    Federal Issues

    On March 27, the Federal Reserve Board (Fed), the FDIC and the OCC jointly announced two measures the agencies have put in place to “support lending to households and businesses” during the Covid-19 pandemic. First, effective immediately, the agencies will “[a]llow[] early adoption of a new methodology on how certain banking organizations are required to measure counterparty credit risk derivatives contracts.” Second, the agencies will “[p]rovid[e] an optional extension of the regulatory capital transition for the new credit loss accounting standard.”

    The first measure deals with the Standardized Approach for Calculating the Exposure Amount of Derivative Contracts (SA-CCR), which had an effective date of April 1. Allowing early adoption for the quarter ending on March 31 may “improve current market liquidity and smooth disruptions” caused by the Covid-19 pandemic. Further, the interim final rule for Current Expected Credit Losses (CECL)—the second measure—was released to minimize the effect of the “CECL accounting standard [on] regulatory capital.” In addition to the transition period of three years already available, the interim final rule—Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances—provides up to two more years to “mitigate the estimated cumulative regulatory capital effects” of CECL. Comments on the interim final rule must be submitted by May 11. (See OCC News Release 2020-42 here and FDIC press release here.)

    Federal Issues FDIC Federal Reserve OCC CECL Agency Rule-Making & Guidance Covid-19

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