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Waters and Brown urge regulators to reconsider Volcker Rule changes
On October 17, House Financial Services Committee Chairwoman Maxine Waters (D-Calif) and Senate Banking Committee Ranking Member Sherrod Brown (D-Ohio) wrote to the heads of the Federal Reserve Board, FDIC, OCC, SEC, and CFTC to oppose the federal financial regulators’ recent approval of changes to the Volcker Rule. (Previous InfoBytes coverage here.) According to Waters and Brown, the final revisions—which are designed to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds—“open the door to the very risky, speculative activities that Congress sought to prohibit.” Specifically, the letter addresses rollback concerns such as (i) narrowing the definition of a “trading account,” which would weaken the short-term intent prong; (ii) “eliminating metrics reporting”; (iii) “removing activity restrictions on non-U.S. banks”; and (iv) “expanding permitted activity related to covered funds.” Waters and Brown urged the regulators to reconsider their decision to adopt the revisions, and requested that they be provided with the data and metrics used by the regulators during their analysis, as well as the regulators’ justification for “eliminating or reducing the information and data reported by banking entities.”
Agencies seek comments on proposed changes to CECL
On October 17, the OCC, Federal Reserve Board, FDIC, and NCUA published a proposed interagency policy statement on allowances for credit losses and proposed interagency guidance on credit risk review systems.
The proposed policy statement describes the measurement of expected credit losses under the current expected credit losses (CECL) methodology for determining allowances for credit losses applicable to financial assets measured at amortized costs. It will apply 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 proposed 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. Once finalized, the proposed policy would be effective at the time of each institution’s adoption of CECL.
The proposed credit risk review systems guidance—which is relevant to all institutions supervised by the agencies—will update the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses to reflect the CECL methodology. The proposed 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 proposed guidance stresses that financial institution employees involved with assessing credit risk should be independent from an institution’s lending function.
Comments on both proposals are due December 16.
Federal Reserve finalizes capital and liquidity requirement rules for large firms; proposes changes to assessment fees
On October 10, the Federal Reserve Board approved final rules, consistent with changes made by the Economic Growth, Regulatory Relief, and Consumer Protection Act, to establish a framework that revises the criteria for determining the applicability of regulatory capital and liquidity requirement for large U.S. banking organizations and U.S. intermediate holding companies (IHC) of certain foreign banking organizations with $100 billion or more in total assets. The framework—jointly developed with the FDIC and the OCC—establishes “four risk-based categories for determining the regulatory capital and liquidity requirements applicable to large U.S. banking organizations and the U.S. intermediate holding companies of foreign banking organizations, which apply generally based on indicators of size, cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets, and off-balance sheet exposure.” According to the Fed, while the framework is “generally similar” to proposals released for comment over the past year (see InfoBytes coverage here and here), the final rule further simplifies the proposals by applying liquidity standards to a foreign bank’s U.S. IHC that are based on the IHC’s risk profile instead of the combined U.S. operations of the foreign bank. For larger firms, the framework applies standardized liquidity requirements at the higher end of the range that was originally proposed for both domestic and foreign banks.
The following categories are established under the framework: (i) Category I will be reserved for U.S.-based global systemically important banks; (ii) Category II will apply to U.S. and foreign banking organizations with total U.S. assets exceeding $700 billion or $75 billion in cross-border activity that do not meet Category I criteria; (iii) Category III will apply to U.S. and foreign banking organizations with more than $250 billion in U.S. assets or $75 billion in weighted short-term wholesale funding, nonbank assets, or off balance sheet exposure; and (iv) Category IV will apply to other banking organizations with total U.S. assets of more than $100 billion that do not otherwise meet the criteria of the other three categories.
The framework will take effect 60 days after publication in the Federal Register.
Additionally, the Fed separately issued a notice of proposed rulemaking to raise the minimum threshold for being considered an assessed company and to adjust the amount charged to assessed companies. The notice also announces the Fed’s intention to issue a capital plan proposal that will “align capital planning requirements with the two-year supervisory stress testing cycle and provide greater flexibility for Category IV firms.” Comments on the proposal are due December 9.
Federal Reserve joins other regulators in approving final revisions to Volcker Rule
On October 8, the Federal Reserve Board announced that all five federal financial regulators have signed off on final revisions to the Volker Rule (the Rule) to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds. As previously covered by InfoBytes, the other four regulators approved the revisions last month. The revisions, which take full effect on January 1, 2021, clarify prohibited activities and simplify compliance burdens by tailoring compliance obligations to reflect the size and scope of a bank’s trading activities, with more stringent requirements imposed on entities with greater activity. The Fed noted that community banks are generally exempt from the Rule by statute, and stressed that the “revisions continue to prohibit proprietary trading, while providing greater clarity and certainty for activities allowed under the law,” and that the regulators “expect that the universe of trades that are considered prohibited proprietary trading will remain generally the same as under the agencies’ 2013 rule.” However, Federal Reserve Governor Lael Brainard issued a dissenting statement, stressing that the revised Rule “weakens the core protections against speculative trading within the banking federal safety net,” and that the elimination without replacement of the “‘short-term intent’ test for firms engaged in higher levels of trading activities… materially narrows the scope of covered activities.” Brainard also expressed concern about “examiners’ ability to assess compliance with the final rule because it relies on firms’ internal self-policing to set limits to distinguish permissible market making from illegal proprietary trading, no longer requires firms to promptly report limit breaches and increases, and narrows the scope of the CEO attestation requirement.”
Agencies raise residential appraisal requirement to $400,000
On September 27, the OCC, the Federal Reserve Board, and the FDIC announced a final rule increasing the threshold for residential real estate transactions requiring an appraisal from $250,000 to $400,000. As previously covered by InfoBytes, in November 2018, the agencies proposed the threshold increase in response to feedback that the exemption threshold had not increased to keep pace with the price appreciation in the residential real estate market. The final rule also includes the rural residential appraisal exemption included in the Economic Growth, Regulatory Relief, and Consumer Protection Act (previously covered by InfoBytes here), and implements the Dodd-Frank Act mandate that institutions appropriately review appraisals for compliance with the Uniform Standards of Professional Appraisal Practice. The final rule is effective the first day after publication in the Federal Register, except for the evaluation requirement for transactions exempted by the rural residential appraisal exemption and the requirement to review appraisals for compliance with the Uniform Standards of Professional Appraisal Practice, which are effective January 1, 2020.
The FDIC press release is available here, the Federal Reserve Board press release is available here, and the concurrence letter from the CFPB is available here.
Fed issues enforcement action for flood insurance violations
On September 5, the Federal Reserve Board announced an enforcement action against a Nebraska-based bank for allegedly violating the National Flood Insurance Act (NFIA) and Regulation H, which implements the NFIA. The consent order assesses a $37,000 penalty against the bank for an alleged pattern or practice of violations of Regulation H, but does not specify the number or the precise nature of the alleged violations. The maximum civil money penalty under the NFIA for a pattern or practice of violations is $2,000 per violation.
Fed updates private flood insurance interagency examination procedures
On August 22, the Federal Reserve Board (Fed) issued CA 19-10, which provides updates to the interagency examination procedures for the Flood Disaster Protection Act (FDPA). The updated guidance is applicable to all Fed-supervised institutions with total consolidated assets of $10 billion or less, and supersedes CA 16-1’s FDPA examination procedures. Specifically, the updated procedures address new sections from a final interagency rule issued in February concerning the acceptability of private flood insurance (previously covered by InfoBytes here). Additionally, the updated procedures provide guidelines for lending institutions when considering a mutual aid society flood protection plan. The Fed notes that “state member banks may not typically analyze mutual aid society plans in the course of their lending activities,” and reminds lenders that acceptance standards for mutual aid society plans will vary depending on the state.
Fed issues two enforcement actions for flood insurance violations
On August 20, the Federal Reserve Board announced enforcement actions against two separate Massachusetts-based banks for allegedly violating the National Flood Insurance Act (NFIA) and Regulation H, which implements the NFIA. The first consent order assesses a $20,000 penalty against the bank for a pattern or practice of violations of Regulation H, but does not specify the number or the precise nature of the alleged violations; the second consent order assesses a $36,000 penalty, while similarly not specifying the number or precise nature of the violations. The maximum civil money penalty under the NFIA for a pattern or practice of violations is $2,000 per violation.
Federal agencies update host state loan-to-deposit ratios
On August 9, the Federal Reserve Board, the FDIC, and the OCC released the current host state loan-to-deposit ratios for each state or U.S. territory, which the agencies use to determine compliance with Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the Act, banks are prohibited from establishing or acquiring branches outside of their home state for the primary purpose of deposit production. Branches of banks controlled by out-of-state bank holding companies are also subject to the same restriction. Determining compliance with Section 109 requires a comparison of a bank’s estimated statewide loan-to-deposit ratio to the yearly host state loan-to-deposit ratios. If a bank’s statewide ratio is less than one-half of the yearly published host state ratio, an additional review is required by the appropriate agency, which involves a determination of whether a bank is reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches. Banks that do not meet the compliance requirements are subject to sanctions by the OCC. Notably, Section 109 is not applicable to federal savings associations or community banks with covered interstate branches.
Fed issues final rules related to rate decreases
On August 12, the Federal Reserve Board (Fed) published two final rules following its July 31 decision to lower the target range for the federal funds rate to 2 - 2.25 percent. These rules affect the primary and secondary credit available to depository institutions as a short-term backup source of funding, as well as reserve requirements that depository institutions must meet.
A final rule amending Regulation A (Extensions of Credit by Federal Reserve Banks) was issued to reflect the Fed’s approval of a one-quarter percent decrease, from 3 percent to 2.75 percent. Additionally, because the formula for the secondary credit rate incorporates the primary rate, the secondary credit rate also decreased by one-quarter percentage point, from 3.50 percent to 3.25 percent. The amendments are effective August 12, with rate changes for primary and secondary credit applicable on August 1.
A second final rule amending Regulation D (Reserve Requirements of Depository Institutions) was issued to reflect approval of a one quarter percent decrease to the rate of interest paid on balances maintained to satisfy reserve balance requirements (IORR), along with the rate of interest paid on excess balances (IOER) maintained at Federal Reserve Banks by or on behalf of eligible institutions. The final rule specifies that both the IORR and the IOER are 2.10 percent. The amendments are effective August 12, with IORR and IOER rate changes applicable on August 1.