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Federal Reserve proposes new structure for determining bank control
On April 23, the Federal Reserve Board issued a notice of proposed rulemaking (NPRM) and request for comment to simplify and increase transparency of existing rules for determining if a company has control over a banking organization under the Bank Holding Company Act and the Home Owners’ Loan Act. Among other things, the NPRM will “provide a series of presumptions of control for use by the Board in control proceedings and other control determinations,” and will create a tiered structure premised on the level of voting ownership—5 percent, 10 percent, and 15 percent—of one company in another company. The Board noted it will also consider several additional factors, such as (i) the size of a company’s voting and total equity investment; (ii) rights to director and committee representation; (iii) use of proxy solicitations; (iv) individuals serving as management, employees, and directors at both companies; (v) agreements permitting influence or restrictions on management or operational decisions; and (vi) the scope of business relationships between the companies. The NPRM also contains a new proposed presumption of “noncontrol,” which will apply in instances where a company owns less than 10 percent of the voting securities of a second company and does not trigger any of the presumptions of control. According to a statement issued by Vice Chairman for Supervision Randal Quarles, the NPRM is designed to address concerns that “it has been difficult for banking firms and investors in banking firms to determine whether a particular proposed investment could give rise to control.” Comments on the NPRM are due 60 days after publication in the Federal Register.
FDIC considers modifying living will requirements
On April 16, the FDIC issued an advance notice of proposed rulemaking (ANPR) and request for comment on modifications to its resolution planning framework (known as living wills) for insured depository institutions with over $50 billion in assets. According to the FDIC, the ANPR is considering three changes to streamline the process: (i) creating tiered planning requirements for living wills based on an institution’s size, complexity, and other factors; (ii) revising the frequency and required content of resolution plan submissions, including eliminating living will submission requirements for certain smaller and less complex institutions; and (iii) improving communication between the FDIC and banks on resolution planning. According to a statement issued by FDIC Chairman Jelena McWilliams, the ANPR also proposes two alternative concepts for consideration: “Broadly, either approach would require large, complex institutions to continue to submit periodic resolution plans, streamlined compared to the existing plans. Institutions that are relatively smaller and less complex but still subject to the rule would no longer need to submit actual plans, but would still be subject to periodic engagement and capabilities testing.” Comments on the ANPR are due 60 days after publication in the Federal Register.
Federal regulators discuss national bank’s remediation progress
On April 9, Senators Elizabeth Warren (D-Mass) and Sherrod Brown (D-Ohio) released responses to inquiries sent last month to the Federal Reserve Board, the OCC, and the CFPB, which expressed, among other things, concern about the level of response taken by a national bank regarding its auto-lending practices, as well as the bank’s remediation plans and compliance risk management efforts. In response, the regulators individually discussed the bank’s progress to satisfy its obligations under existing consent orders.
Federal Reserve Chairman Jerome Powell wrote that the asset cap imposed on the bank will remain in place until the bank has implemented—to the Board’s satisfaction—remedies to address risk management breakdowns. Powell noted that the bank and the Board are comprehensively addressing the progress.
OCC Comptroller Joseph Otting emphasized that the agency continues “to monitor the bank’s work to remediate deficiencies” identified in previously issued orders, and commented that while the OCC is disappointed with the bank’s current corporate governance and risk management programs, it “is fully engaged and prepared to bring [the bank’s] matters to resolution.”
CFPB Director Kathy Kraninger stated that “while the Bureau is working with [the bank] to ensure its compliance with the consent order, I am not satisfied with the [b]ank’s progress to date and have instructed staff to take all appropriate actions to ensure the [b]ank complies with the consent order and [f]ederal consumer financial law.”
German-headquartered financial institution to pay $1.3 billion for Iran sanctions violations
On April 15, U.S. regulators announced settlements totaling $1.3 billion with several banking units of a German-headquartered financial institution to resolve allegations by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), the DOJ, the Federal Reserve Board, the New York Department of Financial Services (NYDFS), and the New York County District Attorney’s Office of apparent violations of multiple sanctions programs, including those related to Burma, Cuba, Iran, Libya, Sudan, and Syria. According to OFAC’s announcement, between January 2007 and December 2011, the institution’s banking units in Germany, Austria, and Italy processed thousands of payments through U.S. financial institutions on behalf of sanctioned entities “in a manner that did not disclose underlying sanctioned persons or countries to U.S. financial institutions which were acting as financial intermediaries.”
According to the settlement agreements (see here, here, and here), OFAC considered various aggravating factors, and noted, among other things, that the institution’s banking units failed to sufficiently enforce policies addressing OFAC sanctions concerns or restrict the processing of transactions in U.S. dollars involving persons or countries subject to sanctions programs administered by OFAC. Additionally, OFAC asserted that the Austrian banking unit claimed on several occasions that OFAC’s sanctions programs “were not legally binding or relevant to [the bank].” OFAC further stated that while the banking units failed to voluntarily self-disclose the alleged violations, they have each agreed to implement and maintain compliance commitments to minimize the risk of the recurrence of the alleged conduct.
London-based financial institution to pay $1.1 billion for U.S. sanctions violations
On April 9, U.S. and U.K regulators announced that a London-based global financial institution would pay $1.1 billion to settle allegations by the DOJ, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), the Federal Reserve Board, the New York Department of Financial Services (NYDFS), the Manhattan District Attorney, and the U.K.’s Financial Conduct Authority (FCA) for allegedly violating multiple sanctions programs, including those related to Burma, Cuba, Iran, Sudan, and Syria. According to the OFAC announcement, from June 2009 until May 2014, the institution processed thousands of transactions involving persons or countries subject to sanctions programs administered by OFAC, but the majority of the actions at issue concern Iran-related accounts maintained by the institution’s Dubai branches. OFAC alleged the Dubai branches processed transactions through the institution’s New York branches on behalf of customers that were physically located or ordinarily resident in Iran.
According to the $639 million settlement agreement, OFAC noted, among other things, that the institution “acted with reckless disregard and failed to exercise a minimal degree of caution or care” with respect to the actions at issue. Moreover, OFAC alleged that the institution had actual knowledge or reason to know its compliance program was “inadequate to manage the [the institution]’s risk.” OFAC considered numerous mitigating factors, including that the institution’s substantial cooperation throughout the investigation and its undertaking of remedial efforts to avoid similar violations from occurring in the future.
The $639 million penalty will be deemed satisfied by the institution’s payments to other U.S. regulators, which includes, $240 million forfeiture and $480 million fine to the DOJ, $164 million fine to the Federal Reserve, and $180 million fine to the NYDFS. The institution also settled with the FCA for $133 million. The settlement illustrates the risks to foreign financial institutions associated with compliance lapses when processing transactions through the U.S. financial system.
Federal Reserve seeks comments on capital framework for U.S. subsidiaries of foreign banks
On April 8, the Federal Reserve Board announced a notice of proposed rulemaking and request for comment (NPRM) seeking to modify its regulation of the regulatory capital requirements for U.S. subsidiaries of foreign banking organizations. Chairman Jerome Powell referred to a proposal issued last fall for refining regulations for domestic banking firms based on risk profiles (previously covered by InfoBytes here), and noted that “because the U.S. operations of most foreign banks tend to have a larger cross-border profile, greater capital markets activities, and higher levels of short-term funding, they often present greater risk than a simpler, more traditional domestic bank.”
The NPRM builds upon the Federal Reserve’s framework for U.S. firms announced last fall, and states that foreign banking organizations with $100 billion or more in U.S. assets would be assigned to one of three categories based on the size of their U.S. operations as well as the following risk-based indicators: “cross-jurisdictional activity, nonbank assets, off-balance sheet exposure, and weighted short-term wholesale funding.” Under the proposal, foreign banking organizations would be classified into the following three categories: (i) Category II: foreign banking organizations with U.S. assets exceeding $700 billion or $75 billion in cross-border activity; (ii) Category III: foreign banking organizations with more than $250 billion in U.S. assets that also exceed certain risk thresholds; and (iii) Category IV: foreign banking organizations with U.S. assets between $100 billion and $250 billion and minimal risk factors. Category I would be reserved for U.S.-based global systemically important banks.
A second proposal issued the same day by the Federal Reserve Board, the FDIC, and the OCC (collectively, the “Agencies”) requests comment on, among other things, whether the Agencies should extend standardized liquidity requirements to foreign banking organizations’ U.S.-based branches and agency networks as well as approaches for doing so.
Comments on both proposals are due June 21.
CFPB and Federal Reserve update HMDA examination procedures; CFPB updates ECOA baseline review procedures
On April 1, the CFPB and the Federal Reserve Board (Federal Reserve) issued revisions to the HMDA examination procedures covering data collected since January 1, 2018, under the HMDA amendments issued by the Bureau in October 2015 and August 2017, as well as section 104(a) of the Economic Growth, Regulatory Relief, and Consumer Protection Act (implemented and clarified by the 2018 HMDA Rule, which was covered by InfoBytes in August 2018 here.) According to the Federal Reserve’s CA 19-5, the HMDA examination updates include, (i) Narrative, Examination Objectives, and Examination Procedure sections that were developed by the Task Force on Consumer Compliance of the FFIEC; (ii) Review of Compliance Management System, Examination Conclusions and Wrap-Up, and Examination Checklist sections that were developed in consultation with the FDIC and the OCC; and (iii) sampling, verification, and resubmission procedures. With regard to HMDA data collected prior to January 1, 2018, institutions will continue to be examined according to the interagency HMDA examination procedures “transmitted with CA 09-10 and the HMDA sampling and resubmission procedures transmitted with CA 04-4.”
Additionally, in April, the CFPB also released updated ECOA baseline review procedures. The procedures consist of five modules: (i) Fair Lending Supervisory History; (ii) Fair Lending Compliance Management System (CMS); (iii) Fair Lending Risks Related to Origination; (iv) Fair Lending Risks Related to Servicing; and (v) Fair Lending Risks Related to Models. According to the Bureau, all exams will cover the Fair Lending CMS module and additional modules will be assigned depending on the scope of examination.
Federal agencies propose rule to reduce impact of large bank failures
On April 2, the FDIC, Federal Reserve Board, and the OCC (together, the “Agencies”) released a joint statement announcing a notice of proposed rulemaking (NPR) to limit the “interconnectedness” of large banking organizations and reduce systemic risk resulting from the failure of global systemically important bank holding companies (GSIBs), certain intermediate holding companies, and GSIB foreign banking organizations. Among other measures, the NPR proposes that, to discourage GSIBs and advanced approaches banking organizations (generally firms with total consolidated assets of $250 billion or more or at least $10 billion in on-balance sheet foreign exposure) from purchasing large amounts of unsecured debt issued by GSIBs, the Agencies propose to subject these investments “to deduction from the . . . organization’s own regulatory capital.” This debt, the Agencies note in the statement, is used to recapitalize the GSIB during bankruptcy or resolution as a result of failure, and the proposal is intended to reduce both interconnectedness within the financial system and systemic risk. Comments on the NPR are due 60 days after publication in the Federal Register.
Federal Reserve amends payment system risk policy applicable to foreign banking organizations
On April 1, the Federal Reserve Board published a revised policy statement on payment system risk (PSR policy) in connection with procedures used to determine the “net debit cap and maximum daylight overdraft capacity” of U.S. branches and agencies of foreign banking organizations (FBO). Among other things, the amended PSR policy (i) removes references to the Strength of Support Assessment ranking, citing the ranking is an “inefficient use” of supervisory resources; (ii) removes references to a FBO’s financial holding company status, since that status has limited ability to measure the health of a FBO; and (iii) adopts alternative methods for determining a FBO’s “eligibility for a positive net debit cap, the size of its net debit cap, and its eligibility to request a streamlined procedure to obtain maximum daylight overdraft capacity.” The Board adopted the changes substantially as proposed, following a notice and request for comment period at the end of 2017. The revisions are effective April 1, 2020.
Federal Reserve releases additional information on stress testing
On March 28, the Federal Reserve Board released a report titled, “Dodd-Frank Act Stress Test 2019: Supervisory Stress Test Methodology,” which details the models and methodologies the Board will use for 2019 stress tests. The release is intended to “increase the transparency of [the Board’s] stress tests without compromising [its] ability to test the resiliency of the nation's largest banks.” Specifically, the report provides more information than in years past on the models that are used to project bank losses, including (i) ranges of loss rates for loans that are grouped by distinct risk characteristics; (ii) examples of portfolios with hypothetical loans with projected loss rates; and (iii) enhanced descriptions of models.