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Federal Reserve vice chairman discusses tailoring prudential standards to account for complexity and risk
On July 18, Federal Reserve Vice Chairman for Supervision Randal K. Quarles spoke before the American Bankers Association’s conference in Salt Lake City to discuss ways the Fed can tailor the supervision and regulation of prudential standards for financial institutions with assets between $100 billion to $250 billion. According to Quarles, U.S. regulators should consider scaling back resolution plan requirements and tailor regulation to risk. In discussing resolution plans, also known as living wills, Quarles noted, among other things, that the Fed “should consider limiting the scope of application of resolution planning requirements to only the largest, most complex, and most interconnected banking firms because their failure poses the greatest spillover risks to the broader economy.” Furthermore, banks that do not qualify as global systemically important banks (G-SIBs) should also be granted some measure of regulatory relief, Quarles stated. Existing G-SIB tests and surcharge indicators could be used for measuring cross-border activity, short-term wholesale funding, as well as nonbank activities while the Fed determines adjustments for less complex banks between the $100 billion and $250 billion range. “This review should ensure that our regulations continue to appropriately increase in stringency as the risk profiles of firms increase, consistent with our previously stated tailoring goals and the new legislation,” Quarles said. “The supervision and regulatory framework for these firms should reflect that there are material differences between those firms that qualify as U.S. G-SIBs and those that do not.” Moreover, according to Quarles, while the Economic Growth, Regulatory Relief, and Consumer Protection Act mandates an 18-month deadline for regulators to issue proposed changes, the Fed plans to “move much more rapidly than this.”
Federal Reserve chair delivers semi-annual congressional testimony, discusses U.S. financial conditions and regulatory relief act
On July 17, Federal Reserve Chair Jerome Powell testified before the Senate Banking Committee and spoke the next day before the House Financial Services Committee. In his semi-annual congressional testimony, Powell presented the Federal Reserve’s Monetary Policy Report, and discussed the current economic situation, job market, inflation levels, and the federal funds rate. Powell stressed, among other things, that interest rates and financial conditions remain favorable to growth and that the financial system remains in a good position to meet household and business credit needs. Chairman of the Committee, Senator Mike Crapo, R-Idaho, remarked in his opening statement that, while recent economic developments are encouraging, an effort should be made to focus on reviewing, improving, and tailoring regulations to be consistent with the recently passed Economic Growth, Regulatory Relief, and Consumer Protection Act S.2155/P.L. 115-174 (the Act). During the hearing, Powell confirmed that the Fed plans to implement provisions of the Act as soon as possible. (See previous InfoBytes coverage here.) When questioned by Senator Sherrod Brown, D-Ohio, about the direction the Fed plans to take to address stress test concerns, Powell responded that the Fed is committed to using stress tests, particularly for the largest, most systemically important institutions, and that going forward, the Fed wants to strengthen the tests and make the process more transparent. Powell also indicated the Fed intends to “publish for public comment the range of factors [the Fed] can consider” when applying prudential standards. Powell also stated that he believes government-sponsored-enterprise reform would help the economy in the long term.
When giving testimony to the House Financial Services Committee, Powell also commented that cryptocurrency does not currently impair the Fed’s work on monetary policy and that the Fed will not seek jurisdiction over cryptocurrency and instead will defer to the SEC’s oversight as well as Treasury’s lead to identify the right regulatory structure.
Agencies publish proposed joint revisions to Volcker rule
On July 17, the OCC, Federal Reserve Board, FDIC, SEC, and CFTC (the Agencies) published their joint notice of proposed rulemaking 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 (the Volcker rule). As previously covered in InfoBytes, the Agencies’ announced the proposal on May 30, noting that the amendments would reduce compliance costs for banks and tailor Volcker rule requirements to better align with a bank’s size and level of trading activity and risks. Comments on the proposal are due by September 17.
Federal Reserve issues enforcement actions against New York branch of Pakistani bank, former bank employee
On July 12, the Federal Reserve Board released an enforcement action taken against a Pakistani bank’s New York branch concerning deficiencies in the branch’s Bank Secrecy Act/anti-money laundering (BSA/AML) compliance program. Under the terms of the written agreement, the branch is required to (i) submit a written governance plan to strengthen the board of director’s oversight of BSA/AML compliance; (ii) retain an independent third party to conduct a BSA/AML compliance review; (iii) submit a revised, written compliance program that complies with BSA/AML requirements; (iii) submit an enhanced, written customer due diligence program plan; and (iv) submit a revised program to ensure compliant suspicious activity monitoring and reporting. On a parallel basis, the Federal Reserve terminated an enforcement action taken against the branch in 2013.
The Federal Reserve also issued a separate enforcement action against a former bank employee for engaging in unsafe or unsound banking practices by concealing an unreconciled balance using improper accounting practices. The consent order of prohibition prohibits the former employee from, among other things, participating in any manner in the conduct of the affairs of any insured depository institution, holding company, or subsidiary of an insured depository institution.
Federal Reserve submits annual report to Congress on credit card profitability of depository institutions
In July, the Federal Reserve Board submitted its annual report to Congress on the profitability of credit cards as required by Section 8 of the Fair Credit and Charge Card Disclosure Act of 1988. The Report to Congress on the Profitability of Credit Card Operations of Depository Institutions (the Report) focuses on credit card banks with assets exceeding $200 million meeting the following criteria: (i) more than 50 percent of assets are loans made to individual consumers; and (ii) 90 percent or more of consumer lending involves credit cards or related plans. As of December 31, 2017, the 12 banks that met this criteria accounted for almost 50 percent of outstanding credit card balances on the books of depository institutions. According to the Report, credit card loans have replaced other methods of borrowing, such as closed-end installment loans and personal lines of credit. In the aggregate, “consumers carried slightly over $1 trillion in outstanding balances on their revolving accounts as of the end of 2017, about 6.1 percent higher than the level at the end of 2016.” While the Report notes the difficulty with tracking credit card profitability due to revisions in accounting rules and other factors, it indicates that delinquency rates and charge-off rates for credit card loans saw a modest increase in 2017 across all banks but remained below their historical averages.
The Report also discusses recent trends in credit card pricing practices. Data from a survey that studied a sample of credit card issuers found that the average credit card interest rate across all accounts is about 13 percent, while the average interest rate on accounts that assessed interest was closer to 15 percent. The Report notes that, “while average interest rates paid by consumers have moved in a relatively narrow band over the past several years,” there exists is a great deal of variability across credit card plans and borrowers, reflecting various card features and the risk profile of the borrower.
FDIC implements updated interagency forms
On July 11, the FDIC issued Financial Institution Letter FIL-38-2018 announcing the implementation of revisions to several interagency forms. The updates, based upon recommendations from representatives from the FDIC, Federal Reserve, and the OCC, reflect new laws, regulations, capital requirements, and accounting rules. The changes are intended to improve the clarity of the requests, delete unnecessary information requests, and add transparency for filers concerning information required to consider a proposal.
The following revised forms may be used going forward for all applicable applications filed with the FDIC and are effective immediately:
Agencies issue statement on the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act
On July 6, the Federal Reserve Board, FDIC, and OCC issued an interagency statement regarding the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), S.2155/P.L. 115-174, which was signed into law by President Trump on May 24. The joint statement describes the interim positions the federal agencies will take with regard to amendments within the Act, including, among other things, (i) extending the deadline to November 25 for all regulatory requirements related to company-run stress testing for depository institutions with less than $100 billion in total consolidated assets; (ii) enforcing the Volcker Rule consistently with the Act’s narrowed definition of banking entity; and (iii) increasing the total asset threshold for well-capitalized insured depository institutions to be eligible for an 18-month examination cycle. The agencies intend to engage in rulemakings to implement certain provisions at a later date. The accompanying OCC and the FDIC releases are available here and here.
The Federal Reserve Board also issued a separate statement describing how, in accordance with the Act, the Board will no longer subject certain smaller, less complex banking organizations to specified regulations, including stress test and liquidity coverage ratio rules. The Act raised the threshold from $50 billion to $100 billion in total consolidated assets for bank holding companies to be subject to Dodd-Frank enhanced prudential standards. The Board intends to collect assessments from all assessed companies for 2017 but will not collect assessments from newly exempt companies for 2018 and going forward. Additionally, the statement provides guidance on implementation of certain other changes in the Act, including reporting high volatility commercial real estate exposures.
Federal Reserve, FDIC extend resolution plan filing deadline for 14 domestic firms
On July 2, the Federal Reserve Board and the FDIC announced that the deadline to file resolution plans, also known as living wills, for 14 domestic firms has been extended to December 31, 2019. This one-year extension provides more time for the agencies to provide feedback on the firms’ last round of resolution plan submissions, as well as for the firms to produce their next resolution plans as required by the Dodd-Frank Act. The agencies also issued a reminder that due to the recent passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act, banks with less than $100 billion in total consolidated assets are no longer bound by resolution plan requirements.
Federal Reserve issues enforcement actions against former bank employees
On June 26, the Federal Reserve released enforcement actions taken against two former bank employees for improper actions, including one employee who allegedly embezzled money from a bank’s customer on several occasions, and another who misappropriated funds through false representations and accounting entries to pay off personal and family members’ loans owed to the bank. The Federal Reserve issued consent prohibitions for both former employees, which prohibits them from, among other things, participating in any manner in the conduct of the affairs of any insured depository institution, or holding company or subsidiary of an insured depository institution.
Federal Reserve releases Comprehensive Capital Analysis and Review results
On June 28, the Federal Reserve released the results of the Comprehensive Capital Analysis and Review (CCAR) conducted for 35 firms. This is the eighth year the Fed has conducted the CCAR exercise for the largest U.S.-based bank holding companies. The Fed considers quantitative and qualitative factors in its evaluation, including projected capital ratios under hypothetical severe economic conditions and strength of the firm’s risk management, internal controls, and governance practices that support the capital planning process. This year, 18 firms were subject to both quantitative and qualitative assessments, and 17 firms were only subject to the quantitative assessment. The Fed objected to one firm’s capital plan based on qualitative concerns and issued conditional non-objections to two firms based on changes to the tax law that negatively affected capital levels. However, the one-time reductions are not considered a reflection of the firms’ performances under stress. Overall, U.S. firms have substantially increased their capital since 2009 when the first round of stress tests were conducted.