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Fed Releases List of Small Issuers Exempt from Debit Card Interchange Fees
On May 22, the Federal Reserve Board announced its lists of institutions that either are or are not exempt from the its debit card interchange fee standards found in Regulation II, which implements section 920 of the Electronic Fund Transfer Act (EFTA). The lists are intended to facilitate compliance by assisting payment card networks and others in determining which issuers qualify for the statutory exemption. The lists were generated from available data and contain institutions in existence on Dec. 31, 2016. Exempt institutions, together with their affiliates, have reported assets of less than $10 billion and are not subject to the interchange fee standards under the statute. Institutions that are not exempt have, either individually or together with their affiliates, reported assets of $10 billion or more, and therefore must comply with the interchange fee standards under the statute. Debit card issuers that do not appear on either of the lists must certify to their participating payment card networks that they are exempt from the interchange fee standards. The EFTA requires the Fed to biennially report on interchange fee revenue and costs incurred by debit card issuers and payment card networks. The Fed’s last report—for calendar-year 2015—cites interchange fees across all debit and general-use prepaid cards totaled $18.41 billion.
OIG Recommends CFPB Improve Enforcement Data Security
On May 15, the Office of Inspector General for the Consumer Financial Protection Bureau issued findings in a report entitled The CFPB Can Improve Its Practices to Safeguard the Office of Enforcement’s Confidential Investigative Information (the Report), stemming from an evaluation to determine whether the Bureau has effective controls to manage and safeguard access to Confidential Investigative Information (CII). The Report found that the Bureau’s practices could be improved. According to the findings, the Bureau’s Office of Enforcement (Office) allowed 113 unique users to have access to databases in which there was CII—which may include personally identifiable information—about companies that were subject to reviews by enforcement staff. Of those 113 users, 72 were still employed by the CFPB but did not have a need for access to that information, the report said.
Specifically, the OIG determined users continued to have access to at least one electronic application when it was no longer relevant to the performance of the users’ assigned duties. The OIG also cited instances of improper handling and safeguarding of sensitive information and inconsistent naming conventions for matters across its four electronic applications and two internal drives, which impeded the Office’s ability to verify, maintain, and terminate access to files. The OIG noted in the report that during its assessment the Office took several steps to correct these issues.
The OIG presented the following recommendations: (i) enhance practices for managing access rights to matter folders; (ii) improve the handling of printed sensitive information; and (iii)establish a standard naming convention for electronically stored information.
Germany’s Largest Bank Agrees to Fix Foreign Exchange Activities Controls and Volcker Rule Compliance Program, Fined Nearly $157 Million
On April 20, the Federal Reserve issued two separate enforcement actions against a major German global bank and its subsidiaries for allegedly failing to have appropriate controls to ensure that the bank’s foreign exchange activities (Covered FX Activities) were in compliance and also allegedly failing to have an adequate compliance program to ensure its traders abided by the Volcker Rule’s requirements. The combined sanctions total almost $157 million in civil money penalties.
Covered FX Activities. According to the Fed’s cease and desist order, the Board of Governors’ investigation, covering October 2008 through October 2013, found deficiencies in the bank’s governance, risk management, compliance, and audit policies and procedures. Specifically, FX traders communicated through chatrooms with traders at other financial institutions, but due to deficient policies and procedures, the bank failed to detect and address such “unsafe and unsound conduct.” Under the terms of the order, the bank is required to submit the following: (i) a written plan to improve senior management’s oversight of the bank’s compliance with applicable U.S. laws and regulations and applicable internal policies in connection with its foreign exchange activities; (ii) an enhanced written internal control and compliance program designed to monitor and detect potential misconduct; and (iii) a written plan to improve its compliance risk management program with applicable U.S. laws and regulations with respect to foreign exchange activities. In addition, the bank must pay a $136.9 million civil money penalty.
Volcker Rule. That same day the Fed also issued a consent order to the bank for allegedly failing to establish a compliance program reasonably designed to ensure and monitor compliance with Volcker Rule requirements. The Volker Rule prohibits insured depository institutions and affiliates from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund. The consent order’s findings were based on a Volcker Rule CEO attestation, “which identified the existence of weaknesses in the [bank’s] Volcker Rule compliance program, including, among other things, certain governance, design, and operational deficiencies across key compliance pillars and the design of reporting mechanisms.” Moreover, the Board of Governors’ determination was based on, among other things, (i) “significant” gaps in the bank’s compliance program which resulted in deficiencies in the scope of independent testing efforts; (ii) “significant” weaknesses in the bank’s demonstrable analyses “showing that its proprietary trading is not to exceed the reasonably expected near term demands of clients, customers, or counterparties—[referred to as “RENT-D”]—required for permitted market-making activities,”; and (iii) weakness in the bank’s metrics reporting and monitoring process which, when combined with the aforementioned, “limited the [b]ank’s ability to adequately monitor trading activity.” Under the terms of the consent order, the bank is required to submit a written plan to improve senior management’s oversight of the firm’s compliance with Volcker Rule requirements. It must also submit enhanced written internal controls and compliance risk management program measures. These submissions are in addition to paying a $19.71 million civil money penalty.
Credit Unions, Small Banks Encourage Fed Payments System Operational Role
On April 18, three industry organizations representing community banks and credit unions—the Credit Union National Association (CUNA), the Independent Community Bankers of America (ICBA), and the National Association of Federally-Insured Credit Unions (NAFCU)—sent a letter urging the Federal Reserve System (Fed) to provide central bank settlement services in support of private sector development of future payment systems, rules, and standards. The letter also urges the Fed to take on three operational roles in addition to settlement capabilities: (i) to serve as an “on-ramp” to real-time payments; (ii) to serve as a real-time payments operator, much as it currently is an operator for checks, automated clearinghouse payments, and wire transfers; and (iii) to maintain a “payments directory” that would link together financial institutions and private-sector payments directories. The organizations argue, among other things, that the Fed’s commitment to these operational roles is critically important to achieving the “much-needed goals of safety, equitable access, and ubiquity” in developing an improved payments system. The letter emphasizes that the organizations are not requesting that the Fed develop rules or standards for real-time payments, but rather take the position that such efforts “should be left for private sector rules and standards organizations.”
As previously covered by InfoBytes, the Fed created the Faster Payments Task Force and the Secure Payments Task Force in June 2015 to lead industry efforts toward a speedier and better payments system. The CFPB also issued a set of guiding principles aimed to help private industry better protect consumers as new, faster electronic payment systems continue to emerge. (See InfoBytes coverage) The April 18 letter “applaud[s] the formation of both [Task Forces]” and “strongly encourage[s] the ongoing commitment of the [Fed] to lead and catalyze payments industry activities until the desired outcomes stated in the 2015 Strategies for Improving the U.S. Payments System paper are achieved.”
Dallas Fed Explores Reasons Why Community Banks are “Flipping to State Charters”
Released earlier this month, the latest issue of the Federal Reserve Bank of Dallas’ Quarterly Publication Financial Insights, takes a closer look at the causes behind a recent trend in community banks opting to change from a national to a state charter. As explained in the article—entitled Community Banks Flipping to State Charters—“[v]ery few commercial banks—only about 1 percent—change charters in any given year,” but, “of those that do change charters, twice as many are choosing a state charter.” Indeed, according to the authors, “[o]f the 780 community banks that changed charters between 1995 and 2015, 529 left the control of the [OCC].” Having analyzed data from the National Information Center (NIC), the authors conclude that motivations for changing to a state charter vary broadly “from cost to culture,” but that “[b]roadly speaking, charter choice is generally a question of whether the higher assessment cost often associated with a national charter is offset by the benefits of operating under a single set of laws and regulations.”
Fed/CFPB OIG Releases Strategic Plan 2017-2020
On April 11, the Office of Inspector General (OIG) for the Fed and the CFPB published its Strategic Plan 2017–2020, providing an overview of the OIG’s organizational objectives for the next four years, as well as the indicators it will use to measure its performance as the “trusted oversight organization” of the Fed and the CFPB. According to a “Message From the Inspector General,” the Strategic Plan, is “the culmination of an extensive process that included a thorough functional assessment and organizational review of the OIG,” as well as an “extensive rebranding initiative.” The plan notes, among other things, that in order to “effectively engage all [its] stakeholders,” it is important that the OIG “successfully communicate [its] mission,” and “timely and effectively communicate [its] results.”
Departing Federal Reserve Governor Offers Final Thoughts
On April 4, outgoing Federal Reserve Governor Daniel K. Tarullo presented his departing thoughts on the Fed’s response to the “worst recession since the Great Depression.” In his speech, Tarullo discussed the Fed’s initial post-crisis regulatory response and how it addressed the “too-big-to-fail” concept—positing that the “quick action in assessing the firms, recapitalizing them where needed, and sharing the results of the stress tests with the public stands as one of the turning points in the crisis.” On the subject of the Dodd-Frank Act, Tarullo noted that “partisan divisions” have prevented necessary substantive enhancements from being made, such as changing various thresholds to narrow the scope of strict prudential requirements and relieve the burdens placed on small community banks, and changing the Volcker Rule to make it less complicated. Tarullo summarized his position by stating that “[e]ight years at the Federal Reserve has only reinforced my belief that strong capital requirements are central to a safe and stable financial system” and that furthermore, “it is crucial that the strong capital regime be maintained, especially as it applies to the most systemically important banks. Neither regulators nor legislators should agree to changes that would effectively weaken that regime, whether directly or indirectly.” Tarullo’s last day at the Fed was April 5.
Federal Reserve System Releases Audited Financial Statements for 2015 and 2016
On March 24, the Federal Reserve System released the 2015–2016 combined annual audited financial statements for the Reserve Banks and Board of Governors (Board) for the years ended December 31, 2015 and 2016 (27-FMIC-B-002). The report—conducted by an independent auditing firm and reviewed by the Office of Inspector General—issues unqualified opinions on the Reserve Banks’ and Board’s financial statements and internal controls over financial reporting. According to the Federal Reserve System, the financial statements “provide a significant amount of information about the assets, liabilities, and earnings of the Reserve Banks and the Board as of December 31, 2016, including information about the composition, fair value, and earnings related to the $4.4 trillion of U.S. Treasury securities, government-sponsored enterprise (GSE) debt securities, and federal agency and GSE mortgage-backed securities (MBS) acquired through open market operations.”
Some of the highlights include:
- 2016 earnings for the Reserve Banks were approximately $92 billion;
- Reserve Banks provided payments of $91.5 billion to the U.S. Treasury in 2016;
- Reserve Banks’ interest income on securities acquired through open market operations totaled $111.1 billion, a decrease of $2.5 billion when compared to 2015 results, and attributable to “changes in the composition of securities held in the Federal Reserve System Open Market Account”;
- Interest expense on depository institutions’ reserve balances and term deposits during 2016 was $12 billion, an increase of $5.1 billion from 2015;
- Interest expense on securities sold under agreements to repurchase was $1.1 billion in 2016, an increase of $874 million when compared to the prior year; and
- Reserve Bank operating expenses for 2016 were $6.7 billion, which includes assessments of $2 billion for Board expenses, currency costs, and the operations of the CFPB.
Bank Holding Company and Nonbank Auto Lender Subsidiary Sign New Written Agreement with Boston Fed
On March 21, the Federal Reserve Bank of Boston (Boston Fed) and a national bank holding company and its nonbank subsidiary (a Dallas-based auto lender) entered into a Written Agreement to address concerns related to their July 2015 Written Agreement, which required a detailed description of the holding company’s efforts to strengthen board oversight specifically with regard to committees, executive positions, and lines of reporting (see July 2015 InfoBytes summary). The 2017 Written Agreement is a result of deficiencies identified by the Boston Fed in the subsidiary’s compliance risk management program. The terms of the current Written Agreement require, among other things, the board of directors of the subsidiary to submit a revised compliance risk management plan addressing, among others: (i) comprehensive compliance risk assessments to identify “risks associated with applicable consumer compliance laws”; (ii) enhanced written policies and procedures to address risks arising from noncompliance; and (iii) a revised code of conduct for employees that outlines rules governing compliance and reporting processes for known or suspected violations of consumer compliance laws, regulations, and supervisory guidance. Furthermore, the company must submit written revisions to its firmwide internal audit program with respect to auditing its revised compliance risk management program.
OCC Chief Issues Remarks on Fintech Charter Plan; Federal Reserve Governor Highlights Virtual Currency Risks
On March 6, Thomas Curry, Comptroller of the Office of the Comptroller of the Currency (OCC) spoke at the LendIt USA 2017 conference and addressed arguments against the regulator’s authority to provide charters to Fintech firms as presented in its December 2016 white paper, Exploring Special Purpose National Bank Charters for Fintech Companies (see InfoBytes Special Alert). Curry stated, “[T]he National Bank Act [] give[s] the OCC the legal authority to grant national bank charters to companies engaged in the business of banking,” and added that “[i]t is not circumscribed just because a company delivers banking services in new ways with innovative technology.” Curry says the OCC plans to publish a supplemental document to clarify ways it will evaluate Fintech companies that apply for charters.
Regarding the risks posed by institutions creating their own virtual currencies, Federal Reserve’s lead governor, Jerome Powell, said in remarks made to Yale University on March 3 that the risks and technological challenges are far too high for central banks to undertake. “Any central bank actively considering issuing its own digital currency would need to carefully consider the full range of the payments system and other policy issues, which do seem substantial, as well as the potential societal benefits,” said Powell. “I would expect private-sector systems to be more forward-leaning than central banks in providing new features to the public through faster payments systems as they compete to attract retail customers,” Powell said. “A central bank-issued digital currency would compete with these and other innovative private-sector products and may stifle innovation over the long run.”