InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Federal Reserve Approves Final Regulatory Capital Rules
On July 2, the Federal Reserve Board approved a final rule to implement the risk-based and leverage capital requirements in the Basel III framework and relevant provisions mandated by the Dodd-Frank Act. The rule will require all banks to hold increased levels of higher quality capital. Specifically, the rule (i) increases the minimum common equity tier 1 capital requirement from 2% to 4.5% of risk-weighted assets; (ii) increases the minimum tier 1capital requirement from 4% to 6% of risk-weighted assets; and (iii) adds a new capital conservation buffer of 2.5% of risk-weighted assets. These minimum capital requirements remain unchanged from the agencies proposal issued last June. The rules also establish a minimum leverage ratio of 4% for all banking organizations.
The Federal Reserve Board received more than 2,600 comments on its proposed capital rules, most of which came from community banks. In response to concerns raised by smaller and community banking organizations, the Federal Reserve Board walked away from more onerous capital requirements that would have substantially increased the risk-weightings for residential mortgages. Instead, the final rule retains the risk-weights under current regulations for residential mortgage loans, provided they are not restructured or modified. Consistent with the proposal, residential mortgage exposures that are modified pursuant to the U.S. Treasury’s Home Affordable Mortgage Program (HAMP) will receive more favorable risk-weightings than other modified or restructured mortgage loans. In addition, the final rule would allow banking organizations that are not subject to the advanced approaches rule to make a one-time election to opt out of the requirement to include unrealized gains and losses in their regulatory capital. Moreover, the final rule permits banks with less than $15 billion in assets to grandfather certain existing trust preferred securities in their capital accounting. The final rule does not change the more stringent limits on the inclusion of mortgage servicing assets and deferred tax assets in regulatory capital calculations.
The final rule also extends the phase-in period for community banks. Internationally active banks must begin to implement the new capital rules in January 2014, while all other banking organizations will have until January 2015 to begin to phase in the new capital requirements.
Federal Reserve Board Requires AML Enhancements Prior to Bank Merger
On June 18, the Federal Reserve Board announced the execution of a written agreement with a bank and its bank and non-bank subsidiaries to resolve alleged shortcomings in the institutions’ BSA/AML compliance programs. The bank previously announced that its planned merger with another institution was delayed due to the Federal Reserve Board’s concerns. The bank retained a consultant to assist with compliance enhancements, which under the written agreement include, among other things: (i) a revised firm-wide written BSA/AML compliance program, (ii) a revised written customer due diligence program, (iii) a written suspicious activity monitoring and reporting program, and (iv) a six month suspicious activity look-back review.
Federal Reserve Board Report Finds Interchange Fee Exemption Benefiting Small Issuers
On May 23, the Federal Reserve Board issued a report showing that the exemption designed to protect small debit card issuers from interchange fee standards applied to large issuers is working as intended. The report indicates that depository institutions with consolidated assets of less than $10 billion, which are exempt from the interchange fee standard in Regulation II, received fee revenue of 43 cents per transaction in 2012 – roughly the same as the average received before Regulation II took effect. While the Dodd-Frank Act exempted small issuers from the interchange fee standard set in the regulation, it did not provide an exemption from the statute’s prohibition on network exclusivity. As a result, Regulation II requires every debit card issuer, regardless of size, to have at least two unaffiliated networks on every debit card. According to the report, most small issuers that responded to a survey about the effect of the network exclusivity provisions of the rule indicated that significant compliance costs were not incurred.
Banking Agencies Delay Certain Changes to Call Reports
On May 23, the OCC, the FDIC, and the Federal Reserve Board published a notice to delay certain proposed changes to Call Report data collection pending further consideration of whether and how to proceed with the changes. The notice explains that Call Report revisions related to consumer deposit accounts, including (i) the screening question about an institution's offering of such deposits, (ii) consumer transaction and nontransaction savings deposit account balances for institutions with $1 billion or more in total assets, and (iii) data on certain service charges on consumer deposit accounts, would not take effect before March 31, 2014. Similarly, data collection regarding total liabilities of an institution’s parent depository institution holding company that is not a bank or savings and loan holding company would not take effect before the same date. Certain other changes still will take effect on the proposed June 30, 2013 date, while others will be delayed until the end of 2013.
Federal Reserve Board, Illinois Regulator Issue Joint Enforcement Action Against U.S. Subsidiaries of Foreign Bank, OCC Issues Parallel Action
On May 17, the Federal Reserve Board released an April 29, 2013 written agreement between the Federal Reserve Board, an Illinois state regulator, a foreign bank, and its U.S. bank holding company subsidiary (the Holding Company) regarding certain Bank Secrecy Act/Anti-Money Laundering (BSA/AML) deficiencies at the foreign bank’s Chicago branch (the Branch) and an OCC regulated subsidiary of the Holding Company. The OCC took parallel action on the same date against the Holding Company’s Chicago bank subsidiary. The Federal Reserve Board agreement requires that the Holding Company conduct a comprehensive review of its BSA/AML compliance program within 60 days, and within 90 days submit a report of its findings and recommendations, a written enhanced program, and a written plan to strengthen board oversight. Also within 90 days, the Branch must submit a written plan to improve its BSA/AML compliance, and the foreign bank, the Holding Company, and the Branch must submit an enhanced customer due diligence program. The OCC agreement requires that the Chicago bank’s board establish a compliance committee and within 90 days submit a compliance action plan. Within 30 days, the bank’s board must review its current engagement with an independent consultant, and within 90 days (i) develop a staffing plan for its internal BSA compliance department, (ii) conduct an MIS assessment, (iii) develop customer due diligence controls, and (iv) develop written suspicious activity policies and procedures. Both agreements require quarterly reporting, and neither includes a monetary penalty.
Senator Warren Pushes Federal Authorities on Bank Prosecutions
On May 14, Senator Elizabeth Warren (D-MA) sent a letter to Federal Reserve Board Chairman Ben Bernanke, Attorney General Eric Holder, and SEC Chairman Mary Jo White seeking additional information about the agencies’ respective approach to enforcement actions. Specifically, the letter asks whether the agencies have conducted any internal research or analysis on trade-offs to the public between settling an enforcement action without admission of guilt and going forward with litigation to obtain an admission. The letter notes that the OCC recently informed Ms. Warren that it does not have any such internal research or analysis and reiterates Ms. Warren’s concern that “if a regulator reveals itself to be unwilling to take large financial institutions all the way to trial . . . the regulator has a lot less leverage in settlement negotiations.
Federal Reserve Board Issues Statement on Deposit Advance Products
On April 25, the Federal Reserve Board issued a policy statement on deposit advance products. The statement came on the same day that the OCC and the FDIC proposed more formal guidance for such products. The Board statement identifies potential “significant risks” associated with deposit advance products, including UDAP risk and other consumer compliance risk. The statement directs examiners to thoroughly review any deposit advance products offered by supervised institutions for compliance with Section 5 of the FTC Act and reminds banks of their responsibility for vendors hired to offer deposit advance products.
Federal Reserve Board Proposes Large Bank Assessment Rule
On April 15, the Federal Reserve Board proposed a rule that would establish an annual assessment for bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets and for nonbanks designated by the Financial Stability Oversight Council. The Dodd-Frank Act directed the Board to establish such an assessment to cover expenses the Board estimates are necessary to carry out its supervision and regulation of those companies. This proposed rule outlines how the Board would (i) determine which companies are assessed, (ii) estimate the total anticipated expenses, (iii) determine the assessment for each of the covered companies, and (iv) bill for and collect the assessment from the companies. Beginning this year, the Board proposes to notify covered companies of the amount of their assessment no later than July 15 of the year following each assessment period (the calendar year). After an opportunity for appeal, assessed companies would be required to pay their assessments by September 30 of the year following the assessment period. For the 2012 assessment period, the Board estimates that the assessment basis would be approximately $440 million. Comments on the proposal are due by June 15, 2013.
Banking Regulators Issue Additional Resolution Plan Guidance
On April 15, the Federal Reserve Board and the FDIC issued additional guidance for the first group of institutions required to submit resolution plans pursuant to the Dodd-Frank Act. That group includes 11 institutions that submitted initial resolution plans last year. Based on their review of those initial plans, the regulators offer additional instruction as to what information should be included in the 2013 submissions, including more detailed information about certain potential obstacles to resolvability under the Bankruptcy Code. Given the additional request, the regulators also extended the due date for the plans from July 1, 2013 to October 1, 2013.
Bank Regulators Announce First Foreclosure Review Payments
On April 9, the Federal Reserve Board and the OCC announced that payments to borrowers impacted by allegedly improper foreclosure practices would begin on April 12, 2013. The planned payments range from $300 to $125,000, and will be sent to certain borrowers whose mortgages were serviced by 11 of the 13 mortgage servicers subject to recently amended consent orders that replaced requirements related to the Independent Foreclosure Review process with $3.6 billion in cash payments and $5.7 billion in other assistance to 4.2 million borrowers. Payments to borrowers with mortgages serviced by two other servicers will be announced later. The payments will be sent in several waves, with the last wave expected to be sent in mid-July 2013. The announcement notes that the regulators categorized borrowers according to the stage of their foreclosure process and the type of possible servicer error. Then, amounts were determined for each category using the financial remediation matrix published in June 2012 as guidance, but also incorporating input from various consumer groups. The Board and the OCC also published a chart of payment amounts and the number of borrowers identified for each category.