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Senate Confirms Multiple Nominees
On March 29, the U.S. Senate confirmed President Obama’s three nominees for the FDIC Board of Directors: Martin Gruenberg, Thomas Hoenig, and Jeremiah Norton. However, the Senate did not confirm Mr. Gruenberg as Chair of the FDIC or Mr. Hoenig as the Vice Chair. Instead, Mr. Gruenberg will continue to serve as Vice Chair and will lead the board in an acting capacity. Thomas Curry was confirmed to serve as Comptroller of the Currency. As such, he will also sit on the FDIC Board, as he has in an independent position since 2004. The Senate also confirmed (i) Maurice Jones to be the Deputy Secretary of the Department of Housing and Urban Development, (ii) Christy Romero as Special Inspector General for the Troubled Asset Relief Program, (iii) Mary John Miller to serve as the Under Secretary for Domestic Finance at the U.S. Treasury Department, and (iv) Jon Leibowitz to another seven year term as Federal Trade Commission Chairman. Two nominees to the Federal Reserve Board, Jerome Powell and Jeremy Stein, remain pending in the Senate.
Federal Banking Regulators Propose Joint Revisions to Leveraged Finance Guidance
On March 26, the Federal Reserve Board, the FDIC, and the OCC proposed revisions to the interagency leveraged finance guidance issued in 2001. Leveraged finance transactions are characterized by a borrower with a degree of financial or cash flow leverage that significantly exceeds industry norms as measured by various debt, cash flow, or other ratios. According to the agencies, the guidance needs to be revised given increasing leveraged lending volumes, deteriorating underwriting practices, limited protection of debt agreements, aggressive capital structures and repayment prospects, and less than satisfactory management information systems. Specifically, the agencies believe that the guidance should be updated to refocus attention on the following five key areas: (i) establishing a sound risk-management framework, (ii) underwriting standards, (iii) valuation standards, (iv) pipeline management, and (v) reporting and analytics. The agencies are accepting comments on the proposed guidance through June 8, 2012.
FDIC Approves Proposed Rule to Amend Large Bank Pricing Assessment System
On March 20, the FDIC approved for publication a proposed rule to amend the large bank pricing assessment system to include revised definitions of nontraditional mortgage loans, subprime consumer loans, and leveraged commercial loans. A February 2011 FDIC rule, among other things, eliminated risk categories and the use of long-term debt issuer ratings and instead adopted scorecards that combine CAMELS ratings and certain forward-looking measures to assess risk posed by an institution to the FDIC insurance fund. One of the financial ratios used in the scorecards involves higher-risk assets, defined as the sum of construction and land development loans, leveraged loans, subprime loans, and nontraditional mortgage loans. The February rule used existing interagency guidance to define nontraditional mortgage loans, subprime consumer loans, and leveraged commercial loans, but refined the definitions to minimize reporting discrepancies. A subsequent FDIC notice added a requirement that covered institutions include nontraditional mortgage loans, subprime consumer loans, and leveraged commercial loans data in their Call Reports. However, institutions generally do not maintain data on those loans consistent with the definitions in the February rule, and therefore were not able comply with the reporting requirements. The proposed rule extensively revises these definitions to allow large banks to report the information needed to conduct the assessments.
FDIC Approves Proposed Rule Regarding Enforcement of Subsidiary and Affiliate Contracts
On March 20, the FDIC approved for publication a proposed rule to implement new authorities granted by the Dodd-Frank Act that permit the FDIC, as receiver for a financial company whose failure would pose a significant risk to financial stability, to enforce certain contracts of subsidiaries and affiliates of the covered company. This proposed rule would include contracts that purport to terminate, accelerate, or provide for other remedies based on the insolvency, financial condition, or receivership of the covered company, so long as the FDIC complies with statutory requirements. The proposed rule would apply broadly to all contracts and make clear that the FDIC’s authority as receiver effectively preserves contractual relationships of subsidiaries and affiliates during the liquidation process.
FDIC Warns Bank Directors and Officers Regarding Copying and Removal of Institution Information
On March 19, the FDIC issued Financial Institution Letter FIL-14-2012, which warns bank directors and officers that financial institution records belong exclusively to the institution, and supervisory records are the property of the FDIC. As such, directors and officers of failing institutions who make and remove copies of institution and supervisory records for “personal use” in preparing for anticipated litigation or enforcement activity (i) are breaching their fiduciary duty, (ii) are engaging in an unsafe and unsound banking practice, and (iii) may be violating the institution’s information security program. Personal use includes use by directors or officers to defend themselves against administrative, civil, and criminal proceedings or lawsuits based on actions taken in their official capacity. The Financial Institution Letter also reminds outside counsel to financial institutions that their legal and ethical obligations are only to the institution, and not to an institution’s directors or officers. The FDIC threatens bank directors and officers, and outside counsel with legal action for knowing or reckless violations of law or breach of fiduciary duty. In 2011, in a case in which the FDIC sued a law firm for having accepted copies of bank records from a bank prior to its closing to preserve for the defense of bank directors, BuckleySandler prepared an amicus brief for the American Association of Bank Directors asserting the right of bank directors to have free access to bank records that they need to defend themselves against administrative, civil, and criminal proceedings or suits.
Senate Banking Chairman Requests Audits of Community Bank and Credit Union Exam Processes
On February 10, Senator Tim Johnson, Chairman of the Senate Banking Committee, sent a letter to the inspectors general of the Department of Treasury, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the National Credit Union Administration seeking audits of each agency's exam process for community banks and credit unions. The letter cites community bank and credit union complaints of unclear standards and inconsistent application of policies and procedures. Sen. Johnson asked that the audit review (i) the overall exam process, (ii) examination timelines, and (iii) the ability of an institution to question or appeal exam results. The House Financial Services Committee has been considering legislation, H.R. 3461, that would mandate changes to the examination process. To date, no corresponding bill has been introduced in the Senate.
Agencies Release Guidance on ALLL Estimation Practices for Junior Liens
On January 31, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency (collectively, the agencies), released joint guidance related to allowance for loan and lease losses (ALLL) estimation practices associated with loans and lines of credit secured by junior leans on one- to four-family residential properties. The guidance reiterates, specifically with regard to junior liens, key concepts included in generally accepted accounting principles and existing ALLL supervisory guidance related to the ALLL estimation practices. The agencies provided the guidance to remind regulated financial institutions to monitor all credit quality indicators relevant to credit portfolios and to follow appropriate risk-management principles in managing junior liens.
FDIC Approves Final Rule Regarding Resolution Plans
On January 17, the FDIC approved a final rule establishing the requirements for submission and content of plans to assist the FDIC in the orderly resolution of insured depository institutions with total assets of at least $50 billion. The rule aims to help mitigate risks presented by insolvency of large and complex institutions by enhancing the FDIC’s ability to reduce losses to the Deposit Insurance Fund and limit disruption to the broader financial system. The $50 billion asset threshold means that thirty-seven institutions currently will be required to submit resolution plans (also known as “living wills”). This final rule follows and amends an interim final rule published in September 2011 (see InfoBytes, September 23, 2011). Some amendments are designed to more closely align the rule with a similar rule issued jointly by FDIC and the Federal Reserve Board in October 2011 to require resolution plans for certain bank holding companies. (See InfoBytes, October 21, 2011). Other changes to the interim final rule address comments submitted by stakeholders, including changes to (i) require plans to identify potential barriers or other material obstacles to an orderly resolution, (ii) allow for recapitalization as a resolution option, and (iii) require the FDIC in its plan review process to consult with a covered institution’s regulator before finding that an institution’s data production capability is unacceptable. Resolution plans will be submitted in phases to address the largest institutions first. For example, the first phase requires covered institutions whose parent company had at least $250 billion of nonbank assets as of November 30, 2011 to submit plans on July 1, 2012. Each covered institution must submit plans annually on the anniversary date of their initial submission.
FDIC Approves Proposal for Large Bank Stress Testing
On January 17, the FDIC approved a proposed rule to implement annual capital-adequacy stress tests for FDIC-insured state nonmember banks and state-chartered savings associations with over $10 billion of total consolidated assets. As of September 30, 2011, there were twenty-three such institutions. Required by the Dodd-Frank Act, the stress tests would assist the FDIC in assessing risk presented by an institution’s capitalization and help ensure the bank’s financial stability. Under the proposal, the FDIC would annually provide covered banks with at least three sets of conditions – baseline, adverse, and severely adverse – that must be used in conducting an annual stress test. The tests would include calculations, for each quarter-end within a defined planning horizon, of the impact on the covered bank’s (i) potential losses, (ii) pre-provision revenues, (iii) loan loss reserves, and (iv) pro forma capital positions, including the impact on capital levels and ratios. Covered banks also would be required to establish an oversight and documentation system to ensure that stress testing procedures are effective. Following a test, a covered bank would be required to submit the results to the FDIC and later release a summary to the public. Under the proposed timeline, each year (i) the FDIC would provide scenarios no later than mid-November, (ii) covered banks would submit their stress test reports by January 5, and (iii) by early April covered banks would publicly release a summary of results. Public comments on the rule will be accepted sixty days following publication of the rule in the Federal Register.