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GOP Senators express concern on FDIC proposed rules regarding corporate governance and risk management
On July 31, Republican members of the U.S. Senate penned a letter to the Chairman of the FDIC, Martin Gruenberg, to convince the Chairman that an FDIC proposed rule regarding soundness standards for corporate governance and risk management may “hinder, not improve, safety and soundness in the U.S. financial system.” As previously covered by InfoBytes, the FDIC last sought comment on its NPRM titled “Guidelines Establishing Standards for Corporate Governance and Risk Management for Covered Institutions with Total Consolidated Assets of $10 Billion or More” in October 2023, which, among other things, would expand the responsibilities of the board of directors for financial institutions.
The Senators expressed three principal concerns about the proposed rules: first, that the proposed rules would impose new responsibilities on a financial institution’s board of directors that may be better suited to senior management, effectively “blur[ring] the lines between the responsibilities of senior management and responsibilities of the [b]oard,” particularly in respect of risk management processes; second, consistent with the criticisms by state supervisors, that some of the rules may conflict with other state and federal regulatory requirements, such as the preference that “risk management functions reside with the firm’s chief risk officer”; and third, the proposed rules would impose “burdensome” corporate governance standards to the smallest banks without any “empirical evidence” that any “discernible benefit” would be obtained. To confirm their findings, the Senators argued that the OCC removed requirements that were found to be analogous from a prior rulemaking — yet the FDIC has not.
The GOP Senators requested answers to several questions no later than August 16, such as whether the FDIC plans to amend or withdraw the proposed rules, and what level of engagement the FDIC had with state-based regulators or stakeholders in developing the proposal. The Senators also directed a question to the OCC’s Acting Comptroller regarding whether the OCC still “believes that board or risk committee approval of material policies under the Framework would be burdensome, and that these policies should be approved by management instead.” The Senators requested the FDIC withdraw the NPRM entirely.
FDIC seeks comments on proposed and stricter governance guidelines for regional banks
On October 11, the FDIC published a request for comment on proposed corporate governance and risk management guidelines that would apply to all insured state nonmember banks, state-licensed insured branches of foreign banks, and insured state savings associations that are subject to Section 39 of the Federal Deposit Insurance Act (FDI Act), with total consolidated assets of $10 billion or more on or after the effective date of the final guidelines.
The proposed guidelines cover board of director’s obligations, composition, duties, and committee structure that must be met to meet the standard of good corporate governance. The proposed guidelines state that the board will ultimately be responsible for the affairs of the covered institution and each individual member must abide by certain legal duties. Under the proposed guidelines, the board of directors must, among other things: (i) evaluate and approve a strategic plan covering at least a three-year period; (ii) establish policies and procedures by which the covered institution operates; (iii) establish a code of ethics covering legal requirements, such as insider information, disclosure, and self-dealing; (iv) provide active oversight of management; (v) exercise independent judgement; and (vi) select and appoint qualified executive officers. Additionally, the board will be required to maintain a majority of independent directors on the board and should consider diversity of demographic representation, opinion, experience, and ownership level when choosing its board members. The proposed guidelines would also require that the board have an audit committee, a compensation committee, a trust committee (if the covered institution has trust powers), and a risk committee.
Comments must be received by the FDIC by December 11, 2023.
FDIC proposes additions to its safety and soundness standards
On October 5, the FDIC issued a notice of proposed rulemaking that would add a new appendix to the agency’s safety and soundness standards. The new appendix, which would be Appendix C, “is intended to promote strong corporate governance and risk management at FDIC-supervised institutions that have total consolidated assets of $10 billion or more by proposing corporate governance and risk management guidelines.” The proposed guidelines would describe the general obligations of the board of directors, requiring the board to be active and involved in protecting the interests of the institution, adopt a code of ethics for the institution’s operations, and form a Risk Committee within the institution’s committee structure. The proposed guidelines would also require institutions to establish a risk management program that includes a “three-line-of-defense model” for risk monitoring and reporting, as well as require institutions to create and maintain a risk profile and risk appetite statements that are communicated to all employees to encourage compliance.
Agencies issue interim final rules to comply with EGRRCPA
On August 22 and 23, the OCC, Federal Reserve, and FDIC (Agencies) jointly issued two interim final rules to comply with the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) (previously Senate bill S.2155).
On August 22, the Agencies issued an interim final rule amending the liquidity coverage ratio (LCR) rule to treat certain eligible municipal securities as high-quality liquid assets. The LCR rule applies to banking organizations that have $250 billion or more in total assets or that have $10 billion or more in foreign exposures, and to their subsidiaries that have assets of $10 billion, as required by Section 403 of EGRRCPA. According to the FDIC’s Financial Institution Letter, FIL-43-2018, the interim final rule amends the LCR rule to (i) add liquid, readily-marketable, and investment grade municipal obligations to the list of assets eligible for treatment as level 2B liquid assets; (ii) include a definition for “municipal obligations”; and (iii) add a reference to the Federal Reserve’s definition of “liquid and readily-marketable.” The rule takes effect upon publication in the Federal Register and comments are due within 30 days of publication.
On August 23, the Agencies issued an additional interim final rule allowing a lengthened examination cycle for an expanded number of qualifying insured depository institutions and U.S. branches and agencies of foreign banks. Specifically, as authorized by EGRRCPA, the interim final rule would allow qualifying insured depository institutions with less than $3 billion in total assets (an increase from the previous threshold of $1 billion) to be eligible for an 18-month on-site examination cycle. The rule takes effect upon publication in the Federal Register and comments are due within 60 days of publication.
Prudential Regulators Finalize Liquidity Coverage Ratio Rule
On September 3, the OCC, the FDIC, and the Federal Reserve Board released a final rule establishing a minimum liquidity requirement for large and internationally active banking organizations. The rule will require banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure, and such banking organizations’ subsidiary depository institutions that have assets of $10 billion or more, to hold high quality, liquid assets (HQLA) that can be converted easily into cash in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a 30-day stress period. The ratio of the institution’s HQLA to its projected net cash outflow is its “liquidity coverage ratio,” or LCR. The Federal Reserve Board also is adopting a modified LCR for bank holding companies and savings and loan holding companies that do not meet these thresholds, but that have $50 billion or more in total assets. Bank holding companies and savings and loan holding companies with substantial insurance or commercial operations are not covered by the final rule. Relative to the proposal issued in October 2013, the final rule includes changes to the range of corporate debt and equity securities included in HQLA, a phasing-in of daily calculation requirements, a revised approach to address maturity mismatch during a 30-day period, and changes in the stress period, calculation frequency, and implementation timeline for the bank holding companies and savings and loan companies subject to the modified LCR. Covered U.S. firms will be required to be fully compliant with the rule by January 1, 2017. Specifically, covered institutions will be required to maintain a minimum LCR of 80% beginning January 1, 2015. From January 1, 2016, through December 31, 2016, the minimum LCR would be 90%. Beginning on January 1, 2017, and thereafter, all covered institutions would be required to maintain an LCR of 100%.
Prudential Regulators Propose Large Institution Liquidity Rule
On October 24, the Federal Reserve Board issued a proposed rule it developed with the OCC and the FDIC to establish a minimum liquidity coverage ratio (LCR) consistent with the Basel III LCR, with some modifications to reflect characteristics and risks of specific aspects of the U.S. market and U.S. regulatory framework. The proposal would create for the first time a minimum liquidity requirement for certain large or systemically important financial institutions. The covered institutions would be required to hold (i) minimum amounts of high-quality, liquid assets such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash, and (ii) liquidity in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a short-term stress period. The requirements would apply to all internationally active banking organizations—i.e., those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure—and to systemically important, non-bank financial institutions designated by the FSOC. The proposal also would apply a less stringent, modified LCR to bank holding companies and savings and loan holding companies that are not internationally active, but have more than $50 billion in total assets. The regulators propose various categories of high quality, liquid assets and also specify how a firm's projected net cash outflows over the stress period would be calculated using common, standardized assumptions about the outflows and inflows associated with specific liabilities, assets, and off-balance-sheet obligations. Comments on the proposed rule must be submitted by January 31, 2013.