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Fed, FDIC, and OCC release stress test scenarios for 2024
On February 15, the Fed, OCC, and the FDIC released their annual stress test scenarios for 2024 to assist the agencies in evaluating their respective covered institution’s risk profile and capital adequacy. The Fed released its “2024 Stress Test Scenarios” to be used by banks and supervisors for the 2024 annual stress test. The scenarios include hypothetical sets of conditions to evaluate the banks under baseline and severely adverse scenarios. The OCC similarly released economic and financial market scenarios to be used by national banks and federal savings associations and include both baseline and severely adverse scenarios as mandated by the stress testing requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The FDIC also released its stress test scenarios for certain state nonmember banks and state savings associations in conjunction with the OCC and the Fed.
Fed finds CEO engaged in crypto “pig butchering” scam which led to bank failure
On February 7, the Federal Reserve issued an evaluation report, as required by the Federal Deposit Insurance Act (where a loss to the deposit insurance fund is considered material), on a recently failed bank; the Fed concluded the bank failed due to alleged fraudulent activity by the bank’s CEO. In particular, the Fed found that the CEO initiated a series of wire transfers over the course of three months totaling about $47.1 million of the bank’s money as part of a cryptocurrency scam known as “pig butchering.” According to a FinCEN alert, “pig butchering” occurs when a scammer convinces its victims to invest in purportedly legitimate cryptocurrency investments but then steals the victim’s money.
The Fed found that the bank’s employees neglected to follow proper internal controls and policies that could have “prevented or detected” the alleged fraudulent activity, attributing the failure to a reluctance to challenge the CEO given the CEO’s “dominant role in the bank and prominent role in the community.” Specifically, the employees did not comply with the bank’s BSA/AML policy or file suspicious activity reports as outlined under the policy. As a result, the Fed recommended (i) increasing the awareness among state member banks of cryptocurrency scams; and (ii) providing training to examiners on cryptocurrency scams.
OCC’s Hsu discusses appraisal bias
On February 13, Acting Comptroller of the Currency Michael Hsu discussed eliminating appraisal bias in the financial industry at a public hearing held by the Appraisal Subcommittee of the FFIEC. In his remarks, Hsu highlighted the importance of addressing bias in the existing standards for appraisal reports to aid in the OCC’s efforts to expand access to homeownership. Hsu noted that the OCC is taking steps to increase access to homeownership by improving supervisory methods used to identify potential discrimination in lending and housing valuations and encouraging banks to expand affordable housing financing and access to credit.
Senate Banking Committee hearing on P2P payment scams calls for updates to EFTA definitions
On February 1, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing on “Examining Scams and Fraud in the Banking System and Their Impact on Consumers,” and invited three panelists to testify, including an attorney from a consumer law center and two vice presidents from banking associations. Chairman Sherrod Brown (D-OH) led the hearing by noting that peer-to-peer (P2) apps are a rising target among scammers, alongside a rise in check fraud. The Chairman noted a 2023 alert from FinCEN warning (as covered by InfoBytes here) of a surge in check fraud after a “drastic” rise in scams, and concluded with a statement that the P2P companies need “rules to make them” do better. Next, Ranking Member Senator Tim Scott (R-SC) called for the companies to spend more money developing security technologies to protect consumers from fraud. Sen. Scott then called for better education in financial literacy to learn about scams and methods.
At the hearing, Mr. John Breyault noted that reported losses from P2P payment platforms nearly doubled from $87 million in 2020 to $163 million in 2022. Mr. Breyault asked Congress to play a larger role in preventing fraud on P2P platforms and urged the passage of the Protecting Consumers from Payment Scams Act (which would expand EFTA’s definition of unauthorized electronic fund transfer to cover fraudulently induced payments). Ms. Carla Sanchez-Adams, in her testimony, asserted the entire burden of payment fraud should not fall on the customers and advocated for an updated Electronic Funds Transfer Act that protects consumers from fraudulently-induced transactions. She testified that receiving institutions should have more responsibility, and called for anti-fraud policies that protect consumers from having their accounts frozen, among others. Mr. Paul Benda testified to similar points: he called for an increase in consumer education and the closure of regulatory loopholes to stop impersonation scams. He testified in favor of improved information sharing and enhanced collaboration with law enforcement and regulators.
UK’s Prudential Regulation Authority imposes its second highest fine against a bank
On January 30, UK’s Prudential Regulation Authority (PRA) fined a large bank £57,417,500, the second highest fine ever imposed by the PRA, for allegedly failing to properly implement Depositor Protection Rule requirements. The bank allegedly exhibited shortcomings in depositor protection like maintaining information integrity, which is relied upon by the Financial Services Compensation Scheme (FSCS) to make payments to depositors in the event of a firm failure. In addition, the PRA alleged that the bank did not identify eligible deposits for FSCS protection from 2015 to 2022. The bank also allegedly failed to notify the PRA of inaccuracies in its account of eligible FSCS-protected accounts in a timely manner or to appoint a senior manager responsible for ensuring compliance with Depositor Protection Rules. The bank agreed to settle this matter at an early stage of the PRA’s investigation.
OCC and FDIC announce their CRA evaluations
On February 2, OCC and the FDIC released their Community Reinvestment Act (CRA) evaluations. The OCC disclosed a list of evaluations of national banks, federal savings associations, and insured federal branches of foreign banks that became public in January 2024. Out of the 18 evaluations, six were rated “outstanding,” nine were rated “satisfactory,” and three were rated as “needs to improve.” The evaluations can be accessed on the OCC’s website, including a searchable list of all public CRA evaluations. Simultaneously, the FDIC released its list of state nonmember banks that were evaluated for CRA compliance in November 2023. Out of 57 evaluations, 56 were rated as “satisfactory” and one bank was rated as “outstanding.”
Federal Reserve releases January SLOOS report on bank lending practices from Q4 2023
On February 5, the Federal Reserve Board released the results from their January 2024 Senior Loan Officer Opinion Survey (SLOOS) on bank lending practices. The SLOOS addressed changes in standards, terms, and the demand over bank loans over the past three months (i.e., Q4 of 2023). The SLOOS’s topics included commercial and industrial lending, commercial and residential real estate lending, and consumer lending. The SLOOS included questions on banks’ expectations for changes in lending standards, borrower demand and asset quality over 2024.
The SLOOS provided specific findings for each of its topics. On loans to businesses, banks generally reported tighter standards and weaker demand for commercial and industrial loans, as well as all commercial real estate loan categories. Demand weakened for all residential real estate loans. On loans to households, banks generally reported tighter lending standards for residential real estate loans, but the standards were unchanged for government-sponsored enterprise-eligible residential mortgages. For home equity lines of credit, banks reported tighter standards and weaker demand; this falls in line with credit card, auto, and other consumer loans, generally. Last, on the banks’ 2024 expectations, they expect lending standards to remain unchanged for commercial and industrial loans, and residential real estate loans, but to tighten further for commercial real estate, credit card, and auto loans. Banks also reported that they expect demands for loans to strengthen, but loan quality to weaken, across all categories. The SLOOS includes 67 pages of data gleaned from its questions.
FDIC issues December 2023 enforcement actions
On January 26, the FDIC released a list of administrative enforcement actions taken against banks and individuals in December 2023. During that month, the FDIC made public 12 orders consisting of “four orders of termination of deposit insurance; three orders terminating consent orders; two consent orders; one order terminating supervisory prompt corrective action directive; one order of prohibition from further participation; one order to pay a civil money penalty (CMP); and one Decision and Order to Prohibit from Further Participation and Assessment of Civil Money Penalty.”
Included is a consent order with a Mississippi-based bank for alleged Bank Secrecy Act violations, along with violations of a previous consent order from 2020, imposing a $600,000 civil money penalty. Also included is a consent order with a Kentucky-based bank, alleging the bank engaged in “unsafe or unsound banking practices and violations of law or regulation” relating to, among other things, the Bank Secrecy Act. The bank neither admitted nor denied the allegations but agreed to create a written plan to recover its losses from the bank’s relationship with a third-party loan program, to reduce the bank’s risk position in the program, and to stop granting any extensions of credit through adversely classified or criticized loans related to the third-party loan program. The consent order additionally requires the bank’s board to assess the sufficiency of the bank’s allowance for credit losses (ACL), ensuring the establishment of an appropriate ACL and to uphold and accurately report it. Specifically, “management shall review updated credit risk metrics and loss data for the third-party loan programs referenced in the ROE and ensure appropriate provisions to the ACL relative to this information.”
OCC issues proposed rule for bank merger approvals
On January 29, the OCC announced a proposed rule for bank merger approvals under the Bank Merger Act (BMA). The OCC proposed changes to 12 CFR 5.33 to reflect its view that a business combination is a significant corporate transaction.
The OCC suggested two key changes to its business combination regulation (12 CFR 5.33). First, it proposed removing the expedited review procedures outlined in § 5.33(i). Currently, this provision automatically approves certain filings after the 15th day following the close of the comment period, but the OCC believes that no business combinations subject to § 5.33 should be approved solely based on elapsed time. Additionally, the OCC suggests removing paragraph (d)(3), as it pertains to defining applications eligible for expedited review. Second, the OCC proposes the removal of § 5.33(j), which outlines four scenarios allowing an applicant to use the OCC's streamlined business combination application instead of the full Interagency Bank Merger Act Application. The streamlined application seeks information on similar topics, but only requires detailed information if the applicant answers affirmatively to specific yes-or-no questions. Currently, a transaction eligible for the streamlined application also qualifies for expedited review, a feature the OCC is proposing to eliminate. Additionally, a new policy statement (proposed as Appendix A to 12 CFR part 5, subpart C) is introduced to provide clarity and guidance on general principles used by the OCC in reviewing applications under the BMA. The policy statement also covers considerations for financial stability, resources, prospects, and convenience and needs factors. Criteria for deciding whether to hold a public meeting on a BMA application were also outlined.
Comments from the public are due 60 days from the date of publication in the Federal Register.
Fed announces an end date to its Bank Term Funding Program
On January 24, the Federal Reserve announced that its program created to protect liquidity following a period of financial stress last spring, named the Bank Term Funding Program (BTFP), will stop making loans on March 11. The Fed was granted the authority to provide more liquidity to depository institutions under Section 13(3) of the Federal Reserve Act, whereby the Fed can lend to banks and nonbanks in emergencies and for one year at a time. The Spring 2023 banking issues led to liquidity concerns, which the Fed sought to stabilize with the BTFP. According to the term sheet, the rate for term advances will be the “one-year overnight index swap rate plus 10 basis points” as long as the rate is not lower than the IORB rate that same day. In return, the borrower financial institutions pledge their debt and securities as collateral. The Fed notes that advances can still be requested under the BTFP until March 11. However, the interest rate applicable to new BTFP loans between now and March 11 will be no lower than the interest rate on reserve balances (IORB).