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FDIC Vice Chairman Discusses Forces of Change in Banking Industry, Proposes Regulatory Relief
On May 12, FDIC Vice Chairman Tom Hoenig spoke at the Systemic Risk and Organization of the Financial System Conference in California. He delivered prepared remarks on “Financial Markets and Accountability: A Better Way Forward.” Specifically, Hoenig discussed his views on the need for change in the banking industry and how his recently introduced reform proposal would strengthen the financial system and provide regulatory relief and long-term economic growth.
Hoenig argued that his proposal, “Regulatory Relief and Accountability for Financial Holding Companies Engaged in Nontraditional Banking Activities,” would help cure the ills and vulnerabilities of the current U.S. financial system, in which the largest banks have grown disproportionately big with activities that are too consolidated, resulting in a financial system that remains “heavily subsidized, increasingly concentrated, and less competitive.”
Hoenig’s proposal outlines ideas to address too-big-to-fail, enhance financial stability, and return the “safety net to its original purpose of depositor and payment system protection.” The proposal requires the largest banks to hold more capital, while partitioning nonbank activities away from the safety net. Hoenig stated that his proposal is intended to enhance competition by creating a more level playing field between insured and noninsured financial firms. The proposal also inhibits the intermingling of funding and operations between affiliates, which, while advantageous during good times, provides “far greater advantages” during bad times. Hoenig stated this would provide more stability and more consistent economic growth, and facilitate resolution using bankruptcy.
ICBA Support. Independent Community Bankers of America President and CEO Camden R. Fine issued a statement on Hoenig’s remarks, agreeing that “excessive regulatory burdens have exacerbated the dangerous consolidation of the banking industry into fewer and fewer hands,” and that “[t]o combat excessive consolidation and concentration of resources in the largest and most systemically risky financial firms, ICBA advocates comprehensive regulatory relief for community banks.” ICBA recently published a white paper entitled Community Bank Regulatory Relief: A Roadmap to Economic Growth and Prosperity outlining its views on regulatory reform.
House Financial Institutions and Consumer Credit Subcommittee Examines Transparency in the Financial Regulatory System
On March 6, the House Financial Institutions and Consumer Credit Subcommittee held a hearing to consider the need to increase transparency in the financial regulatory system and examine opportunities for reform. According to a committee memorandum, the purpose of the hearing was to examine both (i) “the impact the rules and processes from federal financial agencies . . . have had on financial companies and their customers”; and (ii) “opportunities for reform of these federal financial agencies, with the aim of improving transparency, accountability and due process for regulated persons and entities and their customers.” As explained by Chairman Blaine Luetkemeyer in a committee press release following the hearing, “ambiguous guidance, contradictory rules, and aggressive enforcement has led to confusion for financial companies seeking to comply with Dodd-Frank and other Obama-era rules.” And, the Chairman continued, “the greatest impact is on the customers of those financial companies, who in many cases have been left clamoring for access to financial services, and paying more for the ones they’ve been able to retain.”
Four witnesses offered testimony and answered questions before the committee:
- Greg Baer, President of the Clearing House Association, focused his testimony on the critical importance of the due process clause and the Administrative Procedure Act, and how “a transparent [rule-making] process tend[s] to produce better regulation,” while the lack thereof has “adverse consequences on the quality of rules being administered and the ability of our banking system to support economic growth.”
- Norbert Michel, a senior Research Fellow at the Heritage Foundation, testified, among other things, that “for decades, the U.S. regulatory framework has increasingly made it more difficult to create and maintain jobs and businesses that benefit Americans,” and that, “[o]ne of the main reasons the regulatory regime has been counterproductive for so long is because it allows regulators to micromanage firms’ financial risk, a process that substitutes regulators’ judgments for those of private investors.”
- Amias Moore Gerety, Former Acting Assistant Secretary for Financial Institutions, U.S. Department of the Treasury discussed both (i) how the post-crisis Wall Street Reforms “strengthened our financial system and supported our economic recovery,” and (ii) how “the ability to deliver regulation that is appropriate to the risk is the central question for policy makers designing financial regulation—both of individual institutions and for the constantly evolving financial system as a whole.”
- Bill Himpler, an Executive Vice President at the American Financial Services Association shared what he viewed as a contradiction between his belief that “[c]redit should not be limited to the wealthy or those with perfect credit scores,” and his observation that the “CFPB seems to believe that credit should only be extended to those borrowers who do not present any risk.”
House Financial Institutions and Consumer Credit Subcommittee Hearing Examines Decline in New Bank/Credit Union Charter Applications
In an afternoon hearing on March 21 entitled “Ending the De Novo Drought: Examining the Application Process for De Novo Financial Institutions,” Members of the House Financial Services Financial Institutions and Consumer Credit Subcommittee met to examine the impact that the Dodd-Frank Act has had on the creation of new or “de novo” financial institutions. According to a majority staff memorandum released in advance of the hearing, the number of new, or “de novo,” bank and credit union charters has declined to historic lows since the passage of the Dodd-Frank Act. From 2010 to 2016, there were only five new bank and 16 new credit union charters granted. In comparison, between 2000 and 2008, 1,341 new banks and 75 new credit unions were chartered.
Three of the witnesses – each of whom appeared on behalf of a banking industry group – generally agreed that the Dodd-Frank Act has, to some extent, had a “chilling impact” on the creation of new banks:
- Kenneth L. Burgess, speaking on behalf of the American Bankers Association noted, among other things, that “in the five years since Dodd-Frank was enacted, the pace of lending was half of what it was several years before the financial crisis. Some banks have stopped offering certain products altogether, such as mortgage and other consumer loans.”
- Keith Stone, representing the National Association of Federally-Insured Credit Unions, noted that “[t]he compliance requirements in a post-Dodd-Frank environment have grown to a tipping point where it is nearly impossible for many smaller institutions to survive, much less start from scratch.”
- Patrick J. Kennedy, Jr., appearing on behalf of the Subchapter S Bank Association, noted that “[m]any banks exited the mortgage loan business because of the complexity and uncertainty resulting from Dodd Frank, the CFPB and related rulemaking.”
The fourth witness, Sarah Edelman, offered an alternative explanation for the decline in new bank applications to the FDIC. Ms. Edelman—who is currently the director of housing finance at the Center for American Progress—testified as to her belief that the “decline” in “[t]he number of new bank applications to the FDIC . . . is largely the result of macroeconomic factors, including, historically low interest rates reducing the profitability of new banks, as well as investors being able to purchase failing banks at a discount following the financial crisis.”
In December of last year, the FDIC released a handbook entitled Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions, which provides an overview of the business considerations and statutory requirements that de novo organizers face as they work to establish a new depository institution and offers guidance for navigating the phases of establishing an insured institution. Rather than establish new policy or offer guidance, the Handbook instead “seeks to address the informational needs of organizers, as well as feedback from organizers and other interested parties during recent industry outreach events.” Comments were due February 20. Additional resources are available through an FDIC website dedicated to applications for deposit insurance.
Conference of State Bank Supervisors Releases Statement to Congress on OCC Fintech Charters
On March 15, the Conference of State Bank Supervisors released a statement from its president, John W. Ryan, in response to last December’s OCC white paper titled Exploring Special Purpose National Bank Charters for FinTech Companies (the Proposal). As previously covered in an InfoBytes Special Alert, the white paper outlines the authority of the OCC to grant national bank charters to FinTech companies and describes minimum supervisory standards for successful FinTech bank applicants. CSBS’s statement follows a comment letter submitted to the OCC in January (along with several other letters submitted by stakeholders—see previously posted InfoBytes summary) in which numerous concerns about the federal charters were raised. Ryan stated that the OCC’s Proposal "sets a dangerous precedent [by demonstrating that] the OCC has acted beyond the legal limits of its authority [and has] bypassed and ignored bipartisan objections from Congress, [thereby] creat[ing] new risks to consumers.” He asserted that the proposed charter would “preempt existing state consumer protections without a comparable mechanism to replace them. It also exposes taxpayers to the risk of inevitable [F]inTech failures." Furthermore, state regulators oversee "a vibrant system of non-depository regulation," he noted. Many mortgage, debt collection, and consumer finance companies operate under state charters, and non-banks have access to a streamlined process to obtain licenses to operate in more than one state via a nationwide licensing system. “State regulators continuously improve this process—having slashed approval times by half in recent years—and lead the way in developing model frameworks and consumer protections for cutting-edge areas like virtual currency. And by its very nature, state regulation limits systemic risk.”
OCC Releases Draft “Licensing Manual Supplement” to be Used for Evaluating Fintech Bank Charter Applications; Will Accept Comments Through April 14
On March 15, the OCC released both a Draft Licensing Manual Supplement for Evaluating Charter Applications From Financial Technology Companies (“Draft Fintech Supplement”) and a Summary of Comments and Explanatory Statement (“March 2017 Guidance Summary”) (together, “March 2017 Guidance Documents”) in which it provides additional detail concerning application of its existing licensing standards, regulations, and policies in the context of Fintech companies applying for special purpose national bank charters. The Draft Fintech Supplement is intended to supplement the agency’s existing Licensing Manual. The March 2017 Guidance Summary addresses key issues raised by commenters, offers further explanation as to the OCC’s decision to consider applications from Fintech companies for an Special Purpose National Bank (“SPNB”) charter, and provides guidance to Fintech companies that may one day wish to file a charter application.
The March 2017 Guidance Documents emphasize, among other things, certain “guid[ing]” principles including: (i) “[t]he OCC will not allow the inappropriate commingling of banking and commerce”; (ii) “[t]he OCC will not allow products with predatory features nor will it allow unfair or deceptive acts or practices”; and (iii) “[t]here will be no “light-touch” supervision of companies that have an SPNB charter. Any Fintech companies granted such charters will be held to the same high standards that all federally chartered banks must meet.” Through its commitment to (and alignment with) these principles, the OCC “believes that making SPNB charters available to qualified [FinTech] companies would be in the public interest.”
Notably, the OCC emphasized that its latest Fintech guidance “is consistent with its guiding principles published in March 2016” and “also reflects the agency’s careful consideration of comments received (covered by InfoBytes here) on its December 2016 paper discussing issues associated with chartering Fintech companies.” As covered in a recent InfoBytes Special Alert, the OCC has, over the past several months, taken a series of carefully calculated steps to position itself as a leading regulator of Fintech companies.
Finally, although it does not ordinarily solicit comments on procedural manuals or supplements, the OCC will be accepting comments on the aforementioned Fintech guidance through close of business April 14.
President Trump Hosts “National Economic Council” Listening Session with CEOs of Small and Community Banks
On March 9, President Trump met with 11 community bank CEOs at the White House seeking the bankers’ input on which regulations may be crimping their ability to lend to consumers and small businesses. The meeting included representatives from the Independent Community Bankers of America (ICBA), and the American Bankers Association (ABA), as well as nine bank executives from across the country. Treasury Secretary Steven Mnuchin, National Economic Council Chairman Gary Cohn, and White House Chief of Staff Reince Priebus also were present.
The President started the meeting by noting that “[n]early half of all private-sector workers are employed by small businesses” and that “[c]ommunity banks are the backbone of small business in America” before announcing his commitment to “preserving our community banks.” Following the President’s brief opening remarks, the attendees had the opportunity to introduce themselves and share specific examples of how excessive regulatory burdens affect their ability to serve their customers, make loans and create jobs at the local level. Proposals, such as the ICBA’s Plan for Prosperity, also were discussed.
Following the meeting, ABA President and CEO Rob Nichols released a statement “commend[ing] President Trump for meeting with community bankers to hear the challenges they face serving their clients.” He described the meeting as “an important step” toward re-examining the “highly prescriptive rules” that have created a “regulatory environment” in which “mortgages don’t get made, small businesses don’t get created and banks find it more difficult to make the loans that drive job creation.” The ICBA also issued a post-meeting Press Release, in which their Chairman, Rebeca Romero Rainey, explained that among the items discussed at the meeting was the ICBA’s “Plan for Prosperity”—a “pro-growth platform to eliminate onerous regulatory burdens on community banks” that “includes provisions to cut regulatory red tape, improve access to capital, strengthen accountability in bank exams, incentivize credit in rural America and more.” The ICBA Chairman also confirmed that the Association “looks forward to continuing to work with President Trump, his administration and Congress to advance common-sense regulatory relief that will support communities nationwide.”
Also weighing in was House Financial Services Committee Chairman Jeb Hensarling (R-TX), who issued a press release praising the President for “listening to the concerns of community bankers who have been buried under an avalanche of burdensome regulations as a result of Dodd-Frank.” Chairman Hensarling also took the opportunity to tout the Financial CHOICE Act, his bill that would make sweeping amendments to the Dodd-Frank Act. According to Chairman Hensarling, GOP members on the Financial Services Committee are “eager to work with the President and his administration this year to fulfill the pledge to dismantle Dodd-Frank and unclog the arteries of our financial system so the lifeblood of capital can flow more freely and create jobs.”
NYDFS Landmark Cybersecurity Rule Set to Take Effect on March 1
On February 16, New York Governor Andrew Cuomo announced that with the New York Department of Financial Services’ (NYDFS) publication of a Final Regulation, New York’s “First-in-the-Nation Cybersecurity Regulation” is set to take effect on March 1. As discussed previously in InfoBytes, the regulation—which requires banks, insurance companies, and other financial services institutions regulated by NYDFS to establish and maintain a cybersecurity program designed to protect consumers’ private data—imposes broad and, in some cases proscriptive, data security and cybersecurity requirements on Covered Entities that venture into new territory for both state and federal financial regulators. Indeed, as described by Governor Cuomo, the regulation reflects New York’s efforts to “lead[] the nation” through “decisive action to protect consumers and our financial system from serious economic harm that is often perpetrated by state-sponsored organizations, global terrorist networks, and other criminal enterprises.”
Moreover, as detailed in a follow-up InfoBytes Special Alert, NYDFS issued a updated proposed regulation on December 28 in response to over 150 comments and testimony presented at a hearing before New York State lawmakers. Though the updated proposed regulation did not differ drastically from the original, the revised proposed regulation provided for somewhat greater flexibility in how covered entities could go about implementing the requirements. Among other things, the December 28 revisions provided for: (i) longer timeframes for compliance with its requirements; (ii) more flexibility for compliance with certain requirements and acknowledgement that some requirements may not be applicable to all financial institutions; and (iii) clarifications to certain key definitions.
The newly released Final Regulation retains the revisions incorporated in the December 28 revision, but also contains the following notable revisions:
- Record retention requirements for audit trail materials relating to Cybersecurity Events were reduced from five years to three years.
- Clarification that Covered Entities’ policies and procedures for reporting by Third Party Service Providers of Cybersecurity Events only apply to the Covered Entity’s Nonpublic Information.
- The limited exemption for small businesses to certain requirements of the rule has been narrowed by including a Covered Entity’s New York affiliates when calculating its number of employees and annual revenue.
- Further clarification on the exemptions for companies regulated under New York’s Insurance Law.
With the expiration of the 30-day comment period and the publication of the Final Rule, New York’s Cybersecurity regulation is officially cleared to become effective upon publication in the New York State Register on March 1.
InfoBytes will continue to monitor the rollout of this pioneering regulation as it progresses.
OCC Proposes Final Revisions to Stress Test Information Collection
On February 2, the OCC requested comment on proposed revisions to an existing information collection entitled “Company-Run Annual Stress Test Reporting Template and Documentation for Covered Institutions with Total Consolidated Assets of $50 Billion or More Under the [Dodd-Frank Act].” The agency is also giving notice that it has sent the collection to the OMB for review. This information collection is related to the conduct of annual stress tests that the Dodd-Frank Act requires of certain financial companies, including national banks and federal savings associations. Comments on the current notice must be received by March 6, 2017.
FDIC Issues List of Banks Examined for CRA Compliance
On February 3, the FDIC released its February 2017 list of state nonmember banks recently evaluated for compliance with the Community Reinvestment Act (CRA). As part of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Congress mandated the public disclosure of an evaluation and rating for each bank or thrift that undergoes a CRA examination on or after July 1, 1990. A monthly list of banks examined for CRA compliance dating back to 1996 can be accessed here. The February 2017 list covers evaluation ratings that the FDIC assigned to institutions in November 2016. Of the 49 banks evaluated, five were rated Outstanding, 43 received a Satisfactory rating, and one was rated Needs to Improve.
OCC, FDIC, and Fed Release Stress Test Scenarios for 2017
On February 3, the Fed announced the release of the “Supervisory Scenarios” to be used by banks and supervisors for the 2017 Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress test exercises and also issued instructions to firms participating in CCAR. The Fed also published three letters that provide additional information on its stress-testing program. The three letters describe: (i) the Horizontal Capital Review for large, noncomplex companies; (ii) the CCAR qualitative assessment for U.S. intermediate holding companies of foreign banks, which are submitting capital plans for the first time; and (iii) improvements to how the Fed will estimate post-stress capital ratios.
On February 3, the OCC similarly released economic and financial market scenarios for 2017 that are to be used by national banks and federal savings associations (with total consolidated assets of more than $10 billion) in their annual Dodd-Frank Act-mandated stress test. On February 6, the FDIC released its stress test scenarios, working in consultation with the Fed and OCC.
The three sets of supervisory scenarios provide each agency with forward-looking information for use in bank supervision and will assist the agencies in assessing the covered institutions’ risk profile and capital adequacy.