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Federal Regulators Finalize Bank Stress Test Rules
On October 9, the OCC and the FDIC each finalized a rule to implement the company-run stress test requirements of the Dodd-Frank Act. The stress tests are exercises designed to gauge the losses that covered institutions might experience under hypothetical scenarios established by the regulators. The OCC and FDIC rules apply to covered institutions with average total consolidated assets greater than $10 billion. Covered institutions with assets over $50 billion are subject to the stress test requirements immediately. They will be required to submit results in January 2013 of stress tests based on data as of September 30, 2012 and scenarios that the FDIC and the OCC plan to publish next month. Implementation of the stress test requirements for institutions with assets of $10 billion to $50 billion will not begin until October 2013. Also on October 9, the Federal Reserve Board (FRB) finalized two stress test-related rules. The first rule establishes the stress test requirements for bank holding companies, state member banks, and savings and loan companies with more than $10 billion in total consolidated assets. As with the OCC and FDIC rules, the FRB rule delays implementation of stress test requirements for covered institutions with $50 billion or less in assets until the fall of 2013. Additionally, the results of that first test will not have to be publicly disclosed. The second FRB rule establishes the company-run stress test requirements for bank holding companies with $50 billion or more in total consolidated assets, and nonbank financial companies designated as systemically important by the Financial Stability Oversight Council. These institutions are required to conduct two internal stress tests each year, in addition to a stress test performed by the FRB. Like the OCC and the FDIC, the FRB expects to release its stress test scenarios in November.
Three State AGs Join Challenge to Dodd-Frank Act and CFPB Appointment
On September 20, the Attorneys General (AGs) of Michigan, Oklahoma, and South Carolina joined an earlier-filed lawsuit in the U.S. District Court for the District of Columbia that challenges aspects of the Dodd-Frank Act, including the CFPB and its director. The AGs joined an amended complaint that seeks to challenge as unconstitutional the “formation and operation” of the CFPB, and that argues the President side-stepped constitutional checks and balances by refusing to submit his nominee for CFPB Director to the Senate. The AGs also charge that the “orderly liquidation authority” (OLA) for financial institutions provided to the Treasury Secretary by the Dodd-Frank Act violates the separation of powers doctrine, as well as the Fifth Amendment’s bar against the taking of property without due process. The AGs cite their state pension funds—each of which is invested in “a variety of institutions” subject to the OLA—as their basis for standing, claiming that the OLA exposes the states and their funds to “the risk that their credit holdings could be arbitrarily and discriminatorily extinguished.” Finally, the private plaintiffs that originally filed the suit also contest based on a separation of powers argument the “unconstitutional creation” of the Financial Stability Oversight Council.
FSOC and OFR Publish Annual Reports
This week, the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) each published annual reports to Congress, as mandated by the Dodd-Frank Act. This is the first such report the OFR has prepared. The FSOC annual report surveys the macroeconomic environment within which the U.S. economy exists, identifies risks to U.S. financial stability, reports on implementation of the Dodd-Frank Act and activities of FSOC, and provides a series of recommendations for policymakers. The FSOC’s recommendations fall into four categories: (i) reforms to address structural vulnerabilities, (ii) heightened risk management and supervisory attention, (iii) housing finance reforms, and (iv) implementation and coordination of financial reform. Within the housing finance category, the FSOC notes recent efforts to encourage private capital to re-enter the market in the near term but stresses the continued need for long-term housing finance reform. This section also reviews federal efforts to alter mortgage servicing standards and recommends that federal agencies finalize comprehensive servicing standards. The OFR report summarizes the OFR’s efforts to (i) analyze threats to financial stability, (ii) conduct research on financial stability, (iii) address data gaps, and (iv) promote data standards. According to the report, over the next year, the OFR will focus on the migration of financial activities into the so-called shadow banking system, and will continue to build on research related to threats to financial stability, stress tests, and risk management.