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Federal Banking Regulatory Agencies Issue Proposed Rulemaking to Simplify Regulatory Capital Rule
On September 27, the Federal Reserve Board, the FDIC, and the OCC (agencies) issued a joint notice of proposed rulemaking to simplify capital rule compliance requirements and reduce the regulatory burden in accordance with the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). Among other things, the proposed rule will “apply a simpler regulatory capital treatment” for mortgage servicing assets, certain deferred tax assets, investments in unconsolidated financial institutions, and capital issued by a consolidated subsidiary of a banking organization and held by third parties, or minority interest. To assist banks in evaluating the potential impact of the proposal, the agencies provided an estimation tool template and summary of the proposal. As previously discussed in InfoBytes, the agencies—all members of the Federal Financial Institutions Examination Council (FFIEC)—issued a report in March following an EGRPRA review, in which the agencies outlined initiatives designed to reduce regulatory burdens, particularly on community banks and savings associations. In a statement issued by FDIC Chairman Martin J. Gruenberg, commenters are encouraged to also consider methods for simplifying existing regulatory capital rules impacting community banks. Comments on the joint proposed rule are due 60 days after publication in the Federal Register.
Fed Fines New York Bank $3 Million for Violating Regulatory Risk Capital Requirements
On June 26, the Federal Reserve fined a New York-based bank $3 million for unsafe and unsound banking practices after the firm allegedly assigned a lower risk weighting to a portfolio of assets in violation of then-applicable Basel I regulatory risk capital requirements. According to the consent order, between 2010 and 2014, the bank consolidated a portfolio of collateralized loan obligations onto its balance sheet. It allegedly assigned a zero-risk weighting to the assets improperly, and therefore overstated its risk-based capital ratios and set aside less capital than it should have.
NCUA Publishes Proposed Rule Offering Alternate Capital Proposal for Credit Unions
On February 8, the National Credit Union Administration (NCUA) published a notice of proposed rulemaking to expand the types of investment capital that federally insured credit unions could use to meet certain regulatory requirements. NCUA is considering whether to allow credit unions to use investment capital (that would be uninsured capital subordinate to all other claims) to satisfy the risk-based net worth ratio requirement. Currently, only low-income designated credit unions are allowed to use secondary capital to satisfy two regulatory requirements: the net worth ratio and the risk-based net-worth ratio. Although any changes to the definition of net worth would require an act of Congress, the NCUA asserted in the proposal that it has broad authority to adjust the risk-based net worth ratio requirement and therefore may choose to allow credit unions that are not “low-income designated” to use alternative capital to meet this requirement.
Special Alert: OCC Takes the Next Step Toward a Fintech National Bank Charter
On December 2, 2016, the Office of the Comptroller of the Currency (“OCC”) announced its plans to move forward with developing a special purpose national bank charter for financial technology (“fintech”) companies. Accompanying the Comptroller of the Currency, Thomas J. Curry’s announcement, the OCC published a white paper that describes the OCC’s authority to grant national bank charters to fintech companies and outlines minimum supervisory standards for successful fintech bank applicants.[1] These standards would include capital and liquidity standards, risk management requirements, enhanced disclosure requirements, and resolution plans. Over the past several months, the OCC has taken a series of carefully calculated steps to position itself as the preeminent regulator of fintech companies in a hotly-contested race among other federal and state regulators who have similarly expressed interest in formalizing a regulatory framework for fintech companies. This proposal from the OCC reflects the culmination of those efforts.
Click here to read the full special alert
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BuckleySandler welcomes questions regarding this new approach to fintech and banking, and would be happy to assist companies in determining whether a national bank charter would be beneficial for executing on their corporate strategies. Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeremiah S. Buckley, (202) 349-8010
- John P. Kromer, (202) 349-8040
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- Walter E. Zalenski, (202) 461-2910
Bank Regulators Signal Changes to Capital Holding Requirements
On September 8, the Federal Reserve Board (FRB) released a policy statement providing details regarding its Countercyclical Capital Buffer Framework (Framework). The FRB explained that the Framework is designed to implement requirements under the Basel III International bank capital rules, and will generally raise capital holding requirements for internationally active banks when there is an elevated risk of systemic credit losses. In responding to comments, the FRB used the policy statement to clarify that when the systemic threat is reduced, banks would be allowed to release excess capital into the economy to further create financial stability. Meanwhile, the Group of Central Bank Governors and Heads of Supervision (Group) that oversees the Basel Committee on Banking Supervision (Committee) cautioned the Committee to avoid significant increases in overall bank capital requirements as the Committee creates a final rule to address excessive variability in risk-weighted assets. The Group expressed its desire that the Committee focus on improving and harmonizing the methods through which banks determine their own risks. The Committee’s final rule is due by year’s end.
Financial Stability Board Issues Proposed TLAC Rule For Global Systemically Important Banks
On November 10, the Financial Stability Board issued policy proposals in response to G20 Leaders’ request at the 2013 St. Petersburg Summit to develop proposals by the end of 2014. The proposals consist of “a set of principles and a detailed term sheet on the adequacy of loss-absorbing and recapitalization capacity of global systemically important banks (G-SIBs).” The proposals will establish a new minimum standard for total loss-absorbing capacity (TLAC). The new TLAC standard should (i) ensure home and host authorities that G-SIBs have adequate capacity to absorb losses; (ii) allow resolution authorities “to implement a resolution strategy that minimi[zes] any impact on financial stability and ensures the continuity of critical economic functions;” and (iii) help achieve an equal playing field internationally. Comments and responses to the proposals are due by February 2, 2015.
Financial Stability Board Updates List of Global Systemically Important Banks
On November 6, the Financial Stability Board published its annual update of global systemically important banks (G-SIBs). Included in its annual update is the addition of one international bank bringing the total number of institutions on the list to 30. Eight U.S. G-SIBs remain on the list. Coinciding with the updated list, the Basel Committee on Banking Supervision also published updated information regarding denominators and capital thresholds used to calculate bank scores and allocate capital requirements of G-SIBs.
House Passes Nonbank Examination Bill; House Committee Approves Mortgage-Related Bills
On July 29, the U.S. House of Representatives passed by voice voteH.R. 5062, a bipartisan bill that would amend the Consumer Financial Protection Act with respect to the supervision of nondepository institutions, to require the CFPB to coordinate its supervisory activities with state regulatory agencies that license, supervise, or examine the offering of consumer financial products or services. The bill declares that the sharing of information with such state entities does not waive any privilege claimed by nondepository institutions under federal or state law regarding such information as to any person or entity other than the CFPB or the state agency. The following day, the House Financial Services Committee approved numerous bills, including two mortgage-related bills. The first, H.R. 4042, would require the Federal Reserve Board, the OCC, and the FDIC to conduct a study to determine the appropriate capital requirements for mortgage servicing assets for any banking institution other than an institution identified by the Financial Stability Board as a global systemically important bank. The bill also would prohibit the implementation of Basel III capital requirements related to mortgage servicing assets for non-systemic banking institutions from taking effect until three months after a report on the study. A second bill, H.R. 5148, would exempt creditors offering mortgages of $250,000 or below from certain property appraisal requirements established by the Dodd-Frank Act.
Prudential Regulators Propose Changes To Timing Of Stress Tests
On June 12, the Federal Reserve Board and the OCC separately released proposed rules that would push back by 90 days the start date of the stress test cycles and the deadlines for submitting stress test results. The regulators propose making the new schedules effective beginning with the 2015-2016 cycles. On June 13, the FDIC proposed a rule to similarly shift the stress test cycles. In addition, the Federal Reserve’s proposed rule would (i) modify the capital plan rule to limit a large bank holding company’s ability to make capital distributions to the extent that its actual capital issuances were less than the amount indicated in its capital plan; (ii) clarify the application of the capital plan rule to a large bank holding company that is a subsidiary of a U.S. intermediate holding company of a foreign banking organization; and (iii) make other technical clarifying changes. Comments on the Federal Reserve’s proposal are due by August 11, 2014. Comments on the OCC’s and the FDIC’s proposals are due 60 days after their publication in the Federal register.
Prudential Regulators Finalize Leverage Ratio Rule For Largest Institutions
On April 8, the Federal Reserve Board, the FDIC, and the OCC adopted a final rule, effective January 1, 2018, requiring certain top-tier U.S. bank holding companies (BHCs) to maintain a minimum supplementary leverage ratio buffer of 2% above the minimum supplementary leverage ratio requirement of 3%. The final rule applies to BHCs with more than $700 billion in total consolidated assets or more than $10 trillion in assets under custody (Covered BHCs), and to insured depository institution subsidiaries of those BHCs (Covered Subsidiaries). A Covered BHC that fails to maintain the supplemental leverage buffer would be subject to restrictions on capital distributions and discretionary bonus payments. Covered Subsidiaries must also maintain a supplementary leverage ratio of at least 6% to be considered “well capitalized” under the agencies’ prompt corrective action framework. The final rule is substantially similar to the rule the agencies proposed in July 2013. Concurrent with the final rule, the agencies also (i) proposed a rule that would modify the denominator calculation for the supplementary leverage ratio in a manner consistent with recent changes agreed to by the Basel Committee, which would apply to all internationally active banking organizations, including those subject to the enhanced supplementary leverage ratio final rule; and (ii) proposed a technical correction to the definition of “eligible guarantee” in the agencies’ risk-based capital rules. The agencies are accepting comments on both proposals through June 13, 2014. Separately, the FDIC Board adopted as final its Basel III interim final rule, which is substantively identical to the final rules adopted by the Federal Reserve Board and the OCC in July 2013.