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OCC announces CRA bank asset-size threshold adjustments for 2024
On December 26, 2023, the OCC announced revisions to the asset-size thresholds used to define small and intermediate small banks and savings associations under the Community Reinvestment Act (CRA). Effective January 1, 2024, a small bank or savings association will mean an institution that, as of December 31 of either of the past two years, had assets of less than $1.564 billion. An intermediate small bank or savings association will mean an institution with assets of at least $391 million as of December 31 of both of the prior two years, and less than $1.564 billion as of December 31 of either of the prior two years. As previously covered by InfoBytes, the Fed and the FDIC also announced joint annual adjustments to the CRA asset-size thresholds used to define “small bank” and “intermediate small bank.”
FDIC Director McKernan suggests phasing ‘underdeveloped’ parts of Basel III
On December 12, a member of the FDIC Board of Directors, Jonathan McKernan, expressed concerns about its Endgame proposal’s reliance on Basel Committee decisions. In his speech at a conference on trading book capital, he highlighted the lack of explanation behind design choices, leaving banking regulators unable to justify or comprehend certain reform aspects. The board member added that the absence of rationale hindered public feedback and raised doubts about the reform’s legitimacy.
McKernan suggested an approach to defer less developed areas of the reforms while implementing uncontested aspects—acknowledging the proposal’s goal to address weaknesses in the trading book framework and citing concerns about specific design decisions. McKernan notes certain design decisions like the profit-and-loss attribution test and non-modellable risk factors. McKernan explained that the PLA attribution test assesses the alignment between a bank’s risk management and front office models. McKernan said that for both designs, there is very little public information on the Basel Committee’s threshold formulation and that they are based on simulated data, which is viewed as a preliminary estimate still under development. Finally, McKernan supported enhancing the regulatory capital framework but stressed the need to validate the rationale behind key design decisions in the Basel reforms.
OCC issues annual federal banking report for 2023
On December 11, the OCC published its 2023 Annual Report, which provides a comprehensive overview of the current state of the federal banking system, outlines the OCC’s strategic priorities and initiatives, and details the agency’s financial management and condition.
The OCC restated its supervisory priorities for the year, summarized proposed rules, guidance and other publications issued in FY 2023, reported on its licensing activities and summarized the results of enforcement actions against institutions and individuals, which netted over $100 million in civil money penalties. The report also highlighted the OCC’s efforts in “guarding against complacency, reducing inequality, adapting to digitalization, and acting on climate-related financial risks—which collectively focus the OCC’s efforts on maintaining the public’s trust in banking.” According to the “comptroller’s viewpoint” within the report, Acting Comptroller Michael J. Hsu proposed an annual survey to gauge the American public’s trust in banks and banking supervision over time. The survey will aim to collect diverse data on consumer trends to aid policymakers, regulators, and community groups in better understanding and enhancing trust in the banking system. Hsu also highlighted some actions he believes will help restore trust in the banking system: (i) bank supervisors acting in a timely and efficient manner; (ii) the strengthening of large bank resilience and resolvability regulations; (iii) updates to deposit insurance coverage; and (iv) preserving “the diversity of the banking system… as the industry evolves.” Among other points of the annual report, as part of its emphasis on climate-related financial risk, the OCC reported that it is conducting exploratory reviews of banks with $100 billion or note in assets, in an attempt to establish a baseline understanding of how banks manage financial risks related to climate change.
Regulators address concerns at Senate Banking Committee hearing, receive written concerns regarding Basel III
On November 14, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing where regulators, Fed Vice Chair for Supervision Michael Barr, FDIC Chair Martin Gruenberg, NCUA Chair Todd Harper, and acting Comptroller of Currency Michael Hsu, testified regarding the Basel III Endgame proposal. Gruenberg’s prepared remarks noted that Basel III reforms are a “continuation of the federal banking agencies’ efforts to revise the regulatory capital framework for our nation’s largest financial institutions, which were found to be undercapitalized and over-leveraged during the Global Financial Crisis of 2008.” The proposal would raise capital requirements for large banks (covered by InfoBytes here).
Concerning Basel III, Senator Tester (D-MO) mentioned he has “some concerns about the proposed changes and how its impact will be on workers’ and households’ and small businesses’ access to credit and overall vibrancy of our capital markets.” “These rules don’t affect any banks in Montana, but they do affect the big guys that affect Montana,” he noted.
Among other testimonies, Senator Warner (D-VA) expressed concerns regarding the timeline of the comment period and potential changes to the proposal. Specifically, Sen. Warner mentioned that comments may not be received until after the rule is close to finalization. Fed Vice Chair Barr noted that the regulators have yet to evaluate comments on the proposal, as most are expected to come through mid-January, and that depending on the substance of some comments, they are open to making appropriate changes to the proposal. Acting Comptroller of the Currency Hsu’s written testimony echoed Barr’s remarks, stating “[w]e will consider all comments, including alternative approaches.”
Moreover, on November 12, a group of Republican lawmakers of the committee also sent a letter to the OCC, FDIC, and the Fed. In the letter, the senators argued that the proposal would restrict billions of dollars in capital, resulting in costlier and more limited access to credit for millions of consumers, impacting affordable housing, mortgage lending, small business lending, and consumer access to credit cards and home equity lines. The proposal was also criticized for its potential to disadvantage U.S. companies globally and harm middle-market private entities and small businesses. Moreover, the letter suggested that the proposal could negatively impact pension funds, increase fees for risk hedging, and decrease returns for retirees.
Also on November 12, several banking industry groups sent a letter to the Fed, FDIC, and the OCC requesting them to issue a revised proposal. The letter alleges violations of the Administrative Procedures Act because the data used to inform the interagency proposal is not publicly available. The groups also argued that the proposed rule repeatedly utilizes non-public analyses based on the agencies’ “supervisory experience” to support different aspects of the rule. Regarding sensitive data, the groups say, “Nothing prevents the agencies from releasing such data and analyses in a manner that is anonymized or aggregated to the extent necessary to protect bank or other party confidentiality.” The senators also believe the proposal would impose “significant harm” throughout the economy “particularly in the face of current economic headwinds and tightening credit conditions.”
Fed releases report on banking supervision and regulation
On November 10, the Fed released its biannual Supervision and Regulation Report ahead of congressional oversight hearings next week. The report covers banking system conditions, regulatory developments, and supervisory developments. The report stated that “[t]he banking sector remains sound overall.” After learning from the recent bank failures last spring, the Fed’s report aims to improve its supervision of “liquidity and interest rate risks by conducting targeted reviews… as well as conducting focused training and outreach… for banks and examiners.” Proposed regulatory developments include the Basel III endgame, long-term debt, and discount window preparedness. For supervisory developments, the Fed created the Novel Activities Supervision Program (previously covered by InfoBytes here) in August to supervise novel banking activities such as “crypto-assets, distributed ledger technology, and complex, technology-driven partnerships with nonbanks.”
Fed Governor Michelle Bowman gives speech discussing banking regulatory reforms and concerns
On November 9, Federal Reserve Governor Michelle W. Bowman delivered a speech on the economy and prioritization of bank supervision and regulation. Governor Bowman highlighted recent developments in banking regulatory framework reform. Governor Bowman began by highlighting the proposed reforms to capital requirements for banks with more than $100 billion in assets. She mentioned the central concern raised is the potential inadequacy of the quantitative and analytical foundations of these reforms. Governor Bowman questioned whether Basel III reforms effectively address regulatory deficiencies and emphasized the need for a thorough understanding of both the benefits and costs of implementing such changes. Governor Bowman discussed the actions taken by the agencies, including an extended comment period and efforts to gather more information on the proposal's potential impact. Several areas are identified as necessary to address, such as redundancy in the capital framework, calibration of the Market Risk Capital Rule, the inefficiency of two standardized capital stacks, and the punitive treatment of fee income. Governor Bowman also highlighted the missed opportunity to review leverage ratio requirements, which could have implications for market functioning in times of stress.
Shifting the focus to the CRA, Governor Bowman acknowledged the importance of improving access to credit, especially in low- and moderate-income (LMI) communities. However, the Governor mentioned concerns raised about the new final rule implementing the CRA. She explained some criticism for it being unnecessarily complex, overly prescriptive, and disproportionately burdensome for banks, especially community banks. It applies the same regulatory expectations to small and large banks, failing to recognize the differences among banks in terms of size, risk, and business models, she added. Governor Bowman’s remarks underscore the need for a balanced, data-driven, and risk-focused approach to regulatory reforms.
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.
Senators call for stronger Fed oversight over bank mergers
On August 9, Senators Sherrod Brown (D-OH), Elizabeth Warren (D-MA), Jack Reed (D-RI), and John Fetterman (D-PA) wrote a letter to the Chair and Vice Chair of Supervision for the Board of Governors of the Federal Reserve System urging the Fed to “review and reconsider” its procedures for approving bank mergers. The letter cites the Dodd-Frank Act’s amendment to the Bank Merger Act, which mandates that federal banking regulators consider whether a proposed merger “would result in greater or more concentrated risks” to the stability of the banking or financial system. The senators also voiced concern that the Fed has “not issued any rules or guidance indicating the types of bank mergers that would implicate financial stability concerns” and criticized the process around the Fed’s approval of recent acquisitions.
Fed suggests enhancing supervision of “novel activities” by banks
On August 8, the Federal Reserve Board announced the issuance of two supervision letters that elaborate on the its program to supervise “novel activities” such as fintech partnerships, crypto-related activities, and activities using distributed ledger or “blockchain” technology. The first letter, SR 23-7, announces the establishment of the “Novel Activities Supervision Program,” a program designed to “ensure that the risks associated with innovation” supported by new technologies are managed appropriately by the bank. The program will focus on (i) technology-driven partnerships with non-banks; (ii) crypto-asset related activities such as asset custody, crypto-collateralized lending, asset trading, and crypto issuance and distribution; (iii) exploration or use of distributed ledger technology; and (iv) concentration of banking services to crypto-asset related entities and fintech companies. Supervisory teams will be tasked with monitoring and examining these novel activities within the existing supervisory portfolios and will take a risk-based approach on the level and intensity of supervision. The letter concludes that “the Program will also operate in keeping with the principle that banking organizations are neither prohibited nor discouraged from providing banking services to customers or any specific class or type” as permitted by law.
In the second supervisory letter, SR 23-8, the Fed announced a “nonobjection process” for banks seeking to engage in certain dollar token activities. Previously, the OCC issued an interpretive letter permitting national banks to use distributed ledger technology (or similar) to conduct payments using dollar tokens, as long as the bank could demonstrate adequate controls. (Covered by InfoBytes here). The letter clarifies that any bank supervised by the Fed that wishes to engage in those same activities must first obtain a written notice of supervisory nonobjection from the Fed. In order to do so, the bank must be able to demonstrate it has implemented adequate risk management practices, taking into account operational, cybersecurity, liquidity, illicit finance, and consumer compliance risks, among others. The bank must also demonstrate that it is aware of and can comply with laws applicable to the activities.
Agencies release hypothetical scenarios for 2023 bank stress tests
On February 9, the Federal Reserve Board and the OCC released hypothetical economic scenarios for use in the upcoming stress tests for covered institutions. The Fed released supervisory scenarios, which include baseline and severely adverse scenarios. According to the Fed, the stress test evaluates large banks’ resiliency by estimating losses, net revenue, and capital levels under hypothetical recession scenarios that extend two years into the future. The Fed’s stress test also features for the first time “an additional exploratory market shock to the trading books of the largest and most complex banks” to help the agency better assess the potential of multiple scenarios in order to capture a wider array of risks in future stress test exercises. The OCC also released the agency’s scenarios for covered banks and savings associations, which will be used during supervision and will assist in the assessment of a covered institution’s risk profile and capital adequacy.