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Agencies issue 2023 Shared National Credit Program Report
On February 16, the FDIC, Fed, and OCC issued the 2023 Shared National Credit (SNC) Report, which found that while large, syndicated bank loans generally have moderate credit quality, there appears to be a trend of declining credit quality stemming from higher interest rates and tighter profit margins in certain industries. The report found that credit risk remains high in leveraged loans and specific sectors like technology, telecom, healthcare, and transportation. Also, the real estate and construction sector showed mixed trends.
House Democrats urge agencies to finalize Basel III Endgame rule
On February 16, the Ranking Member for the House Committee on Financial Services, Maxine Waters (D-CA), and 41 other House Democrats sent a letter to the FDIC, Fed, and OCC regarding the Basel III Endgame and the proposed rule which would impose higher capital requirements. The letter urged the agencies to finalize the rule, highlighting the purpose of capital requirements “to shield banks from unexpected losses, preventing their failure, while serving as a source of funding that banks use…” The letter commended the agencies for providing the public with almost six months to comment and argued the endgame rule’s impact on access to credit is low. The letter also noted that the expected funding impact on a large bank’s average lending portfolio is expected to increase by just 0.03 percent, which it describes as “insignificant” compared to Fed interest rate increases. The letter specifically urged the heads of the agencies to finalize the rules this year “to ensure we have a banking system that will promote stable economic growth.”
New York Fed Bank analyzes BNPL usage
On February 14, the Federal Reserve Bank of New York (NY Fed) published a blog post evaluating different households’ use of buy now pay later (BNPL) products, which it generally described as “loans that are payable in four or fewer installments and carry no finance charges.” To understand BNPL usage and its relationship with consumers’ financial situations, the NY Fed conducted a study which revealed distinct usage patterns between the financially fragile and the financially stable.
The study revealed that financially fragile individuals, or individuals who have a credit score below 620, who have been declined for a credit application in the past year, or who have fallen 30 or more days delinquent on a loan in the past year, typically use BNPL to make frequent small purchases when compared to financial stable individuals. The study also found that using BNPL often leads to repeat transactions, indicating a potential trend towards repeat use of the product, particularly among those facing credit challenges.
The study also found that consumers’ motivations for using BNPL differ. Financially stable individuals often cite zero interest as a key advantage, while the financially fragile prioritize ease of access and convenience. The NY Fed summarized that BNPL usage among financially fragile individuals resembles using a credit card for medium-size, out-of-budget purchases, while financially stable users tend to make fewer purchases with a focus of avoiding interest on high-priced items. The NY Fed noted, however, that there is evidence of misunderstanding among users, such as the belief that BNPL helps build credit, concluding that “those with this view may be better off using a credit card.”
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.
Trade associations sue OCC, FDIC, and Federal Reserve on their Proposed Rules for the CRA
On February 5, a group of trade, banking, and business associations filed a class-action complaint for injunctive relief against the OCC, Federal Reserve, and FDIC (the Agencies) for their enforcement of the new rulemaking (the Rule) implementing the Community Reinvestment Act of 1977 (CRA). The plaintiffs argued that the Rule creates a “wholesale and unlawful change” to a successful fifty-year-old statute. After listing several problems, the plaintiffs requested the Court to “enjoin, hold unlawful, vacate, and set aside” the Rule; additionally, plaintiffs requested the Court declare that the Rule violates the CRA and the Administrative Procedures Act.
As previously covered by InfoBytes, the Rule was approved by the Agencies on October 24, 2023, published in the Federal Register on February 1, 2024, and would take effect on April 1, 2024. The plaintiffs state that the new regulatory rules are “extraordinarily and unnecessarily complex” since they require a “staggering” 649 pages. (An FDIC Vice Chairman was quoted as labeling the rules as “by far the longest rulemaking the FDIC has ever issued.”) In detail, the plaintiffs support their claims by pointing out the Rule creates different performance tests that differ “radically” from the previous regulatory framework, e.g., the Retail Lending Test is a two-part test, and that each of these tests includes “multiple sub-parts and sub-parts of sub-parts” that create complexity in the Rule. Banks will be given two years (until January 1, 2026) to comply with the Rule. Plaintiffs argue that banks must act immediately, citing the OCC’s own words that the estimated compliance costs are over $90 million during the first year.
The plaintiffs argue the Rule violates the APA by exceeding the Agencies’ statutory authority by “assessing banks on their responsiveness to credit needs outside of their geographic deposit-taking footprint” (Count I), and by issuing a rule that is arbitrary and capricious by failing to give reasonable notice of the areas and products that will be assessed and the market benchmarks against which performance will be evaluated; failing to conduct an adequate cost benefit analysis; and failing to consider the implications of the Rule (Count II).
Federal bank regulatory agencies seek comment on interagency effort to reduce regulatory burden
On February 6, the FDIC, Fed, and OCC initiated a series of requests for public comment aimed at reducing regulatory burden on supervised institutions. This effort is mandated by the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which required a review of regulations every 10 years. The agencies have divided regulations into 12 categories, with the first round focusing on three categories: Applications and Reporting, Powers and Activities, and International Operations. The public has 90 days to comment on the regulations in these categories. Over the next two years, the agencies will seek public feedback on more, remaining categories to identify regulations that are outdated, unnecessary, or unduly burdensome. Additionally, outreach meetings will be held to allow interested parties to provide direct input on regulatory requirements. Further details about these meetings will be shared as they are finalized.
House Committee calls for new quantitative analysis from Basel III “Endgame” original proposal
On January 31, the House Financial Services Committee issued a press release after holding its hearing on “Federal Banking Proposals Under the Biden Administration,” which invited two leaders from trade organizations, a lawyer, and a business school professor. The Committee’s main takeaway was that the Notice of Proposed Rulemaking from July 2023, as released by the OCC, Federal Reserve, and FDIC, provides “little quantitative analysis” of the potential economic impacts (covered by InfoBytes, here). This Notice initially opened the comment period for the Basel III “Endgame” meant to revise the capital requirements for large banking organizations.
The Committee took the position, through bipartisan agreement, that the Biden Administration “must withdraw” its Basel III “Endgame” implementing proposal and replace it with one that offers a sound and objective economic analysis that is not skewed by politics but supported by data. The Committee supports its position that the Notice provides a “paltry” economic and regulatory analysis by noting that it devotes only 17 out of 1087 pages to the analysis. The press release cited comments from various congressional members, some of whom raised concerns about the proposal’s potential impact on homebuyers and mortgage lending, and the proposal’s potential to disincentivize financing for renewable energy projects. Finally, the Committee linked several members’ comment letters over the past few months.
FFIEC publishes proposed extension of reporting obligations
On January 26, the Federal Financial Institutions Examination Council (FFIEC) approved the OCC, Fed, and FDIC’s publication for public comment of a proposal to extend several information collection items for three years. As previously covered by InfoBytes, the FFIEC last month put forth a similar three-year proposal on FFIEC 002 which affected the three Call Reports (FFIEC 031, 041, and 051). While this proposal includes those same four items, it adds two more: the Regulatory Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 101), and the Market Risk Regulatory Report for Institutions Subject to the Market Risk Capital Rule (FFIEC 102). The proposed changes include a new confidential report (FFIEC 102a) titled the Market Risk Regulatory Report that would “collect information necessary for the agencies to evaluate [an]… institution’s implementation of the market risk rule and validate a [bank’s] internal models used in preparing the FFIEC 102.” The revisions are related to the agencies’ capital rule proposal published on September 18, 2023. Comments are requested by March 25, 2024, and the revisions are planned to be effective as of September 30, 2025.
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).