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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.”
Agencies finalize 2024 HPML smaller loan exemption threshold
On November 13, the CFPB, OCC, and the Fed published final amendments to the official interpretations for regulations implementing Section 129H of TILA, which establishes special appraisal requirements for “higher-risk mortgages,” otherwise termed as “higher-priced mortgage loans” (HPMLs). The final rule increases TILA’s loan exemption threshold for the special appraisal requirements for HPMLs. Each year, the threshold must be readjusted based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers. The exemption threshold will increase from $31,000 to $32,400 effective January 1, 2024.
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.”
CFPB and Fed release updated thresholds for Regulations Z and M
On November 13, the CFPB and the Fed released updated dollar thresholds for whether certain credit and lease transactions are subject to Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) requirements for 2024. The thresholds for both regulations were increased from $66,400 to $69,500, an increase of 4.6 percent. Transactions at or below the 2024 threshold of $69,500 will be “subject to the protections of the regulations.” The CFPB derives its thresholds from the June 1, 2023, report on the Consumer Price Index for Urban Wage Earnings and Clerical Workers (CPI-W). The thresholds for 2023 were previously increased at a rate of 8.8 percent, a larger increase given the rate of inflation during the previous year.
Fed Governor Cook on financial stability
On November 8, Federal Reserve Governor Lisa D. Cook delivered a speech regarding financial stability at the Central Bank of Ireland. Governor Cook underscored the link between financial stability and the Fed’s stable process and maximum employment and focused on four key vulnerability categories: (i) asset valuations; (ii) business and household borrowing; (iii) financial-sector leverage; and (iv) funding risks. Governor Cook noted rising asset valuations in various markets, especially in the real estate sector, and the potential risks associated with high levels of borrowing by businesses and households. Additionally, she discussed the importance of monitoring financial sector leverage and funding risks, both in bank and nonbank financial institutions.
Governor Cook also outlined near-term risks that could impact the resilience of the financial system. These risks included inflationary pressures, potential losses in the real estate market, banking-sector stress, and market liquidity strains. She emphasized the need for robust oversight and prudential requirements for nonbank financial institutions, as they are becoming increasingly interconnected with the banking sector.
Finally, Governor Cook stressed the importance of remaining vigilant in identifying and addressing vulnerabilities within the global financial system to ensure its stability and, in turn, support the well-being of households, businesses, and the broader economy.
FSOC approves analytic framework for financial stability risks and guidance on nonbank financial company determinations
On November 3, the Financial Stability Oversight Council (FSOC) announced that it unanimously voted to issue the final versions of a new analytic framework regarding financial stability risks, in addition to updated interpretive guidance on the council’s nonbank designation guidance. The analytic framework indicates vulnerable points that commonly contribute to financial stability risks, and it explains how FSOC may address the risks, including interagency coordination, recommendations to regulators, or the designation of certain entities. The nonbank designation guidance establishes how the council determines whether a given nonbank should be under the Fed’s supervision and prudential standards under Section 113 of Dodd-Frank. In April, FSOC released the proposed analytic framework and the proposed nonbank designation guidance (as covered by InfoBytes here) and opened a comment period on the proposals.
FSOC adopted key changes in consideration of public comments on the proposed framework, including (i) clarifications to the interpretation of “threat to financial stability”; (ii) more examples of quantitative metrics considered in its analysis; (iii) expanded discussion of transmission channels; and (iv) additional emphasis on FSOC’s engagement with state and federal financial regulatory agencies regarding risk. Comments directed at the interpretive guidance were addressed, and some changes are reflected in the framework. Both CFPB Director Rohit Chopra and OCC Acting Comptroller Michael J. Hsu issued statements supporting the issuance of the interpretive guidance and the framework. Chopra commented that FSOC’s actions to evaluate whether any “shadow bank” meets the statutory threshold for enhanced oversight are essential in preventing potential threats to financial stability. Hsu also noted the significance of leveraging Dodd-Frank's tools for “monitoring and mitigating risks to U.S. financial stability.”
The analytic framework will be effective upon publication in the Federal Register, and the nonbank designations guidance will be effective 60 days after publication in the Federal Register.
Fed’s Vice Chair remarks on payments innovation, CBDCs, and financial inclusion
On October 27, Fed Vice Chair for Supervision, Michael Barr, delivered a speech at the Economics of Payments XII Conference discussing the Fed’s place in the payments system and highlighting its role as a bank supervisor and operator of key payment infrastructure. Emphasizing the Fed’s introduction of its FedNow instant payment service (covered by InfoBytes here), which was designed to enable secure instant payments in response to the increasing demand for secure and convenient payment options, Barr encouraged banks to build upon the new payment infrastructure. He also noted that ongoing experimentation with new payment technologies, such as stablecoins, creates a need for regulation, particularly where an asset is “pegged to government-issued currencies.”
Regarding central bank digital currencies (CBDCs), the Fed is engaged in research and in discussions with various stakeholders; however, it has not decided on whether to issue a CBDC. The Vice Chair stressed that any move in this direction would require “clear support” from the Executive Branch and authorization from Congress.
Barr emphasized the Fed’s commitment to working with the international community to improve cross-border payment systems as well as the need for research into both traditional and emerging payment methods, noting that innovation should “promote broad access and financial inclusion.” Finally, the remarks touched on the Fed’s proposed revisions to the interchange fee cap for debit card issuers, with a call for public input on the matter (covered by InfoBytes here).
Fed seeks comment on lowering the interchange fee for debit card issuers
On October 25, the Fed announced a proposed rule that would lower the maximum interchange fee that a debit card issuer with at least $10 billion in total consolidated assets can receive for a debit card transaction and would also establish a regular process for updating the maximum fee amount every other year going forward. Moreover, the Board approved the release of its latest biennial report which sets forth data collected from larger debit card issuers on interchange fees, issuer costs, and fraud related to debit card transactions.
Under the Dodd-Frank Act, the Fed is required to establish standards for assessing whether the amount of any interchange fee received by a debit card issuer is reasonable and proportional to the costs incurred by the issuer for the applicable transaction, which results in the Fed setting an interchange fee cap. The FRB developed the fee cap in 2011 using data provided by large debit card issuers with $10 billion or more in assets. But since that time, the Fed has found that certain costs incurred by such debit card issuers have declined dramatically, yet the interchange fee cap has remained the same. As such, the Fed (i) proposes to update the interchange fee cap based on the latest data reported to the Board by large debit card issuers, and (ii) proposes to update the fee cap every other year by linking the fee cap to data from the Fed’s biennial report of large debit card issuers.
The comment period will close 90 days after the proposal is published in the Federal Register.
Regulators release final principles for climate-related financial risk management
On October 25, the Fed, OCC, and FDIC issued final interagency guidance titled Principles for Climate-Related Financial Risk Management for Large Financial Institutions. The principles are intended to help the largest institutions supervised by the Federal banking agencies, i.e., those with over $100 billion in assets, manage climate-related risk.
These climate-related risks include both physical and transition risks. Physical risks include “hurricanes, wildfires, floods, and heatwaves, and chronic shifts in climate, etc.,” while transition risks “refer to stresses to institutions or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes… [towards] a lower carbon economy.”
These climate-related risks affect the values of assets of liabilities and damage property, leading to a loss of income, defaults, and liquidity risks. The agencies created these principles to direct board of directors and managers make sound business practices with making progress toward mitigating climate-related financial risks.
CFPB Director Rohit Chopra, a member of the FDIC Board of Directors, shared remarks on the final principles, noting that climate change poses a dual challenge to protect infrastructure and fortify the financial system. He also stressed the need for regulatory guidance to convey clear and practical rules. FDIC Chairman Gruenberg also shared a statement on the final principles, highlighting the FDIC’s focus on the financial aspects of climate change, clarifying its role in managing risks rather than setting climate policy and encouraging cooperation among federal banking agencies to ensure consistency in addressing climate-related financial risks.
FDIC issues NPR to revise Federal Deposit Insurance Act regulations on Section 19
On October 24, FDIC announced a proposed rule to implement the Fair Hiring in Banking Act (FHB Act). The proposed rule amends 2 C.F.R. part 303, subpart L, and part 308, subpart M. The Federal Deposit Insurance Act (FDI Act) prohibits a person from participating in the affairs of an FDIC-insured institution if he or she has been convicted of an offense involving dishonesty, breach of trust, or money laundering, or has entered a pretrial diversion or similar program in connection with a prosecution for such an offense, without the prior written consent of the FDIC, among other provisions. The proposed rule would incorporate several statutory changes to the FDI Act, such as:
- Excluding certain offenses from the scope of the FHB Act based on the amount of time that has passed since the offense occurred or since the individual was released from incarceration;
- Clarifying that the FHB Act does not apply to the following offenses, if one year or more has passed since the applicable conviction or program entry: using fake identification, shoplifting, trespassing, fare evasion, and driving with an expired license or tag;
- Excluding certain offenses from the definition of “criminal offenses involving dishonesty,” including “an offense involving the possession of controlled substances”;
- Excluding certain convictions from the scope of the FHB Act that have been expunged, sealed, or dismissed. While existing FDIC regulations already exclude most of those offenses, the proposed rule would modestly broaden the statutory language concerning such offenses to harmonize the FDIC’s current regulations concerning expunged and sealed records with the statutory language; and
- Prescribing standards for the FDIC’s review of applications submitted under the FHB Act.
The proposed rule also provides interpretive language that addresses, among other topics, when an offense “occurs” under the FHB Act, whether otherwise-covered offenses that occurred in foreign jurisdictions are covered by the FDI Act, and offenses that involve controlled substances.
Comments will be accepted for 60 days after publication in the Federal Register.