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Fed recommends derivatives market follow IBOR Fallback Protocol
On October 9, the Federal Reserve Board issued SR 20-22,which strongly advises supervised institutions to transition away from LIBOR and consider following the International Swaps and Derivatives Association’s (ISDA) IBOR Fallback Protocol and IBOR Fallback Supplement (collectively, “the Protocol”). The Fed warned market participants that because the publication of LIBOR is not guaranteed after 2021, its continued use poses financial stability risks. The Fed recommended that examiners alert supervised firms active in the derivatives market to strongly consider adhering to the Protocol, which will, among other things, “facilitate[] the transition away from LIBOR by providing derivatives market participants with new fallbacks for legacy and new derivative contracts,” and will “allow LIBOR derivatives contracts to continue to perform through the transition.” The ISDA released a statement the same day announcing the Protocol will be launched on October 23 and take effect on January 25, 2021.
Find continuing InfoBytes coverage on LIBOR here.
Financial services firm fined $400 million for risk-management deficiencies
On October 7, the OCC and Federal Reserve Board announced enforcement actions against a financial services firm and its national bank subsidiary (bank) to resolve alleged enterprise-wide risk management, data governance, and internal controls deficiencies. According to the OCC’s announcement, the bank allegedly engaged in unsafe or unsound banking practices by failing to “establish effective risk management and data governance programs and internal controls.” While neither admitting nor denying the allegations, the bank has agreed to pay a $400 million civil money penalty. Additionally, under the terms of the OCC’s cease and desist order, the bank must implement corrective measures to improve its risk management, data governance, and internal controls. The agency’s announcement states that the order further requires the bank “to seek the OCC’s non-objection before making significant new acquisitions and reserves the OCC’s authority to implement additional business restrictions or require changes in senior management and the bank’s board should the bank not make timely, sufficient progress in complying with the order.”
In conjunction with the OCC’s action, the Fed also announced a cease and desist order against the financial services firm, which identified ongoing deficiencies with respect to areas of compliance risk management, data quality management, and internal controls. Among other things, the Fed claims the firm also failed to adequately remediate “longstanding” deficiencies identified in previously issued consent orders, including in areas such as anti-money laundering compliance. The order requires the firm to enhance firm-wide risk management and internal controls, and imposes a series of deadlines for the firm to take measures to ensure compliance with the OCC’s order, enhance its compliance risk management programs, devise a plan to hold senior management accountable, and improve data quality management.
Federal banking agencies amend capital rules to encourage support of recovery
On October 8, the OCC, FDIC and Federal Reserve Board finalized two rules intended to encourage depository institutions to utilize their capital buffers, which must be maintained in order to avoid having restrictions placed on capital distributions, for lending and other financial intermediation activities. The agencies amended rules governing risk-based capital and leverage ratio requirements for U.S. banking organizations, to make limitations on capital distributions more gradual in nature. The agencies also amended rules governing the total loss-absorption capacity of the largest U.S. bank holding companies and U.S. operations of the largest foreign banking organizations.
Fed FAQs clarify bank control structure under BHC and HOLA
On September 30, the Federal Reserve Board issued several frequently asked questions related to its control and divestiture proceedings final control rule that took effect the same day. As previously covered by InfoBytes, in January the Fed revised the bank control framework to clarify the rules used to determine whether a company controls a bank or a bank controls a company pursuant to the Bank Holding Company Act (BHC Act) and the Home Owners' Loan Act (HOLA). Among other things, the Fed notes that it “does not expect” to revisit investment structures that had previously been reviewed prior to the effective date of the control rule, and would not require changes to investment structures “that represent a reasonable interpretation of [Fed] precedent at the time the structure was created.” The FAQs also discuss what constitutes a “limiting contractual right” with respect to a contractual provision between “a first company and a second company that requires the second company to conform its activities to the activities restrictions under the [BHC Act] or [HOLA],” along with whether the control rule differentiates “between limiting contractual rights based on the circumstances under which the right was created or the nature of the document in which the right resides.”
Fed proposes updates to capital planning requirements
On September 30, the Federal Reserve Board issued a notice of proposed rulemaking (NPRM) to tailor the requirements in the Fed’s capital plan rule applicable to large bank holding companies and U.S. intermediate holding companies of foreign banking organizations. The changes would conform the capital planning, regulatory reporting, and stress capital buffer requirements for firms with $100 billion or more in total assets (Category IV) with the tailored regulatory framework approved by the Fed last October (covered by InfoBytes here). The NPRM would also make additional changes to the Fed’s stress testing rules, stress testing policy statement, and regulatory reporting requirements related to “business plan change assumptions, capital action assumptions, and the publication of company-run stress test results for savings and loan holding companies” to be consistent with a final rule issued last year that amended resolution planning requirements for large domestic and foreign firms (covered by InfoBytes here). These changes include removing company-run stress test requirements and implementing biennial, rather than annual, supervisory stress tests for firms subject to Category IV standards. Additionally, the Fed seeks comments on its existing capital planning guidance for firms of all sizes. Notably, the Fed states that the NPRM would not affect the calculation of firms’ capital requirements. Comments on the NPRM are due November 20.
Fed issues enforcement order for BSA/AML and OFAC regulation compliance
On October 1, the Federal Reserve announced an enforcement action against a Pennsylvania state-chartered bank for deficiencies in the bank’s Bank Secrecy Act (BSA), anti-money laundering (AML), and U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) regulations. The order requires the bank to submit, among other things, (i) a board-approved, written plan to improve oversight of BSA/AML requirements and OFAC regulations; (ii) a written BSA/AML compliance program; (iii) a revised customer due diligence program; (iv) a written suspicious activity monitoring and reporting program; and (iv) a written plan for independent testing of compliance with BSA/AML requirements. The bank was not assessed any monetary penalties.
SEC: CARES Act, Federal Reserve facilities reduced impact of Covid-19 on U.S. credit market
On October 5, the SEC released issued a report addressing the economic effects of the Covid-19 pandemic on the U.S. credit markets. The report concludes that the immediate and multi-faceted actions taken by the Federal Reserve and under the CARES Act were instrumental in relieving stress in the credit market, stabilizing housing prices and sustaining consumer spending. The SEC will hold roundtable discussion with U.S. and international regulators on October 14 to discuss the report and related policy issues.
Federal Reserve Board extends temporary actions on intraday credit availability
On October 1, the Federal Reserve Board extended certain temporary actions that are designed to increase the availability of intraday credit to mitigate the impact of Covid-19. The temporary actions were previously announced on April 23 (previously covered here), and include: (1) suspending uncollateralized intraday credit limits and waiving overdraft fees for eligible institutions; (2) permitting a streamlined procedure to request collateralized intraday credit; and (3) suspending two collections of information that are used to calculate net debit caps. The actions are extended to March 31, 2021.
Federal Reserve Board extends measures to ensure high level of resilience among large banks
On September 30, the Federal Reserve Board announced it would extend measures previously instituted to ensure that large banks maintain a high level of capital resilience in light of uncertainty introduced by the Covid-19 outbreak. The measures were extended for an additional quarter. Large banks (i.e. banks with more than $100 billion in total assets) will be prohibited from making share repurchases. Additionally, dividend payments will be capped and tied to a formula based on recent income. The announcement notes that the Board will conduct a second stress test later this year to further test the resiliency of large banks.
Fed issues ANPR on CRA modernization
On September 21, the Federal Reserve Board (Fed) issued an Advance Notice of Proposed Rulemaking (ANPR) inviting public comment on its approach for modernizing the regulations that implement the Community Reinvestment Act (CRA). The Fed’s ANPR follows a final rule to modernize the regulatory framework implementing the CRA issued by the OCC in May (covered by a Buckley Special Alert), which was met by opposition from community coalitions and House Democrats (covered by InfoBytes here and here). Neither the FDIC nor the Fed joined in promulgating the OCC’s final rule, which is technically effective October 1, 2020, but provides for at least a 27-month transition period for compliance based on a bank’s size and business model.
According to the Fed, the ANPR’s objectives are to increase the clarity, consistency and transparency of CRA supervisory expectations and standards, while minimizing data collection burdens. The following are key takeaways from the ANPR:
- Promoting financial inclusion. The ANPR seeks feedback on ways to strengthen regulations and evaluate how banks meet the needs of low- and moderate-income (LMI) communities and address inequities in credit access. The ANPR proposes, among other things, (i) ways to encourage more activities that support minority depository institutions (MDIs), Community Development Financial Institutions, as well as women-owned financial institutions and low-income credit unions outside of a bank’s assessment area; (ii) seeks feedback on additional incentives for investing in and partnering with MDIs; and (iii) requests input on expanding geographic areas for community development activities to allow banks to receive special CRA credit for activities in areas with high unmet needs.
- Metrics. The ANPR introduces a metrics-based approach to bring greater clarity, consistency, and transparency to how banks are assessed and rated. The ANPR proposes assessing banks’ CRA performance using a Retail Test and a Community Development Test with options to be evaluated under certain subsets based on their size. According to the Fed’s fact sheet, the metrics would be “tailored to local market conditions and adjust[ed] automatically to reflect structural economic differences and changes over the business cycle.” Additionally, the proposed retail lending metrics formulas use the number of a bank’s loans, rather than the dollar amount of those loans, to avoid weighting larger loans more heavily than smaller ones.
- Internet banks. The ANPR contemplates defining an internet bank for CRA purposes and allowing such internet banks to delineate nationwide assessment areas to “more holistically capture their banking activities.”
- CRA deserts. The ANPR considers designating “CRA deserts”—“areas with little bank presence and corresponding lesser availability of banking products and services and community development activities”—and allowing banks to receive credit for community development activities in designated areas of need outside of their assessment areas. The ANPR also suggests providing additional consideration if a bank operates a branch in a designated banking desert within an assessment area.
- CRA-approved activities. The ANPR proposes publishing an illustrative, non-exhaustive list of community development activities that qualify for CRA consideration and seeks feedback on an activity pre-approval process.
- Small banks. The ANPR proposes eliminating the current intermediate small bank category and establishing an asset-size threshold of $750 million or $1 billion to distinguish between small and large retail banks. Currently, the asset threshold between small and intermediate small banks is $326 million, and the threshold between intermediate small and large banks is $1.305 billion. Small retail banks could continue to be evaluated under the current CRA framework but would have the option to be evaluated under certain of the new subtests. Small banks are also exempt from additional deposit and certain other data collection requirements.
- Consistent approach. Fed Chair Jerome Powell released a statement stressing that the ANPR “is an important step forward in laying a foundation for the [Fed, OCC, and FDIC] to build a shared, modernized CRA framework that has broad support.”
Comments on the ANPR are due 120 days after publication in the Federal Register.