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Fed issues enforcement action for flood insurance violations
On June 30, the Federal Reserve Board announced an enforcement action against a Virginia-based bank for alleged violations of the National Flood Insurance Act (NFIA) and Regulation H, which implements the NFIA. The consent order assesses an $8,500 penalty against the bank for an alleged pattern or practice of violations of Regulation H, but does not specify the number or the precise nature of the alleged violations. The maximum civil money penalty under the NFIA for a pattern or practice of violations is $2,000 per violation.
Agencies finalize covered funds changes to Volcker Rule
On June 25, the Federal Reserve Board, CFTC, FDIC, OCC, and SEC (agencies) finalized the rule, which will amend the Volcker Rule to modify and clarify the regulations implementing Section 13 of the Bank Holding Company Act with respect to covered funds. As covered by InfoBytes in February, the agencies issued the proposed rule, and, after the notice and comment period, finalized the proposal with certain modifications based on the public comments. Among other things, the final rule (i) exempts qualifying foreign excluded funds from certain restrictions, but modifies the anti-evasion provision and compliance program requirements from the proposal; (ii) revises the exclusions from the covered fund provisions for foreign public funds, loan securitizations, and small business investment companies; (iii) adopts several new exclusions from the covered fund provisions, including an exclusion for venture capital funds, family wealth management, and customer facilitation vehicles; (iv) permits established, codified categories of limited low-risk transactions between a banking entity and a related fund; (v) provides an express safe harbor for senior loans and senior debt, and redefines “ownership interest”; and (vi) provides clarity regarding permissible investments in the same investments as a covered fund organized or offered by the same banking entity. The final rule is effective October 1.
The FDIC also released a Fact Sheet on the final rule.
Fed releases guidance for de novo banks supervision
On June 24, the Federal Reserve Board sent a letter to the Federal Reserve Banks (FRBs) providing guidance regarding the supervision of de novo state member banks, as well as the evaluation of de novo insured depository institutions (IDI) seeking to become state member banks. Under the letter, an insured depository institution is considered to be in the de novo stage until it has been operating for at least three years. Supervisory Letter SR 20-16, which supersedes Supervisory Letter SR 91-17, “applies to any commercial bank, thrift, Edge Act corporation, or industrial bank that has been in existence for less than three years and is converting to become a state member bank,” and outlines de novo application submission guidelines and FRB examination requirements. SR 20-16 provides that within six months following a de novo’s formation or conversion to a state member bank, the responsible FRB should conduct a targeted examination and issue a report summarizing supervisory findings, with targeted focus on the de novo’s risk management process or the management component of the CAMELS rating, as well as any business and operating plans submitted in connection with its membership application.” SR 20-16 outlines the examination cycle and notes that the full-scope statutorily required examination schedule will not occur until a de novo has had three full-scope examinations and has been in operation for three years. SR 20-16 further provides that, for de novo banks that are subsidiaries of existing bank holding companies, an FRB at its discretion, may elect to make a risk-based determination that if the parent bank has consolidated assets of greater than $3 billion and is in good standing, the subsidiary may be examined less frequently.
Community coalitions file complaint to block OCC CRA final rule
On June 25, two community coalitions filed a complaint in the U.S. District Court for the Northern District of California asking the court to block the OCC’s final rule to modernize the regulatory framework implementing the Community Reinvestment Act (CRA). The complaint claims that the OCC failed to provide for meaningful public input on key revisions to the agency’s final rule, and argues that the May 20 rule (covered by a Buckley Special Alert) failed to consider the impact of the Covid-19 pandemic and is in violation of the Administrative Procedures Act. Notably, neither the FDIC nor the Federal Reserve Board joined in promulgating the final rule, the complaint notes. Among other things, the complaint argues that the final rule “guts the [CRA] and eviscerates the backing it provides to the [low- and moderate-income (LMI)] communities and communities of color that have long suffered from discrimination by financial institutions,” and will dilute benefits for these communities. The complaint also alleges that the final rule “will allow banks to claim credit for massive projects that they undoubtedly would have financed anyway; whose benefit to LMI people is questionable and speculative; and that are so costly that they will allow banks to fill up their CRA credits without making real investments in LMI communities as the CRA intended.” Additional arguments include that the final rule limits the coalitions’ ability to advocate for greater access to credit for LMI communities, issue evidence-based reports on banks’ CRA activity, and negotiate CRA funding increases with banks for specific communities. The complaint further alleges that the final rule includes definitions of “CRA deserts”—areas where banking services are not available—that were not part of the proposal, and fails to provide supporting data for many of the provisions. The coalitions seek injunctive and declaratory relief that would block the final rule from taking effect.
Fed: Large banks “sufficiently capitalized” for Covid-19 stress
On June 25, the Federal Reserve Board released the results of the Dodd-Frank Act stress tests for 2020 (DFAST 2020) and another report analyzing additional sensitivities due to the Covid-19 pandemic. The additional sensitivities report assessed the resiliency of large banks under three hypothetical recessions, which could result from the Covid-19 pandemic. Overall, under the hypothetical scenarios, loan losses for the 34 banks ranged from $560 billion to $700 billion in the sensitivity analysis, and aggregate capital ratios declined from 12 percent in the fourth quarter of 2019 to between 9.5 percent and 7.7 percent. The Fed concludes that due to strong current capital levels, “the large majority of banks remain sufficiently capitalized over the entirety of the projection horizon in all scenarios.” The Fed notes that this analysis did not incorporate the effects of government stimulus payments or expanded unemployment insurance. In response to the results, the Fed notes that all large banks are now required to, among other things, resubmit their capital plans later this year to reflect the current stresses, and the Fed intends to conduct additional analysis each quarter to determine if other response adjustments are needed.
Additionally, the results of the full DFAST 2020—which was designed prior to the Covid-19 pandemic—suggest that the 33 banks subject to the test would “experience substantial losses under the severely adverse scenario but could continue lending to businesses and households, due to the substantial buildup of capital since the financial crisis.”
Fed announces tools to help payments industry classify fraud
On June 18, the Federal Reserve Board (Fed) released a set of tools and materials to provide a consistent way for organizations to classify and better understand fraudulent activity occurring across the payments industry. The FraudClassifier model was developed by the Fraud Definitions Work Group (comprised of Fed and payment industry fraud experts), and will allow organizations to classify fraud independently of payment type, payment channel, or other payment characteristics by presenting a series of questions, beginning with who initiated the payment to differentiate payments initiated by authorized or unauthorized parties. This will “help ensure greater internal consistency in fraud classification across an organization. . .and allow for improved information and fraud tracking.” Each of the classifications is supported by definitions that allow the FraudClassifier model to be consistently applied across the industry.
Financial regulators issue examiner guidance on Covid-19
On June 23, the federal financial institution regulatory agencies (Federal Reserve Board, OCC, FDIC, and NCUA), in conjunction with the state bank and credit union regulators, issued interagency examiner guidance for assessing the safety and soundness of financial institutions in light of the Covid-19 pandemic. The joint guidance states that due to the “unique, evolving, and potentially long-term nature of the issues confronting institutions” from the Covid-19 pandemic, examiners will “exercise appropriate flexibility in their supervisory response.” The guidance acknowledges that Covid-19 can have an adverse impact on the financial condition and operational capabilities of financial institutions that have appropriate governance and risk management systems in place.
Among other things, the guidance notes that examiners will (i) “continue to assign supervisory ratings in accordance with the interagency CAMELS and ROCA rating systems”; and (ii) “assess the reasonableness of management’s actions in response to the pandemic given the institution’s business strategy and operational capacity.” The guidance also provides details on things such as capital adequacy and asset quality for examiners to consider when assigning composite and component CAMELS and ROCA ratings.
Fed vice chairman discusses stress testing adaptability due to Covid-19 pandemic
On June 19, Federal Reserve Vice Chair for Supervision Randal K. Quarles spoke at a meeting of the Women in Housing and Finance regarding adjustments to the Fed’s periodic stress testing of large banks in the wake of Covid-19. Quarles explained that because the Fed lacked the time and comprehensive data to run a complete and updated Covid-19 event stress test this year, the Fed made the decision to continue with the “severely adverse scenario” begun in February 2020, while also performing a new “sensitivity analysis.” The sensitivity analysis considers three distinct downside risk paths for the economy—a rapid recovery, a slower recovery, and a W-shaped double-dip recession.
As in past years, the Fed intends to disclose annual stress test results using the February 2020 scenario (run against bank exposures as of December 2019), which will include both firm-specific and aggregate results. Quarles also indicated the Fed would be disclosing some results from the new sensitivity analysis. According to Quarles, these results will not be firm-specific, but will be “aggregated across banks comparing how the banking system as a whole would fare under the three distinct views of the future.” The Fed also plans to “move ahead and provide all banks subject to stress testing with a stress capital buffer requirement based on the February 2020 scenario, under [the Fed’s] new approach integrating stress testing with capital requirements.” Once banks determine their final plans, the Fed will publicly release the final capital requirements for each individual bank later this year before they take effect in the fourth quarter as planned. Quarles also noted that additional policy actions, if warranted, may be taken in the coming months as the Fed continues to monitor the economic conditions.
Federal Reserve Board’s Secondary Market Corporate Credit Facility to purchase corporate bonds
On June 15, the Federal Reserve Board announced that the Secondary Market Corporate Credit Facility (SMCCF) (previously covered here) will begin buying a diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers. The intent is to create a bond portfolio that tracks the composition of the broad, diverse universe of secondary market bonds that are eligible for the program. The announcement included a revised term sheet and updated FAQs for the SMCCF.
Federal Reserve Board resumes examinations for all banks
On June 15, the Federal Reserve Board announced the resumption of examination activities for all banks. Back in March, the board scaled back its examination activities in light of Covid-19 (previously covered here). The announcement anticipates that the board will continue to conduct exams offsite until conditions improve.