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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.
Agencies extend comment period on proposed rules to strengthen large bank capital requirements
On October 20, the Fed issued a joint press release with the FDIC and the OCC announcing the extension of the comment period on proposed rules to expand large bank capital requirements. Earlier this year, the agencies announced the proposed rule which would implement the final components of the Basel III Agreement. The components would revise capital requirements for large banking organizations, among other things. (Covered by InfoBytes here.) Adding an additional six weeks (from the original 120-day comment period set to expire on November 30), the new comment period deadline is by January 16, 2024.
Agencies issue final rule to modernize Community Reinvestment Act regulations
On October 24, the Fed, FDIC, and OCC issued an interagency announcement regarding the modernization of their rules under the Community Reinvestment Act (CRA), a law enacted in 1977 to encourage banks to help meet the credit needs of their communities, especially low- and moderate-income (LMI) neighborhoods, in a safe and sound manner. The new rule overhauls the existing regulatory scheme that was first implemented in the mid-1990s.
For banks with assets of at least $2 billion (Large Banks), the final rule adds a new category of assessment area to the existing facility based assessment area (FBAA). Large Banks that do more than 20 percent of their CRA-related lending outside their FBAAs will have that lending evaluated in retail lending assessment areas, i.e., MSAs or states where it originated at least 150 closed-end home mortgage loans or 400 small business loans in both of the previous two years. All Large Banks will be subject to two new lending and two new community development tests, with lending and community development activities each counting for half a bank’s overall CRA rating. Banks with assets between $600 million and $2 billion will be subject to a new lending test. Large Banks with assets greater than $10 billion will also have special reporting requirements.
Additionally, the rule (i) implements a standardized scoring system for performance ratings; (ii) revises community development definitions and creates a list of community development activities eligible for CRA consideration, regardless of location; (iii) permits regulators to evaluate “impact and responsiveness factors” of community development activities; (iii) continues to make strategic plans available as an alternative option for evaluation; (iv) revises the definition of limited purpose bank so that it includes both existing limited purpose and wholesale banks and subjects those banks to a new community development financing test; and (v) considers online banking in the bank’s evaluations.
Most of the rule’s requirements will be effective January 1, 2026. The remaining requirements, including the data reporting requirements, will apply on January 1, 2027.
OCC releases bank supervision operating plan for FY 2024
On September 28, the OCC’s Committee on Bank Supervision released its bank supervision operating plan for fiscal year 2024. The plan outlines the agency’s supervision priorities and highlights several supervisory focus areas including: (i) asset and liability management; (ii) credit; (iii) allowances for credit losses; (iv) cybersecurity; (v) operations; (vi) digital ledger technology activities; (vii) change in management; (viii) payments; (ix) Bank Secrecy Act/AML compliance; (x) consumer compliance; (xi) Community Reinvestment Act; (xii) fair lending; and (xiii) climate-related financial risks.
Two of the top areas of focus are asset and liability management and credit risk. In its operating plan the OCC says that “Examiners should determine whether banks are managing interest rate and liquidity risks through use of effective asset and liability risk management policies and practices, including stress testing across a sufficient range of scenarios, sensitivity analyses of key model assumptions and liquidity sources, and appropriate contingency planning.” With respect to credit risk, the OCC says that “Examiners should evaluate banks’ stress testing of adverse economic scenarios and potential implications to capital” and “focus on concentrations risk management, including for vulnerable commercial real estate and other higher-risk portfolios, risk rating accuracy, portfolios of highest growth, and new products.”
The plan will be used by OCC staff to guide the development of supervisory strategies for individual national banks, federal savings associations, federal branches and agencies of foreign banking organizations, and certain identified third-party service providers subject to OCC examination.
The OCC will provide updates about these priorities in its Semiannual Risk Perspective, as InfoBytes has previously covered here.
Agencies extend favorable CRA consideration for certain areas affected by Hurricane Maria
On September 20, the Federal Reserve, FDIC, and OCC announced they are providing a 36-month extension to give favorable consideration under the CRA for bank activities that help revitalize or stabilize areas in Puerto Rico and the U.S. Virgin Islands impacted by Hurricane Maria. This extension is the second extension following the original period provided in January 2018 and the first extension granted in May 2021.
The agencies determined that the FEMA’s designation of parts of Puerto Rico and the U.S. Virgin Islands as “active disaster areas” demonstrates ongoing community need to the area. The extension allows the agencies to give favorable consideration to a financial institution’s activities in the qualifying areas that satisfy the definition of “community development” under the CRA, including loans and investments, through September 20, 2026. The activities will be treated consistently with the agencies’ original Interagency Statement in January 2018.
Federal and state financial regulatory agencies issue joint statement on the effects of Hurricane Idalia on supervisory practices
On September 1, the FDIC, Fed, NCUA, OCC and CSBS issued a joint statement recognizing the serious impact of Hurricane Idalia on the customers and operations of many financial institutions in the effected area.
The guidance discusses the following aspects of financial institution operations:
- Lending: The agencies encourage financial institutions to work constructively with borrowers in affected communities, including prudent efforts to adjust existing loan terms, and declares that the agencies will not subject such efforts to examiner criticism. “The agencies recognize that efforts to work with borrowers in communities under stress can be consistent with safe-and-sound practices as well as in the public interest.”
- Temporary Facilities: The agencies understand that many financial institutions face staffing, power, telecommunications, and other challenges in re-opening facilities and will expedite, as appropriate, any request to operate in temporary facilities.
- Publishing Requirements: The agencies understand that the damage that the hurricane caused may affect compliance with publishing and other requirements for branch closings, relocations, and temporary facilities. Impacted institutions should contact their primary federal and/or state regulator.
- Regulatory Reporting Requirements: Impacted institutions that expect to encounter difficulty meeting the agencies' reporting requirements should contact their primary federal and/or state regulator to discuss their situation.
- Community Reinvestment Act: Financial institutions may receive CRA consideration for community development loans, investments or services that revitalize or stabilize federally designated disaster areas.
- Investments: The agencies encourage financial institutions to monitor municipal securities and loans affected by the hurricane, including those related to local government projects.
OCC announces Tropical Storm Hilary disaster relief
On August 21, the OCC issued a proclamation providing discretion to OCC-regulated institutions to close offices affected by Tropical Storm Hilary in California, Nevada, and Arizona “for as long as deemed necessary for bank operation or public safety.” The proclamation directs institutions to OCC Bulletin 2012-28 for further guidance on actions they should take in response to natural disasters and other emergency conditions. According to the OCC, only bank offices directly affected by potentially unsafe conditions should close, and institutions should make every effort to reopen as quickly as possible to address customers’ banking needs.
Find continuing InfoBytes coverage on disaster relief here.
OCC releases enforcement actions and terminations
On August 17, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. The new enforcement actions include civil money penalty orders, formal agreements, and prohibition orders, each issued with the consent of the parties. The OCC also announced a termination of an existing enforcement action against a bank. Included in the release is a formal agreement entered into with a Minnesota-based bank on June 27 in connection with OCC findings of alleged unsafe or unsound practices relating to, among other things, consumer compliance and third party risk management. In connection to violations of certain Flood Disaster Protection Act rules, the agreement requires the bank to (i) establish a compliance committee to monitor the bank’s progress in complying with the agreement’s provisions; (ii) report such progress to the bank’s board of directors on a quarterly basis; and (iii) implement a written consumer compliance program. This program must also include procedures and guidance for compliance with all consumer protection laws, rules, and regulations to which the bank should adhere, an independent audit program, a comprehensive training program for bank personnel in the consumer protection laws, rules, and regulations as appropriate, and policies to manage risks in the credit process. It also separately requires revisions to the third-party risk management program addressing due diligence and monitoring of third parties, including monitoring for compliance with consumer protection-related laws and regulations.
Agencies announce guidance regarding institutions affected by Hawaiian wildfires.
On August 17, the Federal Reserve Board, the FDIC, the Hawaii Department of Commerce and Consumer Affairs’ Division of Financial Institutions, the NCUA, and the OCC issued a joint interagency statement covering supervisory practices for financial institutions affected by the Hawaiian wildfires. The agencies announced that, among other things, the regulators would expedite requests made by institutions for temporary operating facilities. The regulators noted that in most cases, “telephone notice to the primary federal and/or state regulator will suffice” for such requests. The agencies also encouraged financial institutions to work with borrowers in affected communities, explaining that “prudent efforts” to adjust terms on existing loans should not be subject to examiner criticism, in light of the unusual circumstances faced by the financial institutions.
Further, the agencies announced that they understood that damage caused by the wildfires may affect the ability of institutions to comply with publishing requirements for branch closings, relocations, or temporary locations, and instructed institutions experiencing such difficulties to contact their primary federal and/or state regulator. The agencies additionally instructed institutions that face difficulty meeting reporting requirements due to the wildfires to contact their primary federal and/or state regulator, explaining that the agencies “do not expect to assess penalties or take other supervisory action” against institutions that take reasonable steps to comply with reporting requirements. The agencies also announced that financial institutions may receive CRA consideration for loans, investments, or services that revitalize or stabilize federally designated disaster areas. Finally, the agencies encouraged financial institutions to monitor any municipal securities and loans affected by the Hawaii wildfires.
OCC updates bank accounting guidance
On August 15, the OCC released an annual update to its Bank Accounting Advisory Series (BAAS) which is intended to address a variety of accounting topics and promote consistent application of accounting standards and regulatory reporting among OCC-supervised banks. The BAAS reflects updates to clarify the accounting standards issued by the Financial Accounting Standards Board related to, among other things, the elimination of recognition and the measurement of troubled debt restructurings by creditors, loan modifications, and credit losses. The August 2023 edition also includes answers to frequently asked questions from industry and bank examiners. Additionally, the OCC notes that the BAAS does not represent OCC rules or regulations but rather “represents the Office of the Chief Accountant’s interpretations of generally accepted accounting principles and regulatory guidance based on the facts and circumstances presented.”