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Agencies issue joint statement on LIBOR transition
On November 6, the OCC, the Federal Reserve Board, and the FDIC issued a statement reiterating that the agencies do not intend to recommend a specific credit-sensitive rate for use in place of LIBOR. The agencies recommend that financial institutions “use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs” and emphasize the need for fallback language in lending contracts that provide for the “use of a robust fallback rate if the initial reference rate is discontinued.” The agencies note that examiners will not criticize banks solely regarding their choice of reference rate, including a credit-sensitive rate other than Secured Overnight Financing Rate (SOFR) (the rate recommended by the Alternative Reference Rates Committee). Additionally, the agencies encourage financial institutions to reach out to lending customers to ensure they are prepared for the transition and to consider any technical changes to internal systems that might be needed to accommodate a new reference rate.
As previously covered by InfoBytes, in July, the member agencies of the Federal Financial Institutions Examinations Council (FFIEC) issued a joint statement highlighting several risks that will result from the anticipated cessation of LIBOR at the end of 2021 and discussing the supervisory impacts of the LIBOR transition.
OCC warns of key banking risks
On November 9, the OCC released its Semiannual Risk Perspective for Fall 2020, which reports on key risk areas that pose a threat to the safety and soundness of national banks and federal savings associations. In particular, the OCC noted the financial impacts of the Covid-19 pandemic on the federal banking industry, emphasizing that while economic activity rebounded in the third quarter, there is significant ongoing risk. The report discusses, as a special topic in emerging risks, growing trends in payment products and services. The report also highlights several key risk areas for banks: credit, strategic, operational, and compliance. Specifically, the report notes that credit risk is increasing as government assistance programs expire and the economic downturn has led to elevated unemployment levels. The report further notes that strategic risks affecting profitability is an emerging issue due to low interest rates, which historically have negatively affected profitability when low for a long period of time. Moreover, the report notes elevated operational risks due to complex operating environments with cybersecurity being a key concern. The increase in large-scale telework has created unique security and internal control challenges. Lastly, the report discusses elevated compliance risks due to the expedited implementation of a number of Covid-19-related assistance programs.
OCC exempts certain QFCs from express recognition requirements
On November 2, the OCC issued Bulletin 2020-95, which announced a September 30 order granting an exemption from the express recognition requirements of 12 CFR 47.4 for certain categories of qualified financial contracts (QFC). According to the OCC, the order is intended to relieve the burdens faced by financial institutions and is consistent with the purpose of the express recognition requirements of 12 C.F.R. § 47.4 “in achieving uniform cross-border application of the U.S Special Resolution Regimes to contracts subject to such authorities.” Specifically, the order states that “non-U.S. non-linked contracts” that are entered into by foreign subsidiaries of covered banks—large, systemically important banks—are exempt from the express recognition requirements of 12 C.F.R. § 47.4.
Agencies outline standards for strengthening operational resilience
On October 30, the Federal Reserve Board, OCC, and FDIC (agencies) released an interagency paper describing standards and sound practices for increasing operational resilience. (See also the Fed’s release and FDIC FIL-103-2020). The paper, titled Sound Practices to Strengthen Operational Resilience, does not revise existing agency regulations or guidance, but rather provides a “comprehensive approach” for banks to strengthen and maintain operational resilience. According to the agencies, “[r]obust operational risk and business continuity management anchor the sound practices, which are informed by rigorous scenario analyses and consider third-party risks. Secure and resilient information systems underpin the approach to operational resilience, which is supported by thorough surveillance and reporting.” The paper also includes an appendix focused on sound practices for cyber risk management and cybersecurity preparedness. The appendix is aligned to the National Institute of Standards and Technology Cybersecurity Framework and is “augmented to emphasize governance and third-party risk management.” The standards set forth in the paper are intended for large, domestic banks with more than $250 billion in average total consolidated assets, or banks with more than $100 billion in total assets and other risk characteristics.
OCC says banks affected by Hurricane Zeta may close
On October 27, the OCC issued a proclamation permitting OCC-regulated institutions, at their discretion, to close offices affected by Hurricane Zeta “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 2012 Bulletin, 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 issues Concentrations of Credit booklet updating Comptroller’s Handbook
On October 26, the OCC issued Bulletin 2020-90 announcing the revision of the Concentrations of Credit booklet of the Comptroller’s Handbook. Among other things, the revised booklet (i) changes the supervisory calculation for credit concentration ratios for banks that have implemented the current expected credit loss (CECL) transition rule; (ii) replaces the term “criticized” with “special mention” for consistency with Banking Bulletin (BB) 1993-35, “Interagency Definition of Special Mention Assets”; and (iii) reflects relevant OCC issuances and changes to laws and regulations since the booklet was last published in 2011.
OCC finalizes true lender rule
On October 27, the OCC issued a final rule (see also Bulletin 2020-92) addressing when a national bank or federal savings association (bank) is the “true lender” in the context of a partnership between a bank and a third party to provide certainty about key aspects of the legal framework that applies. The final rule generally adopts the test proposed by the agency in July (see InfoBytes coverage here). Specifically, the final rule amends 12 CFR Part 7 to state that a bank makes a loan when it, as of the date of origination, (i) is named as the lender in the loan agreement or (ii) funds the loan. Additionally, the final rule clarifies that if “one bank is named as the lender in the loan agreement and another bank funds the loan, the bank that is named as the lender in the loan agreement makes the loan.” Lastly, the OCC emphasizes that compliance obligations stay with the “true lender” of the loan and “if a bank fails to satisfy its compliance obligations, the OCC will not hesitate to use its enforcement authority consistent with its longstanding policy and practice.”
The rule is effective 60 days after publication in the Federal Register.
Federal agencies will not recommend specific LIBOR replacement rate
On October 21, a group of U.S. financial agencies wrote to the executives of financial institutions that participated in the Credit Sensitivity Group workshops, stating that the agencies do not intend to recommend a specific credit-sensitive rate for use in commercial lending products in place of LIBOR. The letter states that “[t]he transition away from LIBOR is a significant and complex undertaking,” and there are multiple suitable alternative reference rates to replace LIBOR. The letter acknowledges that the use of the Secured Overnight Financial Rate (SOFR), which is recommended by the Alternative Reference Rates Committee is “voluntary.” After participating in the workshops, the agencies concluded that they are “not well positioned to adjudicate the selection of a reference rate between banks and their commercial customers” due to various business needs and terms of commercial loans that are based on the negotiation of banks and borrowing parties. Thus, the letter states, the agencies will continue to convene additional working sessions to highlight innovation in the credit-sensitive rates and explore implementing solutions for commercial loans transitioning away from LIBOR.
For continuing InfoBytes covering on the LIBOR transition see here.
Federal bank regulatory agencies release two final rules supporting large banks
On October 20, the Federal Reserve Board, OCC, and FDIC (collectively, “federal bank regulatory agencies”) finalized two rules for large banks.
The federal bank regulatory agencies first announced a final rule intended to reduce interconnectedness within the financial system between the largest banking organizations and to minimize systemic risks stemming from failure of these organizations. As the federal bank regulatory agencies noted in their announcement, the final rule, Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain Intermediate Holding Companies, and Global Systemically Important Foreign Banking Organizations; Total Loss-Absorbing Capacity Requirements, “prescribes a more stringent regulatory capital treatment for holdings of [total loss-absorbing capacity] (TLAC) debt.” U.S. global systemically important banking organizations (GSIBs) will be required, among other things, to deduct from their regulatory capital certain investments in unsecured debt instruments issued by foreign or U.S. GSIBs in order to meet minimum TLAC requirements and long-term debt requirements, as applicable. The final rule recognizes the systemic risks posed by banking organizations’ investments in covered debt instruments and “create[s] an incentive for advanced approaches [for] banking organizations to limit their exposure to GSIBs.” The final rule takes effect April 1, 2021.
The federal bank regulatory agencies also announced a second final rule, Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements, which will implement a stable funding requirement for certain large banking organizations established by a quantitative metric known as the net stable funding ratio (NSFR). The NSFR will measure banking organizations’ level of stability, and will require that a minimum level of stable funding be maintained over a one-year period. According to the federal bank regulatory agencies, the NSFR is intended “to reduce the likelihood that disruptions to a banking organization’s regular sources of funding will compromise its liquidity position,” and is designed to “promote effective liquidity risk management, and support the ability of banking organizations to provide financial intermediation to businesses and households across a range of market conditions.” The final rule “applies to certain large U.S. depository institution holding companies, depository institutions, and U.S. intermediate holding companies of foreign banking organizations, each with total consolidated assets of $100 billion or more, together with certain depository institution subsidiaries” with “increases in stringency based on risk-based measures of the top-tiered covered company.” The final rule takes effect July 1, 2021.
Agencies propose codifying that supervisory guidance lacks force of law
On October 20, the Federal Reserve Board, CFPB, FDIC, NCUA, and OCC released a notice of proposed rulemaking (NPRM), which seeks to codify the “Interagency Statement Clarifying the Role of Supervisory Guidance issued by the agencies on September 11, 2018 (2018 Statement).” As previously covered by InfoBytes, the 2018 Statement confirmed that supervisory guidance “does not have the force and effect of law, and [that] the agencies do not take enforcement actions based on supervisory guidance.” The Statement emphasized that the intention of supervisory guidance is to outline agencies’ expectations or priorities and highlighted specific policies and practices the agencies intend to take relating to supervisory guidance to further clarify the proper role of guidance, including: (i) not citing to “violations” of supervisory guidance; (ii) limiting the use of numerical thresholds or other “bright-line” requirements; (iii) limiting multiple issuances of guidance on the same topic; (iv) continuing to emphasize the role of supervisory guidance to examiners and to supervised institutions; and (v) encouraging supervised institutions to discuss supervisory guidance questions with their appropriate agency contact.
In addition to codifying the above elements of the 2018 Statement, the proposal would amend the 2018 Statement by (i) clarifying that references in the Statement limiting agency “criticisms” includes criticizing institutions “through the issuance of [matters requiring attention] MRAs and other supervisory criticisms, including those communicated through matters requiring board attention, documents of resolution, and supervisory recommendations”; and (ii) adding that supervisory criticisms should be “specific as to practices, operations, financial conditions, or other matters that could have a negative effect on the safety and soundness of the financial institution, could cause consumer harm, or could cause violations of laws, regulations, final agency orders, or other legally enforceable conditions.”
Comments are due 60 days after publication in the Federal Register, which has not yet occurred.