This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.

Fed releases stress test and CCAR results: big banks well capitalized and most meet capital planning expectations. The much anticipated results of the Federal Reserve's two annual evaluations of 18 major US banks' capacity to withstand a severe (though hypothetical) recession demonstrate that the nation’s largest banks have strong capital levels and are, for the most part, meeting supervisory expectations for capital planning. The Fed on June 21 released the results of the supervisory stress tests mandated by Dodd-Frank. And on June 27, the Fed released the results of its Comprehensive Capital Analysis and Review (CCAR). Only the 18 largest and most complex banks were tested this year, as smaller and less complex banks have been put on a two-year testing cycle under the banking regulatory overhaul law enacted in May 2018. The stress tests revealed that, “The nation's largest banks are significantly stronger than before the crisis and would be well-positioned to support the economy even after a severe shock,” in the words of Randal Quarles, the Fed’s vice chair for supervision. The Fed reported that since 2009, the common equity capital at the 18 firms has increased by more than $680 billion. The CCAR determined that most of the major banks have capital levels sufficient to absorb losses and continue lending to households and businesses even in times of economic downturn, and that large banks have more than doubled their capital levels since the financial crisis. While the Fed did not object to the capital plans of any of the 18 firms, it did issue a “conditional non-objection” to the capital distribution plan of the US holding company of one major foreign bank and is requiring that bank to address “limited weaknesses identified from the test.” Two other US-based banks were able to maintain their post-stress regulatory capital ratios above minimum requirements in the severely adverse scenario only after submitting adjusted capital actions.

23 states join licensing agreement for fintechs. A diverse group of states, large and small and from coast to coast, have joined a multistate agreement to standardize the licensing process for money transmitters and other money services businesses. According to a June 24 announcement from the Conference of State Bank Supervisors, the pact would greatly streamline the MSB licensing process. Under the agreement, if one state reviews key elements of state licensing for a money transmitter – IT, cybersecurity, business plan, background check, and BSA compliance – then other participating states agree to accept the findings. The multistate compact, first announced in February 2018 with seven states participating, was intended to ease the burdensome state-by-state process for money service businesses, including fintech firms, trying to expand nationwide. CSBS said the goal is to have all states on board by next year as part of a larger effort to streamline nonbank supervision, called Vision 2020. The first phase of the pilot program combines initial licensing requirements into one process so the applicant does not need to refile for each state, with the lead state communicating its certification to the other states for approval. In the second phase, each state reviews any remaining, state-specific requirements before making a decision on a license. According to CSBS, 15 companies are in the second pilot and have received 72 licenses as of June 20.

Fed & CFPB issue final amendments to Reg CC inflation adjustment. The Federal Reserve Board and the Consumer Financial Protection Bureau on June 24 jointly published amendments to Regulation CC to implement a statutory requirement to adjust for inflation the dollar amounts depository institutions must make available to their customers. Under the Final Rule, to be published in the Federal Register, the amendments apply in circumstances ranging from next business day withdrawal of certain check deposits to setting the threshold amount for determining whether an account has been repeatedly withdrawn. Reg CC implements the Expedited Funds Availability Act of 1987 and the Check Clearing for the 21st Century Act (Check 21 Act) of 2003. Dodd-Frank amended the EFA Act to grant CFPB and the Fed joint rulemaking authority for funds-availability schedules, disclosure policies, payment of interest, and other EFA Act provisions implemented by Regulation CC, and required that the dollar amounts be inflation-adjusted every five years by the annual percentage increase in the CPI. Additional amendments in the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Dodd-Frank rollback law enacted last year, are also incorporated in the Final Rule. The compliance date for the adjusted amounts is July 1, 2020.

Legislation proposed to enhance state enforcement of banks. Two California Democratic lawmakers are teaming up on a legislative initiative to strengthen the authority of state attorneys general and other law enforcement officials to issue subpoenas during the course of investigations into compliance with state law by national banks. Senator Kamala Harris, also a candidate for the her party’s nomination for the presidency, and Representative Katie Porter have announced plans to introduce versions of the Accountability for Wall Street Executives Act of 2019 in their respective Congressional chambers. According to a one-pager issued by Senator Harris’s office, a 2009 Supreme Court ruling determined that state AGs are preempted from using the “visitorial” oversight of federally-chartered banks, ending what the senator termed a decades-long cooperative arrangement between state law enforcement officials and federal banking regulators and giving exclusive enforcement authority to the Office of the Comptroller of the Currency. The proposed legislation would clarify that state AGs have visitorial authority to conduct oversight of federally-chartered national banks to issue subpoenas to inspect bank records and interview bank executives, and “repair” language in the National Bank Act that the Supreme Court interpreted as limiting those powers. The senator said the measure would “ensure there will always be at least two cops on the block.” Two other presidential contenders, Sens. Elizabeth Warren (D-MA) and Kirsten Gillibrand (D-NY) are listed as original co-sponsors of the bill.

CFPB extends comment period on HDMA proposed rule. The CFPB is extending the public comment period on its advance notice of proposed rulemaking on the Home Mortgage Disclosure Act to October 15, 2019. The June 27 announcement of the extension notes that the original deadline for comments was July 8, 60 days after the proposed rule was first published in the Federal Register, and the bureau said the extension was sought by both industry trade associations and consumer advocacy groups. The CFPB proposal seeks comment and information from the public on whether to have changes to the data points the Bureau’s October 2015 final rule implementing HMDA added to Regulation C or revised to require additional information, and also requests public input on the requirement that institutions report certain business- or commercial-purpose transactions under Regulation C. In a related move, CFPB will issue a  notice to reopen the comment period (which had closed on June 12) on certain aspects of its notice of proposed rulemaking on coverage thresholds under the HMDA rules.

FSB chair seeks international cooperation to avoid market fragmentation. On the eve of the June 28-29 G20 summit in Osaka, Japan, Financial Stability Board Chair Randal Quarles highlighted progress achieved in post-financial crisis reforms and outlined key themes and priorities going forward to promote “an integrated global financial system – an open and resilient financial system, grounded in agreed international standards.” In a June 24 letter to G-20 leaders, Quarles said FSB would continue to monitor emerging risk areas, such as rising corporate and public debt levels. He also called for harnessing technological innovations to contain risks, while at the same time responding to the potential risks posed by some of those innovations, such as crypto-assets. A progress report issued on June 25 finds that the new regulatory framework sought by the G20 is “largely in place” but also notes that “implementation is not complete and remains uneven across reform areas.” Four core reform areas identified in the progress report include more timely regulatory adoption of core Basel III elements; ending too-big-to fail, which has advanced for GSIBs but not as much for less prominent financial institutions, including non-banks; making derivatives markets safer; and strengthening oversight of non-bank financial intermediation. In an opening statement for a June 25 press briefing, Quarles noted that the Japanese G20 hosts had asked FSB to look into ways to reduce market fragmentation along geographic lines, and he noted that financial regulation and supervision can cause “cross-border frictions in financial activities that are international in nature.” In response, FSB’s report focused on cross-border trading and clearing of over-the-counter derivatives, cross-border management of capital and liquidity, and international sharing of data and other information. FSB, based in Basel, Switzerland, was established in 2009 and includes all the G20 economies. Quarles also serves as the Federal Reserve’s vice chair for supervision.

Basel Committee finalizes changes in treatment of client cleared derivatives and leveraged ratio disclosure requirements. The Basel Committee on Banking Supervision will revise the leverage ratio treatment of client cleared derivatives to align it with the standardized approach to measuring counterparty credit risk exposures (SA-CCR). In a June 26 announcement, BCBS explained that  this treatment will allow for cash and non-cash forms of initial and variation margin received from a client to offset the replacement cost and potential future exposure for client cleared derivatives only. “This limited revision balances the robustness of the leverage ratio as a non-risk-based safeguard against unsustainable sources of leverage with the policy objective set by the G20 Leaders to promote central clearing of standardized derivative contracts,” the Committee stated. BCBS also issued revisions to require banks to disclose their leverage ratios based on quarter-end and daily average values of securities financing transactions in an effort to address the practice of “window dressing,” in which temporary reductions of transaction volumes around reference dates lead to public disclosure of artificially elevated leverage ratios. BCBS, whose 45 members comprise central banks and bank supervisors from 28 jurisdictions, is the primary global standard setter for the prudential regulation of banks.

NCUA delays RBC rule by two years. A divided National Credit Union Association Board on June 20 voted, for the second time, to delay the effective date of its risk-based capital rule to January 1, 2022. The vote on the proposed rule that incorporates the delay was 2-1. NCUA Board Chairman Rodney Hood said in June 26 statement that the delay would provide more time for study. “This is an appropriate time to consider additional improvements to the risk-based capital rule,” Hood said. “We have a strong economy, and credit unions are very well-capitalized, with a net worth above 11 percent.” But Board member Todd Harper, who cast the sole dissenting vote, said credit union regulators should follow the example of banking regulators who have imposed risk-based capital requirements on banks in the aftermath of the financial crisis. Also opposing the delay were the ABA and Senate Banking Committee Ranking Member Sherrod Brown (D-OH), who are not typically on the same side of many issues. “Since 2014, every bank in the country has had to adopt and comply with risk-based capital rules recommended by regulators around the world,” ABA President and CEO Rob Nichols said. “It defies simple logic that the NCUA would propose again to delay imposing comparable rules for the nation’s credit unions, when the agency is simultaneously allowing and encouraging credit unions to operate exactly like banks.” Senator Brown said, “I am disturbed that ten years after the financial crisis, the NCUA is once again delaying important rules to increase capital at large credit unions. I commend Board Member Harper for opposing this unnecessary extension and demanding that NCUA focus on strengthening supervision and identifying risks to credit unions.” NCUA originally approved the rule in 2015 and scheduled it to go into effect at the beginning of this year. Last October the Board unanimously approved delaying the effective date to January 1, 2020, and raised the asset threshold for a complex credit union from $100 million to $500 million. Comments on the proposed rule must be received within 30 days after publication in the Federal Register.

Credit unions falling short of and straying from their mission, ABA-funded study finds; trade groups push back. A new study has determined that the credit-union industry is failing to live up to its statutory mission to provide financial services to borrowers of modest means and is calling for stronger enforcement to ensure that mission is achieved. The study, which was funded by the American Bankers Association but conducted independently by Federal Financial Analytics, recommends that the NCUA, the federal regulator of the sector, “go beyond its current policy of measuring only total credit union loan volume” and instead “measure what types of loans are made to whom at how much long-term gain to borrowers in terms of income advancement or wealth accumulation.” Titled The Credit-Union Equality Commitment: An Analytical Assessment, the 38-page study notes that the credit-union industry was established in 1934 to provide households of “small means” with “provident or productive” financial services in exchange for a federal tax exemption and other benefits. Federal Financial Analytics managing partner Karen Petrou said in a June 25 press release that the goal of the study is “to remind policy-makers of their vital mission to ensure that taxpayer-benefits received are credit-union benefits earned.” But, the study argues, “The 2019 credit-union regulatory regime has redesigned the credit-union business model into one often indistinguishable from expressly for-profit financial institutions with no comparable duties to serve low-and-moderate income households.” The National Association of Federally-Insured Credit Unions pushed back on what it called the “banker report.” In a June 26 press release NAFCU spokesperson Jacqueline Ramsay said “the paper offers scant evidence for the conclusions reached and makes no mention of banker efforts to prevent credit unions from serving underserved communities.” The Credit Union National Association also dismissed the report. CUNA’s chief advocacy officer Ryan Donovan was quoted in a published report stating, “As the saying goes, ‘you get what you pay for’ and the ABA appears to have gotten exactly what it was looking for: a well-funded, long-winded attack on a movement that for more than a century has provided value and benefit to consumers in ways big and small.” Federal Financial Analytics describes itself as “a proprietary think tank providing analytical and advisory services on legislative, regulatory, and public-policy issues affecting global financial-services companies.”

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