This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.
Regional banks exempted as Fed releases 2019 stress test scenarios. Banks with total consolidated assets of between $100 billion and $250 billion will be exempted from the 2019 supervisory stress testing cycle, the Fed announced on February 5. In the statement, accompanying the release of 2019 Supervisory Scenarios for the annual tests required under Dodd-Frank, the Fed said that it "will be providing relief to less-complex firms from stress testing requirements and CCAR by effectively moving the firms to an extended stress test cycle for this year. The relief applies to firms generally with total consolidated assets between $100 billion and $250 billion." Banks relieved from having to undergo the 2019 stress testing cycle will still be subject to their results from 2018, which will determine capital disbursements. The Fed is planning to propose for notice and comment a final capital distribution method for firms on an extended stress test cycle in future years. In a separate announcement on the same day, the Fed said it had finalized changes aimed at increasing the transparency and improving public understanding of its stress testing program for the nation's largest and most complex banks. Beginning with the 2019 stress test cycle, more information about the stress testing models used in the annual CCAR will be provided, including ranges of loss rates, portfolios of hypothetical loans with loss rates estimated by the Fed's models, and more detailed descriptions of those models. The Fed's moves to update the stress testing regime were welcomed by banking industry organizations, such as the Financial Services Forum, while reform advocacy groups such as Better Markets expressed concern that the increased transparency could help banks "game the tests."
Fed to hold public conference on stress test framework in July; Quarles cites "improvements" for post-crisis stability. The Fed Board will host a "Stress Testing: A Discussion and Review" conference at the Federal Reserve Bank of Boston on July 9. In its January 28 announcement, the Fed said "the conference will bring together academics, regulators, bankers, and other stakeholders to discuss the transparency and effectiveness of the Board's stress tests and how the stress tests can remain a dynamic and useful tool of large bank supervision." The stress testing regime seeks to determine if firms' capital levels are adequate to withstand a severe economic downturn, and results are usually issued in late June. The Fed reports that the largest US firms have more than doubled their capital levels to approximately $1.2 trillion since the first round of tests in 2009. Additional information on the conference, including an agenda and panelists, will be forthcoming. As part of the Fed's outreach, Randal Quarles, the Fed's vice chairman for supervision, said he and his colleagues are currently working "to improve a cornerstone of our post-crisis rules," the supervisory stress tests. In a February 6 speech to the Council for Economic Education in New York, Quarles noted that the stress testing process has remained ";static" for nearly a decade, and that the "challenge now is to preserve the strength of the test, while improving its efficiency, transparency, and integration into the post-crisis regulatory framework."
CFPB unveils payday lending rule changes, cancelling underwriting requirement; Congressional Democrats object. The CFPB is proposing changes to its payday lending rule that would rescind the so-called ability-to-pay requirement, based on the Bureau's "preliminary finding that rescinding this requirement would increase consumer access to credit." In its February 6 announcement, CFPB states that there was "insufficient evidence and legal support" to justify an October 2017 proposal by its former director Richard Cordray, which would have required lenders to verify borrowers' income and liabilities to determine if they qualified for the loans. The Cordray proposal was opposed by industry leaders, who argued that it would severely limit the number of customers who could qualify for loans, cause credit to dry up in "under-banked" areas and decimate the payday lending sector. The CFPB determined that the 2017 proposal "would reduce access to credit and competition in states that have determined that it is in their residents' interests to be able to use such products, subject to state-law limitations." But key Congressional Democrats are vowing to block the proposed rule, the bureau's first major policy announcement under Director Kathy Kraninger. Senator Elizabeth Warren, D-MA, a member of the Banking Committee who played a major role in conceptualizing and establishing the CFPB, called the proposed rule "a mockery of the CFPB's statutory mission of protecting consumers." In a February 6 letterto Kraninger, Warren said the proposed rule should be "withdrawn immediately." Senator Sherrod Brown, D-OH, ranking Democrat on the Banking Committee, said that the rule change "will result in millions of hardworking families trapped in a cycle of debt and poverty" and accused the bureau of "helping payday lenders rob families of their hard-earned money." House Financial Services Committee Chairwoman Maxine Waters, D-CA, also called for the proposed rule to be rescinded. In a February statement, Waters lamented that Cordray's "successors seem to be working hard to assist payday loan sharks and repeal important consumer protection."
FSB issues monitoring report on "shadow banks." The Financial Stability Board issued its annual Global Monitoring Report on Non-Bank Financial Intermediation for 2018, providing an assessment of global trends and risks from what was until recently known as "shadow banking." The report states that non-bank financing continues to be "a valuable alternative to bank financing for many firms and households, fostering competition in the supply of financing and supporting economic activity." The sector experienced a growth rate of 7.6 percent in 2017, according to the report, growing faster than insurers, banks and pension funds to reach $116.6 trillion in assets. But the report warns the sector could "also become a source of systemic risk, both directly and through its interconnectedness with the banking system, if it involves activities that are typically performed by banks, such as maturity/liquidity transformation and the creation of leverage." FSB Vice Chairman Klaas Knot, also president of the Dutch central bank, warned that non-banks "are becoming important players in areas where banks traditionally have played dominant roles" and said "authorities need to remain vigilant in addressing financial stability risks that emerge as a result of non-bank financing through enhanced data collection, improved risk analysis and implementing appropriate policy measures." FSB last October announced its decision to replace "shadow banking" with "non-bank financial intermediation" to "emphasize the forward-looking aspect of the FSB's work to enhance the resilience of non-bank financial intermediation." FSB, based in Basel, Switzerland, is chaired by the Fed's Randal Quarles.
Senators call for regulators, investment firms to address climate risks. A group of Democratic senators is calling on bank regulators to assess risks to the US financial system posed by climate change and to incorporate those risk assessments into their supervision of financial institutions. In letters dated January 25 to the leaders of the Fed, OCC and FDIC, 20 senators, led by Senator Brian Schatz (D-HI), a member of the Banking Committee, wrote, "We have seen no evidence that your agencies have seriously considered the financial risks of climate change or incorporated those risks into your supervision of financial institutions." They faulted the agencies for not mentioning climate change risks in their supervisory reports or risk assessments, "despite the fact that 2018 saw record-breaking damage from weather and climate events and the publication of several high-profile reports on the impending impacts of climate change." The senators noted that central banks and bank supervisors from 18 other nations have organized the Network for Greening the Financial System to develop best practices to incorporate climate risks in prudential supervision and financial stability surveillance. In a separate but related initiative, Schatz and seven of his colleagues sent letters on February 4 to the CEOs of 11 major investment firms urging their help in mitigating climate change by using their investment portfolios to stop tropical deforestation. "We are concerned that some companies in your portfolio may not be living up to their commitments to address deforestation in their supply chain – if they have made such commitments at all," the senators wrote. "It is our view that addressing risks from deforestation is in line with your fiduciary responsibility." Co-signers of one or both of the letters include other Banking Committee members and several current or potential presidential candidates, including Senators Cory Booker (D-NJ), Sherrod Brown (D-OH), Kamala Harris (D-CA), Amy Klobuchar (D-MN) and Elizabeth Warren (D-MA).
Major bank CEOs expected to face Congress. CEOs of the largest US banks can expect an invitation from the House Financial Services Committee to testify together sometime in March or April, according to a January 24 report in the Wall Street Journal, citing "people familiar with the matter." The new chairwoman of the Committee, Rep. Maxine Waters, D-CA, has recently spoken of her intention of "keeping an eye on the big banks and their activities, including by holding many hearings." In a scenario with potential echoes of the Congressional hearings during the 1990s featuring tobacco CEOs lined up at the witness table opposite angry lawmakers, top bank execs could find themselves facing tough questions on a wide range of topics from a new Democratic majority that is more critical of the industry than the previous GOP-led House, including several outspoken first-term members.
Bipartisan Congressional push for FDIC nominees with state regulatory experience. A bipartisan group of House members is calling on the White House to put forward nominees with state regulatory experience to fill the current vacancies on the FDIC Board of Directors. The January 30 letter, signed by 15 members of Congress, notes that two potential nominees cited in news reports lack state bank regulatory experience. Though the letter does not mention any names, FDIC Director Martin Gruenberg and former Senate Banking Committee minority chief counsel Graham Steele have been cited as possible nominees. The letter acknowledges the federal banking regulatory expertise that the rumored nominees possess, but notes that Federal Deposit Insurance Act of 1996 mandates that at least one of three independent members of the FDIC board have state banking experience, and that no board members since 2012 have had such experience. "As you know, the federal government and the states share responsibility for overseeing of the nation's dual banking system, and the FDIC plays a considerable role in that process," reads the letter, sent to Acting White House Chief of Staff Mick Mulvaney and Office of Presidential Personnel Director Sean Doocey. "State banking regulators also have many significant responsibilities in our nation's dual banking regulatory structure, as nearly 80 percent of our nation's banks are state-chartered." The Conference of State Bank Supervisors has endorsed the representatives' call. In an August 17, 2018, op-ed in American Banker, CSBC Chair Charlotte Corley wrote: "But to have a board solely made up of policymakers not only sidesteps the law, it ignores the importance of why it was created. Congress saw that the FDIC board needs practitioners, as well as policymakers. The FDIC board needs someone who knows about local banks and the communities they serve. It needs a state bank supervisor."
Report: New rule coming on SLR for custody banks. A proposal to reduce capital backup requirements for custody banks will be released by federal bank regulators in the first quarter of the year, according to a January 31 report in Politico, citing "people familiar with the matter." The proposal, which would implement a provision in the banking deregulation law enacted last year, would apply to three specific banks, but not to other banks that provide custodial services to a lesser extent. The proposal would exclude Fed deposits from the calculation of the supplementary leverage ratio for these banks so that they can continue to accept customer deposits during times of stress. The new proposal would not address the pending April 2018 proposal by the Fed and OCC to loosen the SLR, an "enhanced" version of which applies to the eight largest US banks considered crucial to the functioning of the global financial system.
Herman Cain for the Fed Board? Former presidential candidate and Godfather's Pizza CEO Herman Cain is on a "fairly large list" of candidates to fill an open seat on the Federal Reserve Board, as confirmed by the White House National Economic Council Director Larry Kudlow late last month. There are currently two vacancies on the seven-member board. Long-time Fed economist Nellie Liang, who was nominated last year by President Trump for one of those seats, withdrew her name from consideration in early January. The Senate failed to act last year on another Trump nominee for the Board, Carnegie Mellon Professor Marvin Goodfriend. The Goodfriend nomination has expired with the swearing-in of the 116th Congress and his name has not been resubmitted. Cain is hardly a newcomer to the Fed: he was a member of the Federal Reserve Bank of Kansas City, serving as chairman of the Omaha Branch board from 1989 to 1991, and then as deputy chairman (1992-94) and chairman (1995-96) of the regional Reserve Bank.