This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.
FDIC warns banks on gaps in contracts with technology service providers. The FDIC on April 2 issued a Financial Institution Letter to all insured banks in the US identifying examiner-identified deficiencies in contracts with technology service providers that may require financial institutions to take additional steps to manage their own business continuity and incident response. As the letter points out, financial institutions are required by law to notify their FDIC regional office of contracts or relationships with technology service providers, which often have the effect of integrating the systems and processes of the providers and the institutions. But FDIC examinations have found that some of these contracts lack sufficient detail regarding the roles, rights and responsibilities of the parties. The agency is encouraging financial firms, as part of their due diligence and ongoing monitoring, to more clearly address these concerns in their contracts with providers, noting that long-term and automatically-renewing contracts may be at higher risk for coverage gaps. The FDIC also reminds supervised institutions of their responsibilities to safeguard consumer information under the Interagency Guidelines Establishing Information Security Standards, which set expectations for managing technology service provider relationships through contractual terms and ongoing monitoring. "Effective contracts are an important risk management tool for overseeing technology service provider risks, including business continuity and incident response," the FDIC states.
Fed releases details to increase transparency of stress testing regime. With the goal of increasing the transparency of its supervisory models and results, the Fed on March 28 released a document providing details about the methodology used in supervisory stress tests. The 86-page document, which includes more than 30 tables and is accompanied by spread sheets and other supporting data, provides more information than has been available in past years, the Fed stated in announcing its release. "The Board has sought and received feedback regarding the transparency of the supervisory stress test from the public during routine reviews of its stress testing and capital planning programs," the executive summary states. The document is organized into the following sections: Approach to Supervisory Model Development and Validation; Overview of Modeling Framework; Descriptions of Supervisory Models; Modeled Loss Rates; and Appendix A: Model Changes for DFAST [Dodd-Frank Annual Stress Testing] 2019.
FDIC, Fed approve living wills for 14 regional banks. The FDIC and the Fed announced on March 29 that they have completed their evaluations of the 2017 resolution plans for 14 domestic regional banks and "did not identify any deficiencies and shortcomings." In letters to the 14 banking and financial services firms, the agencies outlined their expectations for the next round of resolution plan submissions, which are due by the end of the year. The letters also noted the agencies' intention to propose revisions to the resolution plan rule, including changes pursuant to sections of last year's Dodd-Frank rollback law. In most cases, the agencies generally expect each firm's 2019 submission to include only material changes from its previous plan and updated financial statements. The letters, on FDIC letterhead, are cosigned by Michael Gibson, director of the Fed's Division of Supervision, and Regulation and Doreen Eberly, director of FDIC's Division of Risk Management Supervision.
FDIC seeks to simplify deposit insurance recordkeeping. The FDIC on March 29 approved two proposals intended to simplify its deposit insurance regulations. The first proposal would amend Part 370 of the FDIC's Rules and Regulations for "Recordkeeping for Timely Deposit Insurance Determination," which established recordkeeping requirements for the 36 FDIC-insured banks with at least two million deposit accounts to facilitate rapid payment of insured deposits to customers in the event of a failure. The second proposal would amend Part 330 of the FDIC's rules, which applies to all insured depository institutions, governing the "signature card" requirement. It would move away from the current reliance on physical signature cards or electronic signatures to authenticate account holders and accept usage of the account as verification. "The amendments we propose today are intended to provide these improvements and to better balance the benefits of the rules with the burdens, provide limited relief where appropriate, and improve clarity, while still ensuring the FDIC will have access to the information it needs," FDIC Chair Jelena McWilliams said in a statement. She also noted that there would be an optional one-year extension of time for compliance with Part 370. Comments will be accepted on both rules for 30 days after publication in the Federal Register.
Regulators propose relief for custodial funds. The FDIC, joined by the Fed and the OCC, on March 29 announced a proposed rule that would exempt certain large banks from the requirement to set aside capital for custodial funds under the supplementary leverage ratio. The Notice of Proposed Rulemakingwould pertain to banks whose business model is "primarily focused on custody, safekeeping, and asset servicing activities, as compared to its other commercial lending, investment banking, or other banking activities." According to an FDIC staff memo accompanying the proposal, that definition would apply "if the US top-tier depository institution holding company in the organization has a ratio of assets under custody (AUC)-to-total assets of at least 30:1." The proposal is part of an ongoing effort by the banking regulatory agencies to implement the provisions of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the sweeping financial services regulatory reform measure that became law last year. Section 402 of that Dodd-Frank rollback legislation directs these agencies to amend the SLR of the regulatory capital rule to exclude certain funds of custody banks. Comments will be accepted for 60 days following publication of the proposed rule in the Federal Register.
Agencies offer proposal to minimize effects of GSIB failures. Three federal banking regulatory agencies on April 2 issued a proposed rule intended to limit the impacts from the failure of large banking organizations on other major lenders. In a Notice of Proposed Rulemaking, the Fed, FDIC and OCC are seeking to limit the interconnectedness of banks with over $250 million in assets or at least $10 billion in foreign exposure. Under the proposal, these global systemically important bank holding companies would be required to hold additional capital against substantial holdings of total loss-absorbing capacity debt. “This would reduce interconnectedness between large banking organizations and, if a GSIB were to fail, reduce the impact on the financial system from that failure,” the agencies stated in announcing the proposal. The rule would also require the holding companies of GSIBs to report publicly their TLAC debt outstanding. Comments will be accepted for 60 days following publication in the Federal Register.
CFTC adopts final rule on swaps for banks. The Commodity Futures Trading Commission on March 25 voted to relieve small and midsize banks from certain post-crisis derivatives requirements, allowing them greater leeway to hedge against the risks of loans they originate. CFTC's Final Rule, published in the April 1 Federal Register and effective as of that date, amends "the de minimis exception within the 'swap dealer' definition in the Commission's regulations by establishing as a factor in the de minimis threshold determination whether a given swap has specified characteristics of swaps entered into by insured depository institutions in connection with loans to customers." Small and midsize banks will now be exempt from margin and capital requirements that come with large swap portfolios and have flexibility in how they count interest-rate swaps that are intended to hedge the credit risk of loans. In 2012, CFTC set the de minimis threshold at $8 billion per year in swap dealing activity, requiring an institution exceeding that amount to register as a swaps dealer. The vote at the CFTC's open meeting was 3-2, breaking down along the commissioners' party lines. "This proposal will allow small and medium size commercial borrowers – manufacturers, home builders, agricultural cooperatives, community hospitals and small municipalities – to conduct prudent risk management that is difficult for them under the current rule," Chairman J. Christopher Giancarlo said in his statement. But in a dissenting statement, Commissioner Rostin Behnam said, "not only does this novel exercise in agency discretion undermine the swap dealer definition, but it exemplifies the current Commission's rush to implement sweeping changes to the regulation of swap dealers without regard for the long term consequences of its capricious interpretation of the law and arbitrary analysis of risk."
FAQs on new accounting standard released. Four financial regulatory agencies on April 3 released a list of frequently asked questions – and answers – about the new accounting standard on financial instruments known as current expected credit losses. The 43-page FAQ document was jointly issued by the Fed, FDIC, OCC and NCUA, under the auspices of Federal Financial Institutions Examination Council. The Financial Accounting Standards Board issued the CECL standard, which provides a methodology for estimating allowances for credit losses, in 2016. The revisions went into effect on March 31 for reports with quarterly report dates, and will go into effect on December 31 for reports with an annual report date, with later effective dates for certain other institutions. The new standard applies to all banks, savings associations, credit unions, and financial institution holding companies, regardless of size, that file regulatory reports for which the reporting requirements conform to US generally accepted accounting principles.
CFPB releases HMDA data on banks. The Consumer Financial Protection Bureau on March 29 published Home Mortgage Disclosure Act modified loan application registers for approximately 5,400 financial institutions. The Modified LARs contain loan-level information for 2018 on individual HMDA filers, modified to protect privacy. The modified LARs include additional data that certain firms were required to report under the 2015 HMDA final rule. This is the first year that the expanded dataset has been made publicly available. Additional HDMA-related information will be published later this year, including a complete loan level dataset and HMDA aggregate and disclosure reports, accompanied by a Data Point article highlighting key trends. Last December the Bureau announced final policy guidance describing the HMDA data it would make available to the public beginning this year. A downloadable modified LAR file is available for every financial institution that has completed a HMDA data submission in the selected year.
Cannabis banking bill advances. The House Financial Services Committee on March 28 approved legislation that would allow financial institutions to serve legal marijuana businesses. The SAFE [Secure and Fair Enforcement] Banking Act (HR 1595), sponsored by Representatives Ed Perlmutter (D-CO) and Denny Heck (D-WA), with several amendments including a provision to extend the same treatment to insurers, passed the committee on a 45-15 vote. It now heads to the full House. The bill offers a safe harbor and other protections for depository institutions serving cannabis-related businesses in states that have legalized marijuana. The bill has 155 co-sponsors, though only 15 of them are Republicans and most of the Financial Services Committee Republicans voted against the bill, raising questions about prospects for the legislation in the Republican-controlled Senate if the bill does advance through the House. "My support for the SAFE Banking Act is not an approval of marijuana businesses. It is based on the dangers of these businesses having to store massive volumes of cash, making them prime targets for violent robberies and money laundering schemes," Representative Steve Stivers (R-OH), an original co-sponsor, said. "In addition, having banking relationships creates an auditable trail for these businesses, which is important."
President to nominate Bowman to full term on Fed board. President Trump intends to nominate Federal Reserve Board of Governors member Michelle Bowman to a 14-year term beginning February 1, 2020, according to an April 2 White House announcement. Bowman started as a Fed board member in November 2018 to fill a term expiring on January 31, 2020. She is the first Governor designated with community banking expertise, pursuant to a requirement enacted in 2015. She previously served as the Kansas State Bank Commissioner.
Fed critic Stephen Moore expected to be nominated to Fed Board. President Trump has announced that he plans to nominate economist and commentator Stephen Moore to fill one of the two remaining vacancies on the Fed's Board of Governors. The potential nomination has made waves in banking and financial circles, Congress and the media, and the White House has indicated that the decision to nominate Moore has not been finalized. Moore, an economic advisor to the president's 2016 campaign, is a regular contributor to CNN, a former Wall Street Journal editorial page writer, co-founder of the Club for Growth, and a senior fellow at the Heritage Foundation. The president has expressed his displeasure with Fed Chairman Jerome Powell and Fed policies on interest rates and the Fed's asset portfolio, and Moore, echoing these concerns, has called on Powell to resign and said the Board should be more "responsive" to the president. Powell has consistently maintained that political pressure does not color Fed policy. Moore has also advocated for a lighter regulatory hand on the banking sector, calling the Dodd-Frank rollback enacted last year a "half a loaf." While the major banking organizations have not taken a public position on Moore's nomination, media reports indicate that some in the industry have privately expressed reservations about the effects he could have on the Fed's independence. Congressional Democrats have criticized the nomination. But key Senate Republicans have expressed openness to the nomination, which is subject to Senate confirmation. As previously reported in Bank Regulatory News & Trends, former presidential candidate, Godfather's Pizza CEO and one-time Kansas City Federal Reserve Bank member Herman Cain is also under consideration for one of the open Board seats.
Fed appoints new COO. Patrick McClanahan has been named chief operating officer at the Fed, according to a March 29 announcement. A former naval officer with more than 20 years of service, Shanahan did a previous stint at the Fed as deputy director of the Division of Financial Management from 2014 to 2016. His most recent post was vice president of people operations at Gannett. The COO is responsible for the operation of the Fed's administrative, financial management, technology and strategic planning functions, technology services, short- and long-term strategic planning, and data management. The Fed's management division director, chief financial officer, chief information officer, chief data officer, and the director of the Office of Diversity and Inclusion will report to him. McClanahan, who starts on April 29, succeeds Don Hammond, who had served as COO since 2012 and retired earlier this year after 35 years of federal government service.
FDIC picks new general counsel, other senior staff. In other personnel news, the FDIC on March 26 announced the appointment of Nick Podsiadly as General Counsel, effective April 8. Podsiadly, who succeeds Charles Yi in the post, has most recently served as deputy general counsel and senior vice president for Fifth Third Bancorp of Cincinnati, with responsibility over regulatory legal matters, supervisory examinations, regulatory interactions, and government affairs. His CV also includes senior posts at Regions Financial Corporation and the ABA. In addition, the FDIC announced that agency veteran Harrel Pettway has been promoted to Senior Deputy General Counsel, and Leonard Chanin, has joined the FDIC as Deputy to the Chairman.