Bank Regulatory News and Trends

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Bank Regulatory News and Trends

Bank Regulatory News and Trends

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

  • Fed releases CCAR results, clears 34 of 35 banks to pay dividends and repurchase shares. The Federal Reserve Board on June 28 released the results of its annual examination of the capital planning practices of the nation's largest banks, the Comprehensive Capital Analysis and Review, typically referred to as CCAR. The Fed objected to the capital plan of Deutsche Bank USA, issued conditional non-objections to Goldman Sachs, Morgan Stanley and State Street, and issued no objections to the plans of the other 31 banks it evaluated. Goldman Sachs and Morgan Stanley's capital ratios fell below required levels when subjected to the hypothetical scenario primarily because of the one-time capital reduction from the tax law changes. The Fed expressly noted that the one-time reduction does not reflect these firms' performance under stress. Therefore both firms will still be allowed to make capital distributions at the levels they paid in recent years. The Fed also issued a conditional non-objection to State Street Corporation, largely because the stress test revealed counterparty exposures that produced large losses under the hypothetical scenario. The firm will be required to take certain steps regarding the management and analysis of its counterparty exposures under stress, but will still be allowed to make its planned capital distributions. In its eighth year, CCAR evaluates the capital planning processes and capital adequacy of the largest US-based bank holding companies, including the firms' planned capital actions, such as dividend payments and share buybacks. The Fed reports that US firms have substantially increased their capital since the first round of stress tests in 2009. The common equity capital ratio of the 35 bank holding companies in the 2018 CCAR has more than doubled from 5.2 percent in the first quarter of 2009 to 12.3 percent in the fourth quarter of 2017, reflecting an increase of more than $800 billion in common equity capital to more than $1.2 trillion during the same period. "Even with one-time challenges posed by changes to the tax law, the CCAR results demonstrate that the largest banks have strong capital levels, and after making their approved capital distributions, would retain their ability to lend even in a severe recession," said Fed Vice Chairman for Supervision Randal Quarles.
  • Big banks pass the first round of supervisory Dodd-Frank stress tests. Exactly a week earlier, the Fed released the results of supervisory stress tests mandated by Dodd-Frank, typically referred to as DFAST. (Brief primer on the difference between DFAST & CCAR: while DFAST and CCAR both test whether banks maintain sufficient capital to absorb losses and support operations during adverse economic conditions, DFAST is mandated by Dodd-Frank and is a quantitative test only that assumes each bank will maintain its current dividend and make no share repurchases. Whether a bank passes or fails DFAST is determined strictly by the amount of capital it holds. CCAR on the other hand is not mandated by Dodd-Frank and was created by the Fed as a way to evaluate both the adequacy of a bank's capital under stress and the quality of a bank's capital planning process (ie, the quality of its loss predictions models, data, capital planning governance). CCAR utilizes a bank's actual planned capital distributions (including share repurchases) when calculating whether a bank maintains sufficient capital to absorb losses and support operations during adverse economic conditions. It is possible for a bank to be determined under both DFAST and CCAR to hold an adequate amount of capital, but still fail the qualitative portion of CCAR and have restrictions placed on its capital distributions; as a result). The Fed's annual review of how 35 of the nation's largest banks or US affiliates of foreign institutions, representing a combined 80 percent of total assets, found that they hold sufficient capital to survive the most stringent "severely adverse" scenario yet, involving a sharp economic downturn, a steepening Treasury yield curve, a decline in housing prices and 10 percent unemployment.
  • New law exempts banks with less than $100 billion from stress tests. In conjunction with the June 21 release of the stress test results, the Fed Board announced that bank holding companies with less than $100 billion in total consolidated assets are no longer subject to supervisory stress testing, including both DFAST and CCAR, as provided for in the recently passed Economic Growth, Regulatory Reform, and Consumer Protection Act. Enacted on May 24, the new banking and financial services regulatory statute raised the asset thresholds for application of enhanced supervision under Section 165 of Dodd-Frank. Pursuant to the new law, the Fed will not disclose the current supervisory stress test results for BHCs with greater than or equal to $50 billion but less than $100 billion in total consolidated assets. The Fed indicated that it would provide further information on the implementation of the new law at an unspecified future date.
  • Pass/fail tests seen as a thing of the past. As part of an overall shift in its regulatory approach, there are indications that the Fed will transition away from the current passing or failing grades it assigns on its annual stress tests and toward a capital ratio that the lender must meet during the following year. In April, the Fed proposed a new rule simplifying capital rules and other supervisory procedures for major financial firms, reducing the possibility that banks would fail their stress tests and significantly relieving their compliance costs. Michael Alix, former senior vice president of the New York Fed, was quoted in the Wall Street Journal on June 26 saying the proposed change represented a move away from the "public shaming" of the current regime, and a return to a less public way of addressing risk management issues that is more sensitive to the effects that a negative report card could have on a bank's reputation, as well as more substantial ripple effects on the broader economy. Under the proposal, if it determines that a bank's capital is too low the Fed would impose a higher capital requirement in the next year that could have similar consequences to the current regime, such as limiting shareholder payouts, but without the public stigma of failing the test. The stress testing mandated by Dodd-Frank was initially seen as a way to increase public confidence in banks. The proposed changes are not reflected in this year's DFAST and CCAR results but could be implemented in time for next year's round of testing. Public comments on the April proposal are still being reviewed.
  • Banking sector lobbies Fed and OCC on capital rule for GSIBs. Organizations representing the banking industry are calling on federal regulators to implement additional changes to the enhanced supplementary leverage ratio that applies to US global systemically important bank holding companies. The nation's eighth-largest and most interconnected banks currently face a risk-based capital surcharge, increasing the capital conservation buffer they must maintain. The surcharge, enacted under Dodd-Frank, was intended to require firms to either hold substantially more capital to reduce the likelihood they will fail or to shrink their systemic footprint to reduce the potential harm their failure would cause to the financial system. In a June 25 letter to the Federal Reserve and the Office of the Comptroller of the Currency, the American Bankers Association expanded on previous comments supporting the rule the agencies proposed on April 11 to tailor the eSLR to the business activities and risk profiles of the largest domestic firms, calling for the exclusion of safe assets, such as central bank deposits, from the definition of "leverage exposure" for banks subject to the ratio, reducing the likelihood that banks would be constrained from taking deposits in times of stress. The ABA also advocated for a "holistic" review of the GSIB surcharge, which it noted, "does not reflect significant post-crisis reforms that achieve the same intended policy purpose as the GSIB surcharge." The Clearing House and the Financial Services Forum, in a June 27 joint blog post, argued that the surcharge should be lowered by at least 1 percentage point after factoring in a number of reforms that have happened since the rule was originally designed. The Forum, which represents the CEOs of the eight GSIBs, argued in a June 25 letter that the current surcharge's costs outweigh its benefits and do not "reflect the enhancements to resiliency, liquidity, and resolvability that have been achieved since the surcharge was adopted." The Clearing House, the Securities Industry and Financial Markets Association, the Financial Services Roundtable and the International Swaps and Derivatives Association have also weighed in with the agencies on the surcharge.
  • McWilliams sworn in as FDIC chair pledges reforms and transparency. Jelena McWilliams was sworn in on June 5 to a five-year term as chair of the Federal Deposit Insurance Corporation, succeeding Martin Gruenberg, who had served as chairman since 2012. In her first public speech since the swearing-in, at a June 19 Washington, DC conference hosted by The Clearing House and the Securities Industry and Financial Markets Association, McWilliams promised a sweeping review of regulatory policies and an accelerated decision-making process on deposit insurance applications, including for the industrial loan company charter. She said she would "look anew" at the CAMELS rating system, referring to the six components of a bank's condition that are assessed: Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. And she said she was open to discussions on how federal regulators approach marijuana-related banking issues in states that have legalized marijuana. A native of the former Yugoslavia, McWilliams stressed the importance of transparency in the agency's actions, noting, "I grew up in a system that wasn't transparent." McWilliams comes to the FDIC from Fifth Third Bank of Cincinnati, where she served as executive vice president, chief legal officer, and corporate secretary, and she previously worked for the Senate Banking Committee staff and as an attorney at the Federal Reserve.
  • Anti-money laundering initiatives advance. As part of a growing drive to improve the efficacy, efficiency and compliance with the Bank Secrecy Act, and anti-money laundering requirements, Comptroller of the Currency Joseph Otting said he and other regulators are forming an interagency working group to update regulations. Speaking with journalists at a June 19 conference in Washington, Otting said banking regulators – including the OCC, the Fed and the FDIC – have submitted recommendations, including changing the reporting threshold for currency transactions, to the Treasury Department's FinCEN. The issue is also gaining traction on Capitol Hill. While the House Financial Services Committee has delayed a vote that had been scheduled for June 14 on the Counter-Terrorism and Illicit Finance Act (HR 6068), the full House on June 25 passed the Cooperate With Law Enforcement Agencies and Watch Act (HR 5783), which offers protection for financial institutions that cooperate with federal and other investigations, including keeping suspicious accounts open at the behest of law enforcement without raising regulatory red flags. And illicit finance was the subject of a June 20 hearing by the Senate Banking Committee's National Security Subcommittee that heard testimony from a former FBI Financial Crimes Program officer, a major bank's anti-money laundering director and the head of the Financial Integrity Network. "Our current AML system falls short in many regards," said Senator Benjamin Sasse (R-NE),subcommittee chairman.
  • Quarles defends FSB. The Fed's Randal Quarles made a strong pitch in defense of the Swiss-based Financial Stability Board and other international financial organizations, potentially putting him at odds with some key Trump Administration officials and leading Congressional Republicans. In a June 27 speech before the Utah Bankers Association in Sun Valley, Idaho, titled America's Vital Interest in Global Efforts to Promote Financial Stability, Quarles told the bankers, "America's active participation in the FSB is important to our nation, and even, as remote as it might seem, relevant to your businesses."Stressing that the FSB does not have enforcement powers or legal authority over its sovereign member nations, Quarles said, "when rightly structured our participation in these groups makes our financial system significantly stronger by ensuring that the US perspective is part of the discussions and reflected in standards agreed to." That position contrasts with that of the FDIC's Jelena Williams who recently said she views "with some suspicion" international bodies that negotiate uniform banking standards, and stressed US regulators should be willing to depart from those standards if they don't work in the American context. House Financial Services Committee Chair Jeb Hensarling (R-TX) has referred to the FSB, established by the G-20 during President Barack Obama's Administration, as "a fairly secretive, unaccountable coalition of global bureaucrats."
  • New CFPB nominee – but is it even constitutional? President Trump on June 16 announced the nomination of Kathy Kraninger to be the next director of the Bureau of Consumer Financial Protection. Kraninger currently serves at the White House's Office of Management and Budget, whose director, Mick Mulvaney, is also the acting director of the agency still mostly referred to as the CFPB. The nomination won the praise of the US Chamber of Commerce's Center for Capital Markets, the Consumer Financial Services Association, the Mortgage Bankers Association, the Consumer Bankers Association, and Financial Services Committee Chairman Hensarling. But consumer advocates and Congressional Democrats expressed opposition to the selection. Senator Elizabeth Warren (D-MA), a member of the Banking Committee, said she will put a hold on the nomination until Krasinger turns over documents about her role in families being separated at the border. Senator Sherrod Brown (D-OH), ranking member on Banking, House Minority Leader Nancy Pelosi (D-CA), and Richard Cordray, former CFPB director, also decried the nomination. Whether the confirmation process proceeds or is delayed, however, the Administration will have either of its preferred officials in the job. The Federal Vacancies Reform Act allows a position to be filled on an acting basis for 210 days – unless the president has placed a name in nomination before that deadline, which he has now done. With a nominee pending, Mulvaney can continue as acting director indefinitely. Meanwhile, the US District Court for the Southern District of New York ruled on June 21 that the bureau is "unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director."