This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.
- Quarles sees need for "differentiation" in requirements for G-SIBS vs. other large banks. Randal Quarles, the Fed's vice chairman for supervision, told the Senate Banking Committee that the Fed is reviewing its requirements for firms with more than $250 billion in total assets but which do not otherwise meet the global systemically important threshold. Currently some of the Fed's regulatory requirements for banks above the $250 billion level, including liquidity regulation, are as stringent as those governing G-SIBs, according to Quarles, who said, "I see reason to apply clear differentiation." Regarding the G-SIBs themselves, Quarles responded to senatorial concerns about the effects that the current capital surcharge is having on the competitiveness of major US banks by saying that the G-SIB surcharge "will inevitably be part of considering whether we have appropriately calibrated this complex of rules" in a way that protects the firms and the stability of the financial sector while ensuring a "level playing field internationally." But he added that he did not wish to "prejudge what the outcome of an honest consideration of that whole complex of rules will be." On the heels of recent requests to the Fed and other regulators from House and Senate Republicans seeking to reduce the G-SIB surcharge, 19 Democrats on the House Financial Services Committee, led by ranking member Representative Maxine Waters (D-CA), called on Fed Chairman Jerome Powell to "reject their advice." In a September 20 letter to Powell, the committee Democrats said the surcharge and other regulatory reforms, "have made the financial system much safer following the 2007-2009 financial crisis" and has helped "level the playing field for thousands of community banks," while US banks have seen "record profits" with the current regulations in place.
BHCs with assets between $100-$250 billion. Quarles also testified that the Fed is giving its "highest priority" to issuing a proposed rule on tailoring enhanced prudential standards for banks with assets between $100 billion and $250 billion, providing a framework that will allow banks to better anticipate and understand the rationale behind enhanced regulation. Besides the size of the banks, Quarles said their complexity and interconnectedness should also be factors in tailoring regulation and supervision.
FBOs. Congressional Republicans had also sought to provide regulatory relief for US subsidiaries of some foreign banking organizations, but Quarles said in his prepared testimony that the Fed is "not including any changes to the FBO regulatory scheme for FBOs with more than $250 billion in global assets as part of our implementation of tailoring mandated by" banking regulatory reform legislation passed earlier this year, though he pledged to "review our regulatory framework to improve the manner in which we deal with the particular risks of FBOs in light of the distinct characteristics of such institutions.
Quarles's comments were made at an October 2 hearing of the Senate Banking Committee called to review implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Dodd-Frank overhaul enacted in May of this year, which included testimony from top officials at the Fed, FDIC, OCC and NCUA. Prepared testimony from the witnesses and Banking Committee Chairman Mike Crapo's opening statement can be downloaded here. The opening statement of Senator Sherrod Brown, ranking Democrat on the committee, can be found here.
- Community bank capital rule expected by year's end. Another issue covered at the October 2 Banking Committee hearing was a forthcoming proposal that would exempt many community banks from the complexities of the Basel III capital requirements, as mandated by the Dodd-Frank overhaul bill. FDIC Chair Jelena McWilliams told the senators that a rule establishing a leverage ratio requirement for community banks will be published "before year-end, if not much sooner" Quarles also identified the leverage ratio as a high, near-term priority. The recently enacted law requires regulators to establish a leverage ratio between 8 and 10 percent for qualifying community banks. In an exchange with Senator Crapo, author of the regulatory overhaul legislation, McWilliams said regulators are trying to take a more "simple" approach, "commensurate to the risk profile of small community banks and primarily banks below $10 billion," adding, "We have made things too complicated."
- Agencies still not on same page on CRA reform. As reported in the September 10 edition of Bank Regulatory News and Trends, the OCC has issued an advanced notice of proposed rulemaking seeking input on modernizing the Community Reinvestment Act, including questions on redefining assessment areas beyond physical branches. Notably, the Fed and the FDIC, the other two agencies with jurisdiction over the CRA, did not join the OCC in issuing the proposal. Comptroller Joseph Otting, in testimony at the October 2 Banking Committee hearing, highlighted OCC's proposals to update the CRA's regulatory framework, including "rethinking the concept of the 'communities' that banks serve in a more comprehensive manner." But Otting faced sharp questioning from Senator Elizabeth Warren (D-MA), who expressed concern that OCC's proposals would undermine the intent of the CRA, enacted in 1970, to increase investment and access to capital in underserved urban and rural communities. Warren on September 26 introduced legislation that would extend the CRA cover more financial institutions and strengthen sanctions against institutions that fail to follow the rules. Another committee member, Senator Robert Menendez (D-NJ), focused his questions on McWilliams and Quarles, whose agencies have not gotten behind OCC's proposal, pressing them on whether they support a "rule that de-emphasizes the importance of a bank's physical presence in terms of branches in low- and moderate-income communities." McWilliams said regulators should "take a look at" the role of branches in today's changed banking landscape, adding, "But in general, I believe that branches are important, still important, and in a number of low and moderate income communities, to the extent that the consumers rely on those branches more so than they rely on digital devices, I would certainly want to make sure that emphasis remains a part of the CRA." While noting that today "branches have a different role than they've had in the past," Quarles stressed, "I think place is important with respect to banking." For his part, Fed Chairman Powell expressed hope that the three agencies will ultimately develop a joint approach to CRA reform. At his quarterly press conference on September 26, Powell said, "At the Fed we are deeply committed to the mission of CRA, which is for banks to provide credit and other banking services in the communities they serve. We don't want to lose that focus on community, and we definitely want to see that fundamental purpose of the law sustained."
- The other CRA: Crapo tells regulators to submit rules for Congressional review. Chairman Crapo used part of his opening statement at the October 2 hearing to remind the agency witnesses that they should submit all proposed rules to Congress for review. The Congressional Review Act (another law known by the initials CRA) requires that federal agency rules be submitted for Congressional oversight. The law allows Congress to overturn rules proposed by regulators. The chairman recognized that, as the regulatory agencies go about the work of implementing the banking deregulatory law, some provisions may be implemented through guidance or other more informal means. But, to allow Congress to fulfill its oversight role and ensure that agency policy statements regarding implementation of the banking law are not subsequently overturned, Crapo said, "I encourage the regulators to follow the Congressional Review Act and submit all rules to Congress, even if they have not gone through formal notice and comment rulemaking."
- Senate Banking Republicans call for changes to covered funds under Volcker Rule. A group of seven Republican members of the Senate Banking Committee, led by Chairman Crapo, are calling on financial regulators to include more revisions to the definition of "covered fund" as they rewrite the Volcker Rule. The October 1 letter to Treasury Secretary Steven Mnuchin and the top officials at the Fed, FDIC, OCC, SEC and CFTC – the agencies charged with implementing and enforcing Volcker – notes that questions surrounding "which entities and activities are covered, the impact to market liquidity, coordination of supervision and enforcement, and the collateral damage to smaller entities" are issues that "remain outstanding" in the interagency efforts to revise the rule. The letter expresses particular concern about the "few changes" that have been proposed to the rule's "covered funds" provisions. The senators are seeking a revised definition of "covered funds" or additional exclusions to address the "overly broad" application of the rule to venture capital, other long term investments and loan creation, as well as enactment of recommendations outlined in a 2017 Treasury Department report. "As a general matter, any activity permissible for a banking entity to do directly, especially those that provide stable capital and encourage economic growth, should be permissible through a fund structure as well," the senators wrote, noting that Fed Chairman Powell has stated that such activities do not threaten safety and soundness and are already subject to a regulatory framework. In addition to Crapo, who referenced the letter at the October 2 committee hearing, the co-signers are Senators Pat Toomey (R-PA), Tim Scott (R-SC), Tom Cotton (R-AR), Mike Rounds (R-SD), David Perdue (R-GA), and Thom Tillis (R-NC).
- FinCEN, financial regulators issue guidance for banks seeking collaboration on AML and BSA compliance. The Treasury Department's Financial Crimes Enforcement Network joined with federal depository institutions regulators in issuing a Joint Interagency Statement on Sharing Bank Secrecy Act Resources. The October 3 announcement describes how banks and credit unions can enter into collaborative arrangements and share resources to manage their BSA and anti-money laundering obligations more efficiently and effectively. The document explains how these institutions can share BSA/AML resources in order to better protect against illicit finance risks, which can in turn also reduce costs. Its goals include highlighting the potential benefits of collaborative arrangements that pool resources, such as staff and technology, to increase operational efficiencies, reduce costs, and leverage specialized expertise, while at the same time outlining risk considerations and mitigation measures associated with the use of collaborative arrangements, and encouraging due diligence. The joint statement is a product of a recently convened working group including FinCEN, Treasury's Office of Terrorism and Financial Intelligence, the Fed, FDIC, OCC and NCUA.
- FDIC seeks to promote better communications, transparency. Two recent initiatives from the FDIC aimed at improving the agency's relationships with industry stakeholders and the public have been announced. On October 1, the FDIC issued a Request for Information inviting public comment on how it can improve the way it communicates with insured institutions, consumers and others about laws, regulations, policies and procedures. The request for information is part of Chairman Jelena McWilliams's initiative to enhance transparency and accountability at the agency. Two days later, McWilliams spoke at greater length about the agency's transparency initiative in a speech titled "Trust through Transparency" at a research and policy conference on community banking in St. Louis under the auspices of the FDIC, the Fed and the Conference of State Bank Supervisors. The RFI asks for input on ways to improve the FDIC's process for disseminating information through Financial Institution Letters, and asks for assessments of how effective FDIC communications are and how the agency can better disseminate information through its FDIC.gov website and other platforms. The comment period will be open for 60 days following publication in the Federal Register. The FDIC has launched a new section on its website to provide new performance metrics, which will be regularly updated, including data on the turnaround times for examinations and bank applications and timely response rates for the FDIC call center. A unique mailbox, firstname.lastname@example.org, has been created to allow interested stakeholders to share ways the FDIC can improve transparency. In her speech, McWilliams said, "To promote real trust, we cannot simply make data available, publish performance measures, and consider the job complete. That is not transparency or accountability. Instead, we must strive to be accessible to financial institutions, consumers, and the general public; understandable to most audiences; and responsive to new ideas and demands."
- Fed seeks public comment on proposals to facilitate faster payments. The Fed on October 3 invited public comment on potential actions to facilitate real-time interbank settlement of faster payments, including developing the means to allow cash transfers between banks' Fed accounts at any time of day. The proposal builds upon collaboration with the payment industry through the Fed's Strategies for Improving the US Payment System (SIPS) initiative. While the Fed is not committing to any specific action at this point, views are being sought on two potential actions that may lead to faster payments while increasing the resiliency and security of services offered to the public. The first is the development of a service for real-time interbank settlement of faster payments 24 hours a day, seven days a week, 365 days a year. The other entails creation of a liquidity management tool that would enable transfers between Federal Reserve accounts on a 24x7x365 basis to support services for real-time interbank settlement of faster payments, regardless of whether those services are provided by the private sector or the Fed banks. Fed officials have indicated that real-time settlement avoids interbank credit risk by aligning the speed of interbank settlement with the speed of underlying payments, enhancing the safety of the US faster payments market. Development of a nationwide real-time interbank settlement infrastructure could encourage more banks to develop faster payment services, according to the Fed. "Consumers and businesses increasingly expect to be able to send and immediately receive payments at any time of the day, any day of the year," said Fed Board Governor Lael Brainard. "A 24/7 economy with 24/7 real-time payments needs 24/7 real-time settlement. That is where we believe that the Federal Reserve and the private sector together need to make investments for the future."
- Powell urges senators to support Liang's Fed nomination amid Republican reservations. President Trump's nomination of Nellie Liang to fill one of the vacant seats of the Federal Reserve Board of Governors has hit a patch of turbulence from the president's own party on Capitol Hill. Following the September 19 announcement of the nomination of Liang, who served for more than 30 years as a Fed economist, "significant rumblings of dissatisfaction" have emerged among Republicans on the Senate Banking Committee, which is responsible for vetting the nomination and sending it to the full Senate, according to media reports. Senator Crapo, chairman of the committee, said in an interview with Politico appearing September 25 that concerns center on Liang's "involvement with some of the previous regulatory action of the Fed that people disagree with," adding that he has not made decision on confirming the nominee – and that he was not consulted in advance of the nomination. Senator Toomey, another undecided committee member, also publicly expressed concerns about Liang's "work and her views on financial sector regulation." Liang played a significant role in the Fed's response to the financial crisis, including work on bank stress tests, and was director of the Office of Financial Stability Policy and Research, which focuses on financial system vulnerabilities. Fed Chairman Powell has been reaching out to key senators in an effort to dispel any skepticism about Liang, as confirmed by several senators. In his September 26 press conference, Powell was asked about his role on recommending Fed Board candidates to the president and replied, "traditionally the Fed Chair has been consulted on those, and I'm happy to say that that has continued." He added that he was "very happy and excited about the team that we're putting together."
- Financial regulatory nominations languish amid Supreme Court battle. In addition to the Liang nomination, which hasn't even reached the committee approval stage, several other nominees for key financial regulatory posts are still awaiting votes in the Senate. Nominees for two other vacant Fed Board seats, as well as for the top spots at the CFPB and Ginnie Mae and a seat on the NCUA board, are still pending and votes have not been scheduled. The controversy over the confirmation of Supreme Court nominee Brett Kavanaugh has dominated the Senate's attention through September and into October, pushing other confirmation debates to the back burner. Senate leaders have not indicated when the Senate will adjourn, but there is pressure to do so sooner than later from senators who want to leave Washington and get back to their home states to campaign for November's midterm elections. Regardless of how the election outcome affects the balance of power in the Senate, it is possible that some of the nominations could be taken up in a lame-duck session at the end of the year. If the nominees are not confirmed by year's end, the president would have to re-nominate them, or choose different nominees to present to the 116th Congress.