Bank Regulatory News and Trends Bank Regulatory News and Trends Bank Regulatory News and Trends Share this 16 APR 2018 By: Michael Francis Silva Jeffrey L. Hare Christopher N. Steelman This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape. Fed unveils plan to streamline stress tests: On April 10, the Federal Reserve Board released a proposal for comment that would simplify its capital rules for large banks. The proposal would apply to bank holding companies with $50 billion or more in total consolidated assets and US intermediate holding companies of foreign banking organizations established pursuant to Regulation YY. Some of the more notable aspects of the proposal include: Introduction of a stress capital buffer (SCB) requirement that would replace the existing, static 2.5 percent of risk-weighted assets portion of the capital conservation buffer requirement under the standardized approach of the capital rule. The SCB requirement would equal the decrease in a firm's common equity tier 1 (CET1) capital ratio in CCAR plus four quarters of planned common stock dividends. The new requirement would be added to any applicable surcharge on a US firm identified as a G-SIB and any applicable countercyclical capital buffer amount to establish a firm's capital conservation buffer requirement. For example, if a firm has a common equity tier 1 capital ratio of 9 percent and it declines to 6 percent under the hypothetical severely adverse scenario of the stress test, its SCB for the coming year would be 3 percent. The SCB would then be added to the minimum 4.5 percent common equity capital requirement, which remains unchanged. This would result in a 7.5 percent common equity capital requirement for the coming year. If the firm is a global systemically important bank (GSIB), its GSIB surcharge would be added to the SCB. Additionally, four quarters of planned dividends would be added to the SCB. Elimination of the CCAR quantitative objection, though the proposal would not change CCAR's qualitative review process or provisions of the capital plan rule that allow the Board to object to a capital plan on the basis of qualitative deficiencies for large, complex firms. Inclusion of a stress leverage buffer requirement to maintain the current complementary relationship between the risk-based and leverage capital requirements. Removal of the current assumption in CCAR that a firm will carry out all nine quarters of its planned capital actions (eg, dividends, repurchases and issuances) in the stress test and instead require firms to prefund only four quarters of planned common stock dividends. Modification of the current assumption in CCAR that a firm's balance sheet will grow under stress to an assumption that the firm's balance sheet size will remain constant under stress. Removal of the 30 percent dividend payout ratio that had been used as a threshold for heightened supervisory scrutiny. Additional detail on the Board proposal can be found in the related Board staff memo dated April 5, 2018. Fed and OCC seek to "tailor" capital rule for biggest banks: A day after the announcement on stress tests, the Federal Reserve and the Office of the Comptroller of the Currency proposed loosening the supplementary leverage ratio, an "enhanced" version of which applies to eight large US banks considered crucial to the functioning of the global financial system. Currently, firms that are required to comply with the "eSLR" are subject to a fixed leverage standard. The new proposal seeks to tailor the leverage standard to the risk-based capital surcharge of the firm, which is based on the firm's individual characteristics. But the Fed Board's vote was not unanimous: Fed Chairman Jerome Powell and Vice Chairman for Supervision Randal Quarles, both appointed to their current posts by President Trump, voted for the move, while Lael Brainard, an Obama-era appointee, opposed it. FDIC Chairman Martin Gruenberg (also an Obama appointee) also criticized the proposal, arguing that it would allow bank holding companies to move as much as $121 billion in capital out of their insured depository institution, adding, "Given these reductions in capital requirements, the FDIC did not join the Federal Reserve and the OCC in issuing the proposed rule." In an April 3 speech, Brainard discussed situations where the Fed might require large banks to increase capital in response to potential risks building in the economy – the to-date never used "countercyclical capital buffer." Though she said financial stability concerns are not currently severe, given the potential systemic risks posed by recent fiscal stimulus with tax cuts and increased government spending, Brainard said, "if cyclical pressures continue to build and financial vulnerabilities broaden, it may become appropriate to ask the largest banking organizations to build a countercyclical buffer of capital to fortify their resilience and protect against stress." The Fed-OCC joint notice of proposed rulemaking can be found here and a summary of the proposal can be accessed here. Banking regulatory agencies raise appraisal threshold for commercial property: With the FDIC on board with the Fed and OCC this time, the three agencies issued a final rule that increases the threshold for commercial real estate transactions requiring an appraisal from $250,000 to $500,000. An earlier proposal would have raised the threshold, in place since 1994, to $400,000, but the agencies determined that a $500,000 threshold "will materially reduce regulatory burden and the number of transactions that require an appraisal" without threatening the safety and soundness of financial institutions. The rule allows use of an evaluation, rather than an appraisal, for exempted commercial real estate transactions, providing a market value estimate of the real estate pledged as collateral without the need for compliance with the Uniform Standards of Professional Appraiser Practices or completion by a state licensed or certified appraiser. Industry reps had argued that the current threshold had not kept pace with price appreciation in the real estate market. It's official – Williams to helm NY Fed: As was widely predicted, the Federal Reserve Bank of New York on April 3 announced that John C. Williams was approved by the Fed Board of Governors as president and CEO. Williams is seen as someone who will bring continuity, stability and pragmatism to a uniquely influential financial institution whose jurisdiction includes Wall Street and major New York-based banks, as well as the financial hubs of Stamford, Connecticut and Jersey City. Williams will also have a vote on the Federal Open Market Committee. Former Fed Chair Janet Yellen, whom Williams succeeded as San Francisco Fed president, praised the appointment, saying that Williams's "groundbreaking research helped establish the intellectual foundation for the Federal Reserve's determination to support American households and businesses by pushing short-term interest rates very low and adopting nontraditional strategies to lower long-term interest rates, such as those on mortgages." Williams will officially succeed current New York Fed president William C. Dudley on June 18. Treasury Offers CRA Reform Recommendations: The Treasury Department on April 3 issued a memorandum suggesting how regulators should modernize the 40-year-old Community Reinvestment Act's regulations and examination programs. The recommendations – to the primary CRA regulators, the OCC, the Fed and the FDIC – are intended to "better align CRA activity with the needs of the communities that banks serve." The memorandum suggests banks should receive CRA credit for activities in low- and moderate-income communities beyond where they have branches, recognizing the growth of internet banking and the diminished importance of physical branch locations, while making a wider range of loans, investments and other services eligible for credit. It also calls for clearer, less subjective evaluations of banks' performance under CRA. Comptroller of the Currency Joseph Otting expressed strong support for similar upgrades to the CRA in an April 9 speech before the Independent Community Bankers of America – including establishing metric-based thresholds and revising the definition of assessment areas – increasing the likelihood that the reforms will be adopted. Otting's agenda: In addition to CRA overhaul, Comptroller Otting laid out an agenda for his agency in his April 9 speech that also calls for simplification of the Volcker Rule and a proposed charter for online lenders and other fintech companies. In a speech in which he promised to be more responsive to "our customers, which are the banks," Otting called for easing Bank Secrecy Act compliance by making anti-money-laundering rules more flexible and said he supports efforts to "re-decentralize" supervision of banks. Otting said that action on the fintech proposal would come within the next 60 to 90 days and to expect additional findings on revising Volcker Rule trading limits within a month. Otting also told American Banker's retail banking conference on April 10 that he plans to use the current era of strong profitability and high capital to keep his agency's costs in check, which he said would result in lower exam fees for national banks next year. Powell sees no case for loosening post-crisis regulation of large banks: Fed Chairman Jerome Powell reiterated previous indications that, contrary to some conjecture following his appointment, he was in no rush to ease up on the nearly decade-long enhanced scrutiny of the nation's biggest banks. Following an April 6 speech on the outlook of the US economy at the Economic Club of Chicago, Powell said he did not see that the stringent regulatory regime was hurting large US banks, which he said are "competing very, very successfully. They're very profitable. They're earning good returns on capital. Their stock prices are doing well." While Powell pronounced himself "open" in the future to "evidence that regulation is holding them back," he said he was "not really seeing that case as made at this point." Will Dodd-Frank rollback happen in '18?: Retiring House Speaker Paul Ryan rekindled hope that Congress will get major banking and financial regulatory reform legislation done this year, despite the gulf between the bipartisan bill that has passed the Senate and the desire by House Republicans to enact a more sweeping rollback of Dodd-Frank. In an April 11 interview with Fox News, Ryan pledged, "We're going to be repealing and replacing Dodd-Frank." Indications of support by the Trump Administration for a stronger deregulatory approach came at a House hearing the same day as Mick Mulvaney, OMB director and acting CFPB director, called on the House to expand the Senate's banking legislation, a more explicit statement than previous White House calls to send legislation to the president as soon as possible – though he called the Senate bill a "great fallback." In particular, Mulvaney urged that the House use the Senate bill as a vehicle to curtail the powers of the CFPB – likely a nonstarter for Senate Democrats whose support is crucial to passage. On April 11, House Financial Services Chairman Jeb Hensarling (R-TX) and Sen. Mark Warner (D-VA), a key Democratic supporter of the Senate bill, reportedly discussed possible ways to break the impasse. House continues to move regulatory reform measures. As hopes for a grand bargain on banking regulatory reform between the Senate and the House remain on hold, the House has passed three more financial services bill with some bipartisan support. The Financial Stability Oversight Council Improvement Act of 2017 (HR 4061), passed on April 11, would reform the FSOC designation process to enhance the transparency and procedural fairness of the nonbank SIFI designation process, affording affected institutions a greater opportunity to be heard by the functional regulator and to modify its business, structure or operations prior to designation. The Stress Test Improvement Act of 2017 (HR 4293), approved the same day, would streamline the current regime for stress testing banks, make the company-run stress test an annual exercise, reduce the number of supervisory scenarios from three to two, and limit the Fed's ability to object to a company's capital plan based solely on qualitative deficiencies. And on April 13, the House passed the Volcker Rule Regulatory Harmonization Act (HR 4790), which would amend the Bank Holding Company Act of 1956 to exempt from the Volcker Rule banks with total assets of $10 billion or less, and comprised of 5 percent or less of trading assets and liabilities, a provision also contained in the Senate-passed banking deregulation bill . The bill also grants exclusive rulemaking authority under the Volcker Rule to the Federal Reserve Board. Currently, the OCC, the FDIC, the SEC and the CFTC also have regulatory authority, and those agencies would retain some enforcement powers. "At the end of the day, it's not really the banks that are the subject of these regulations. At the end of the day, it's their customers," said Financial Services Committee Chairman Jeb Hensarling (R-TX). House takes up Volcker Rule reform. On Friday, April 13, the House is scheduled to take up the Volcker Rule Regulatory Harmonization Act (HR 4790), which would amend the Bank Holding Company Act of 1956 to exempt from the Volcker Rule banks with total assets of $10 billion or less and comprised of 5 percent or less of trading assets and liabilities. The bill also grants exclusive rulemaking authority under the Volcker Rule to the Federal Reserve Board. Currently, the OCC, the FDIC, the SEC and the CFTC also have regulatory authority. Mulvaney expects to be "stuck at" CFPB through year-end: CFPB Director Mulvaney said that he and the Bureau are planning for him to continue to run the agency for the rest of this year. Speaking to the Independent Community Bankers of America on April 9, Mulvaney said of the Senate confirmation process, "If it takes a year and a half to confirm [a permanent director], then I'm stuck there for a year and a half." In fact, President Trump has not yet nominated anyone to permanently run the agency; litigation challenging whether Mulvaney's appointment is even valid, and if Mulvaney may serve in his two posts concurrently (director of OMB as well as CFPB), is ongoing in the federal courts. In appearances before the House Banking and Senate Finance committees on April 11 and 12, some Democrats refused to acknowledge Mulvaney's legitimacy to lead the CFPB. And on April 9, the Community Financial Services Association of America and the Consumer Service Alliance of Texas filed suit against the CFPB to invalidate the agency's payday lending rule. The CFPPB's semiannual report, issued April 2, calls on Congress to take control of the bureau's funding and rulemaking, make future directors subject to firing by the President and install an Inspector General. "Congress established an agency primed to ignore due process and abandon the rule of law in favor of bureaucratic fiat and administrative absolutism," Mulvaney stated in the report." The Bureau is far too powerful, and with precious little oversight of its activities."