On April 8, the Federal Reserve Board, the FDIC, and the OCC adopted a final rule, effective January 1, 2018, requiring certain top-tier U.S. bank holding companies (BHCs) to maintain a minimum supplementary leverage ratio buffer of 2% above the minimum supplementary leverage ratio requirement of 3%. The final rule applies to BHCs with more than $700 billion in total consolidated assets or more than $10 trillion in assets under custody (Covered BHCs), and to insured depository institution subsidiaries of those BHCs (Covered Subsidiaries). A Covered BHC that fails to maintain the supplemental leverage buffer would be subject to restrictions on capital distributions and discretionary bonus payments. Covered Subsidiaries must also maintain a supplementary leverage ratio of at least 6% to be considered “well capitalized” under the agencies’ prompt corrective action framework. The final rule is substantially similar to the rule the agencies proposed in July 2013. Concurrent with the final rule, the agencies also (i) proposed a rule that would modify the denominator calculation for the supplementary leverage ratio in a manner consistent with recent changes agreed to by the Basel Committee, which would apply to all internationally active banking organizations, including those subject to the enhanced supplementary leverage ratio final rule; and (ii) proposed a technical correction to the definition of “eligible guarantee” in the agencies’ risk-based capital rules. The agencies are accepting comments on both proposals through June 13, 2014. Separately, the FDIC Board adopted as final its Basel III interim final rule, which is substantively identical to the final rules adopted by the Federal Reserve Board and the OCC in July 2013.
On April 7, the Federal Reserve Board issued a statement that it intends to exercise its authority to give banking entities two additional one-year extensions to conform their ownership interests in, and sponsorship of, certain collateralized loan obligations (CLOs) covered by federal regulations implementing Section 619 of the Dodd-Frank Act, the so-called Volcker Rule. Section 619 generally prohibits insured depository institutions and their affiliates from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund. The Board previously adopted rules for the conformance period for covered funds—including CLOs—and at that time extended the conformance period for all activities and investments by one year, to July 21, 2015. But to ensure effective compliance, the Board plans to grant banking entities two additional one-year extensions, until July 21, 2017. These extensions only apply to CLOs that were in place as of December 31, 2013 and do not qualify for the exclusion in the final rule for loan securitizations. The Board’s decision was challenged during a House Financial Services Committee hearing the following day, in which several lawmakers argued that Congress never intended for the Volcker Rule to cover securitizations, including CLOs. The lawmakers urged the Federal Reserve to address the issue by amending the rule to exclude or grandfather in CLOs, rather than by extending the conformance period.
On March 21, the U.S. Court of Appeals for the D.C. Circuit held that the Federal Reserve Board’s final rule imposing a 21-cent per transaction limit on debit card interchange fees (up from a 12-cent per transaction limit in its proposed rule) was based on a reasonable construction of a “poorly drafted” provision of the Dodd-Frank Act and that the Board acted reasonably in issuing a final rule requiring debit card issuers to process debit card transactions on at least two unaffiliated networks. NACS v. Bd. of Governors of the Fed. Reserve Sys., No. 13-5270, 2014 WL 1099633 (D.C. Cir. Mar. 21, 2014). The action was brought by a group of merchants challenging the increase to the interchange fee cap and implementation of anti-exclusivity rule for processing debit transactions that was less restrictive than other options. In support of their challenge, the merchants argued that in setting the cap at 21 cents the Board ignored Dodd-Frank’s command against consideration of “other costs incurred by an issuer which are not specific to a particular electronic debit transaction.” The court held, in a decision that hinged on discerning statutory intent from the omission of a comma, that when setting the fee cap the Board could consider both the incremental costs associated with the authorization, clearance, and settlement of debit card transactions (ACS costs) and other, additional, non-ACS costs associated with a particular transaction (such as software and equipment). The court further concluded that the Board could consider all ACS costs, network processing fees, and fraud losses. The court, however, remanded the question of whether the Board could also consider transaction-monitoring costs when setting the fee cap, given that monitoring costs are already accounted for in another portion of the statute. Finally, the court rejected the merchants’ argument that the Board’s final rule should have required the card issuers to allow their cards to be processed on at least two unaffiliated networks per method of authentication (i.e., PIN authentication or signature authentication) holding that the statute goes no further than preventing card issuers or networks from requiring the exclusive use of a particular network.
On March 24, the Federal Reserve Board, the OCC, the FDIC, the CFPB, the FHFA, and the NCUA proposed a rule to implement the Dodd-Frank Act’s minimum requirements for registration and supervision of Appraisal Management Companies (AMCs). While current federal regulations mandate that appraisals conducted for federally related transactions must comply with the Uniform Standards of Professional Appraisal Practice (USPAP), this rule would represent the first affirmative federal obligations relating to the registration, supervision, and conduct of AMCs.
Generally, the proposed rule would establish a framework for the registration and supervision of AMCs by individual states that choose to participate, and for state reporting to the Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council (FFIEC). Although state participation is optional, AMCs would be prohibited from providing appraisal management services for federally related transactions in states that do not establish such a program.
Comments on the proposal will be due 60 days following publication in the Federal Register. Read more…
On March 5, the Federal Reserve Board, the OCC, and the FDIC issued final guidance for stress tests conducted by banking institutions with more than $10 billion but less than $50 billion in total consolidated assets. Under Dodd-Frank Act-mandated regulations adopted in October 2012, such firms are required to conduct annual stress tests. The guidance discusses (i) supervisory expectations for stress test practices, (ii) provides examples of practices that would be consistent with those expectations, and (iii) offers additional details about stress test methodologies. Covered institutions are required to perform their first stress tests under the Dodd-Frank Act by March 31, 2014.
On March 5, a group of 16 Democratic U.S. House members sent letters to the leaders of the Federal Reserve Board, the OCC, the FDIC, and the NCUA requesting that the agencies issue guidance that would provide legitimate marijuana businesses access to the federal banking system. Last November, those agencies declined to provide such guidance, stating that the DOJ and FinCEN first needed to agree on a framework to apply BSA/AML provisions to banks seeking to serve marijuana businesses. With FinCEN and DOJ having recently issued such guidance, the lawmakers renewed their push for legitimate marijuana businesses—now operating in 20 states and the District of Columbia—to have “equal access to banking services as other licensed businesses.”
On February 27, Federal Reserve Board Chairman Janet Yellen made her first appearance as Chair before the Senate Banking Committee. During the course of the question and answer session, Ms. Yellen responded to a recent letter from Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) that encouraged the Federal Reserve Board to play a larger role in major supervisory and enforcement decisions, as opposed to delegating most examination and settlement responsibilities to staff. Chairman Yellen generally agreed that the Board itself should play a larger part in supervision and enforcement and stated that she “fully expects” the Board to make changes to its policies. She added that with regard to legislation recently introduced by Senators Elizabeth Warren and Tom Coburn (R-OK) that would require greater transparency in federal settlements, the Federal Reserve Board intends to look carefully at what it discloses about enforcement actions and settlements and will try to provide more disclosure. Among the numerous other topics covered during the hearing, Chairman Yellen also addressed virtual currency issues, stating the Federal Reserve Board currently has no authority to oversee virtual currency. Her comments followed a letter sent on February 26, 2014 by Banking Committee member Joe Manchin (D-WV) to federal financial and enforcement authorities asking for a complete ban on Bitcoin in the United States. Ms. Yellen stated that while Congress should consider the appropriate legal framework for virtual currency, “there’s no intersection at all in any way between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Federal Reserve simply does not have authority to supervise or regulate Bitcoin in any way.”
Federal Reserve Plans Regular Reporting On Bank Applications, Outlines Common Issues Resulting In Application Withdrawals
On February 24, the Federal Reserve Board announced in SR 14-2 that it will start publishing a semi-annual report to provide certain information on bank applications and notices filed with the Federal Reserve. The Board stated that the report will include statistics on the length of time taken to process various applications and notices and the overall volume of approvals, denials, and withdrawals. The report also will provide the primary reasons for withdrawals. The first report will be released in the second half of 2014 and will include filings acted on from January through June 2014. The letter also describes common issues identified by the Federal Reserve that have led to recent withdrawal of applications, including (i) less-than-satisfactory supervisory rating(s) for safety and soundness, consumer compliance, or CRA; (ii) inadequate compliance with the Bank Secrecy Act; and (iii) concerns regarding the financial condition or management of the proposed organization.
Federal Reserve Board Finalizes Enhanced Prudential Standards For Large Bank Holding Companies, Foreign Banks
On February 18, the Federal Reserve Board issued a final rule that incorporates elements of two previously proposed rules related to U.S. bank holding companies with assets of $50 billion or more and foreign banking organization with assets of $50 billion or more. For covered domestic bank holding companies, the final rule (i) incorporates as an enhanced prudential standard previously-issued capital planning and stress testing requirements; and (ii) imposes enhanced risk-management, including liquidity risk-management standards. The rule further imposes a 15-1 debt-to-equity limit for companies that pose a grave threat to U.S. financial stability, as determined by the FSOC. For covered foreign banking organizations, the rule (i) implements enhanced risk-based and leverage capital requirements, liquidity requirements, risk-management requirements, stress testing requirements, and the debt-to-equity limit for FSOC-designated companies; and (ii) requires foreign banking organizations with U.S. non-branch assets of $50 billion or more to form a U.S. intermediate holding company (IHC) and imposes the same enhanced requirements on the IHC. The rule also establishes enterprise-wide risk-committee requirements for publicly traded domestic bank holding companies with total consolidated assets of $10 billion or more and for publicly traded foreign banking organizations with total consolidated assets of $10 billion or more, and implements stress-testing requirements for foreign banking organizations and foreign savings and loan holding companies with total consolidated assets of more than $10 billion. The final rule does not apply to non-bank financial firms designated as systemically important by the FSOC. The rule takes effect on June 1, 2014, but covered U.S. bank holding companies have until January 1, 2015 to comply. Foreign banking organizations must submit an implementation plan by January 1, 2015, but have until July 1, 2016 to comply. The final rule generally defers application of the leverage ratio to IHCs until 2018.
Democratic Lawmakers Urge Federal Reserve Board To Increase Direct Role In Supervision And Enforcement
On February 11, Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) sent a letter to newly appointed Federal Reserve Board Chairman Janet Yellen, asking that she reconsider the Board’s policy of delegating supervisory and enforcement powers to staff. The lawmakers cite a recent letter from former Federal Reserve Chairman Ben Bernanke, in which he explained that in the last 10 years, the Board of Governors voted on only 11 of nearly 1,000 enforcement actions, and that under current application of the Federal Reserve’s enforcement delegation policy, the Federal Reserve can enter into consent orders without ever receiving formal approval of senior staff. The letter asks for a change in policy that would require the Board to retain greater authority over the Federal Reserve’s enforcement and supervisory activities. Specifically, the lawmakers recommend that (i) the Board vote on any consent order that involves $1 million or more or that requires a bank officer to be removed and/or new management installed; (ii) staff formally notify the Board before entering into a consent order under delegated authority; (iii) each Board member be provided with the necessary staffing capacity to review and analyze pending enforcement actions; and (iv) all Board members receive a copy of all letters sent to the Chairman or another Board member by a committee or member of Congress.
Federal Reserve Board Proposes To Repeal Duplicative Regulations Amend Identity Theft Red Flags Rule
On February 12, the Federal Reserve Board proposed to repeal its Regulation DD, which implements the TISA, and Regulation P, which implements Section 504 of the GLBA because the Dodd-Frank Act transferred rulemaking authority for those laws to the CFPB, and the CFPB has already issued interim final rules implementing them. The Board also proposed to amend the definition of “creditor” in its Identity Theft Red Flags rule, which implements Section 615 of the FCRA. Generally, the Indemnity Theft Red Flags rule requires each financial institution and creditor that holds any consumer account to develop and implement an identity theft prevention program. The proposed revision will exclude from the foregoing requirements businesses that do not regularly and in the ordinary course of business (i) obtain or use consumer reports in connection with a credit transaction; (ii) furnish information to consumer reporting agencies in connection with a credit transaction; or (iii) advance funds to or on behalf of a person. The Board will accept comments on the proposal for 60 days from publication in the Federal Register.
On January 24, the Federal Reserve Board issued SR 14-1, which attached new guidance for certain large banks titled Principles and Practices for Recovery and Resolution Preparedness. The document outlines additional expectations for the recovery and resolution preparedness of eight large domestic bank holding companies. The guidance stresses the importance of robust systems to manage collateral, information, and payments, clearing, and settlement activities. It also highlights the importance of adequate liquidity and funding arrangements during times of stress, and robust arrangements for the provision of shared or outsourced services necessary for critical operations. The Federal Reserve will incorporate the guidance into its ongoing recovery and resolution preparedness assessments of large bank holding companies subject to the guidance.
On January 14, the Federal Reserve Board, the CFTC, the SEC, the OCC, and the FDIC issued an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (TruPS CDOs) from the investment prohibitions of section 619 of the Dodd-Frank Act, known as the Volcker rule. The change allows banking entities to retain interest in or sponsorship of covered funds if (i) the TruPS CDO was established, and the interest was issued, before May 19, 2010; (ii) the banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in Qualifying TruPS Collateral; and (iii) the banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013, the date the agencies finalized the Volcker Rule. With the interim rule, the Federal Reserve, the OCC, and the FDIC released a non-exclusive list of qualified TruPS CDOs. The rule was issued in response to substantial criticism from banks and their trade groups after the issuance of the final Volcker Rule, and followed the introduction of numerous potential legislative fixes. On January 15, the House Financial Services Committee held a hearing on the impact of the Volcker rule during which bankers raised concerns beyond TruPS CDOs, including about the rule’s potential impact on bank investments in other CDOs, collateralized mortgage obligations, collateralized loan obligations, and venture capital. Committee members from both parties expressed an interest in pursuing further changes to the rule, including changes to address the restrictions on collateralized loan obligations.
On January 14, the Federal Reserve Board, the OCC, and the FDIC announced final changes to the Call Report to implement the Basel III capital standards and consumer data collection after delaying certain changes last year. The agencies now plan to implement in March 2014 the proposed reporting requirements for (i) depository institution trade names; (ii) a modified version of the reporting proposal pertaining to international remittance transfers; (iii) the proposed screening question about the reporting institution’s offering of consumer deposit accounts; and (iv) for institutions with $1 billion or more in total assets that offer such accounts, the proposed new data items on consumer deposit account balances. The agencies would then implement the proposed breakdown of consumer deposit account service charges in March 2015, but only for institutions with $1 billion or more in total assets that offer consumer deposit accounts. The proposed instructions for these new items also were revised. In addition, the agencies will not at this time proceed with the proposed annual reporting by institutions with a parent holding company that is not a bank or savings and loan holding company of the amount of the parent holding company’s consolidated total liabilities.
Federal Reserve Board Seeks Comment On Designated Utilities’ Risk Management Standards, Payment System Risk Policy
On January 10, the Federal Reserve Board proposed revisions to the Regulation HH risk-management standards for certain financial market utilities that have been designated as systemically important by the Financial Stability Oversight Council, and for which the Federal Reserve Board is the Supervisory Agency pursuant to Title VIII of the Dodd-Frank Act. The Board also requested comment on related revisions to part I of the Federal Reserve Policy on Payment System Risk (PSR policy), which applies to financial market infrastructures more generally, including those operated by the Federal Reserve Banks. The Federal Reserve states that both sets of proposed changes are based on and generally are consistent with the April 2012 Principles for Financial Market Infrastructures developed jointly by the international standard-setting bodies, the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions. Among other things, the revisions: (i) establish separate standards to address credit risk and liquidity risk, (ii) add a standard on general business risk, and (iii) heighten requirements on transparency and disclosure. Comments on both proposals must be submitted by March 31, 2014.