Fed levels playing field for crypto asset keepers without FDIC insurance
The Federal Reserve (Fed) on Jan. 27, 2023, released a policy statement clarifying how it will evaluate requests from state-chartered entities that are not insured by the Federal Deposit Insurance Corp. (FDIC) but are seeking to engage in novel activities, such as those involving crypto assets. The policy seeks to create a level playing field and limit regulatory arbitrage for state banks with deposit insurance, state banks without deposit insurance, and national banks, which are overseen by the Office of the Comptroller of the Currency (OCC). The Fed reiterated that such novel activities must be conducted in “a safe and sound manner.”
In response to inquiries from banks over the years about engaging in crypto asset activities, the Fed statement specifies it will evaluate such requests “consistent with longstanding practice.” In the statement the Fed notes, “Today's action would not prohibit a state member bank, or prospective applicant, from providing safekeeping services, in a custodial capacity, for crypto-assets if conducted in a safe and sound manner and in compliance with consumer, anti-money laundering, and anti-terrorist financing laws.”
The Fed policy statement follows a Jan. 3 interagency joint statement in which the federal banking regulators issued a warning on crypto asset risks and said that they had significant concerns about the safety and soundness of business models that are concentrated in activities related to crypto assets or have concentrated exposures to the crypto asset sector.
Fed offers details on climate scenario pilot exercise
The Fed on Jan. 17, 2023, provided additional details on how its upcoming pilot climate scenario analysis exercise will be conducted and what information on risk management practices will be gathered from the program. The six largest banks in the U.S. will participate in the exercise, starting in the first quarter of this year.
Over the course of the pilot, the Fed will collect qualitative and quantitative information. Areas of interest include governance and risk management practices, measurement methodologies, risk metrics, data challenges, and lessons learned. The exercise will include physical risk scenarios with different levels of severity affecting residential and commercial real estate portfolios in the northeastern U.S., with each bank also asked to consider the impact of additional physical risk shocks for their real estate portfolios in another region of the country. In addition, the banks will be asked to consider the effect on corporate loans and commercial real estate portfolios using a scenario based on current climate policies and one based on reaching net-zero greenhouse gas emissions by 2050.
Without releasing firm-specific information, the Fed plans to publish results of the pilot reflecting what it has learned about climate risk management practices and how insights from scenario analysis will help identify potential risks and promote effective risk management practices. As reported in the January 2023 Financial Institutions Executive Briefing, Fed Chair Jerome Powell recently said that while the Fed has important supervisory responsibilities to ensure banks appropriately manage climate-related financial risk, it is not and will not be a “climate policymaker” and that it should be careful not to pursue perceived social benefits that are not tightly linked to the Fed’s statutory goals and authorities.
OCC revises fair lending booklet
The OCC on Jan. 12, 2023, issued a revised version of the “Fair Lending” booklet of the Comptroller’s Handbook. The booklet outlines information and examination procedures to help OCC examiners assess fair lending risk and evaluate compliance with the Fair Housing Act, the Equal Credit Opportunity Act (EOCA), and Regulation B of the ECOA. The revisions reflect changes to laws and regulations that have occurred since the previous booklet was published in 2010. The revised booklet includes new and clarified details and risk factors for a variety of examination scenarios, and it updates references to supervisory guidance, sound risk management practices, and applicable legal standards. In addition, it details the OCC's current approach to fair lending examinations.
OCC holds bank mergers symposium
The OCC on Feb. 10, 2023, held its 2023 Symposium on Bank Mergers at its Washington, D.C., headquarters with the objective of providing a forum for healthy debate on the future direction of bank mergers policy. Numerous panel discussions throughout the all-day program included representatives largely from academia and economic professionals from federal banking agencies. The conference focused on evaluating the impact of bank mergers on competition, financial stability, and the convenience and needs of the community served – three of the more significant factors the agencies are required to address as part of the merger review and approval process.
Benjamin McDonough, OCC senior deputy comptroller and chief counsel, opened the program with some brief remarks and read a prepared statement from acting Comptroller Michael Hsu that said “the framework for analyzing bank mergers needs updating.” A consistent theme of the symposium was that clear and concise guidance is needed along with a consistent approach across all agencies when reviewing competitive impacts on local markets from mergers while considering the effects on the communities affected by the mergers and access to fair financial products by all consumers in those markets.
Panelists presented competing arguments on whether mergers are good for U.S. financial stability and competition in general. Some panelists cautioned against regulatory policies potentially rejecting healthy mergers, which might restrict innovation of financial products and push banking activities outside of insured depository institutions and into uninsured shadow banking entities that are not subject to strict regulatory standards. Other panelists advocated for a much stricter merger approval process, largely claiming that existing lax merger approval processes have produced institutions that are “too big to fail,” that present challenges with resolution efforts in the event of failure, and that increase overall risk to financial stability.
Several panelists highlighted the continuing multidecade trend of industry consolidation and concentration of assets and deposits in larger institutions. They pointed to higher barriers of entry in more recent years preventing new market entrants, as evidenced by negligible de novo bank formation since 2008. Some said that the agencies should focus on reducing the costs, initial capital, and time needed to form a new bank in order to help reduce potential negative competitive impact of mergers while also enabling new smaller banks to meet the convenience and needs of communities. Continued dialogue on the merger review process among the federal banking regulators and legislators is expected through the remainder of 2023.
FHFA issues guidance on MSRs for managing counterparty credit risk
The Federal Housing Finance Agency (FHFA) on Jan. 12, 2023, released an advisory bulletin on the valuation of mortgage servicing rights (MSRs) for managing counterparty credit risk. The notice is intended to communicate the FHFA’s supervisory expectations for Fannie Mae and Freddie Mac “to establish and implement risk management policies and procedures for monitoring and valuing seller/servicers’ mortgage servicing rights.”
In the bulletin the FHFA states, “Enterprise-wide risk management policies and procedures should be commensurate with [Fannie and Freddie]’s risk appetite, and based on an assessment of seller/servicer financial strength and MSR risk exposure levels.” The FHFA also notes that although seller/servicers assign values to their MSRs, Fannie Mae and Freddie Mac should have their own processes to evaluate the reasonableness of seller/servicer MSR values.
The advisory outlines risk management expectations to ensure MSR values are reasonable, objective, and transparent. Specific guidance is included on objective evaluation of MSR values, MSR valuations for mortgage loans owned or guaranteed by Fannie and Freddie and stress testing, MSR valuations for mortgage loans not owned or guaranteed by Fannie and Freddie, market data input, use of third-party providers, frequency of evaluations, and discount to MSR values when servicing rights are terminated. The bulletin only applies to MSRs for single-family mortgage loans and is effective April 1, 2023.
FinCEN solicits comments on proposed beneficial ownership reporting process
The Financial Crimes Enforcement Network (FinCEN) on Jan. 17, 2023, issued a notice and request for comments on the reporting process that the agency plans to use to collect beneficial ownership data from reporting companies.
The beneficial ownership information reporting requirements final rule issued on Sept. 30, 2022, requires reporting companies to provide FinCEN with information about the reporting company, the individual beneficial owners of the reporting company, and individuals who have filed an application with specified governmental authorities to create a domestic reporting company or register a foreign reporting company to do business in the U.S. The notice gives the public an opportunity to comment on the proposed reporting process as well as on the agency’s estimate of the burden resulting from preparing and submitting the report.
FinCEN said the report will be filed electronically through an online interface and must identify the reporting entity. The reporting company must certify that the report is true, correct, and complete. In addition, companies would be required to update the information in these reports as needed and correct any incorrect information within specific time frames. The collected information will be maintained by FinCEN and made accessible to authorized users.
Comments are due March 20, 2023.
CFPB proposal would remove credit card late fee safe harbor
The Consumer Financial Protection Bureau (CFPB) on Feb. 1, 2023, issued a proposed rule that would eliminate a longstanding safe harbor that banks of all sizes rely on when setting late fees on credit card payments. Citing “excessive credit card late fees,” the CFPB proposal would reduce the safe harbor dollar amount for late fees from $30 to $8 and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type, eliminate the annual inflation adjustment for the safe harbor amount, and mandate that late fees must not exceed 25% of the required minimum payment.
With the proposed rule, the CFPB looks to amend Regulation Z and the Fed provisions approved in 2010 that implemented the Credit Card Accountability Responsibility and Disclosure Act, which included a Fed provision that allowed credit card issuers to set fees at a particular level as a safe harbor.
Comments are due April 3, 2023.
