The Financial Institutions Executive Briefing offers updates on financial reporting, governance, and risk management topics from Crowe. In each issue of this electronic newsletter, you will find abstracts of recent standard-setting activities and regulatory developments affecting financial institutions.
From the Federal Financial Institution Regulators
Regulatory Burden Reduction Discussed
Representatives of the Office of the Comptroller of the Currency (OCC), the Federal Reserve (Fed), and the Federal Deposit Insurance Corp. (FDIC) met in Los Angeles in early December at the first Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) outreach meeting to discuss unnecessary, duplicative, and excessively burdensome regulations affecting community banks.
In his opening remarks, Comptroller of the Currency Thomas J. Curry stated, “What worries me is the way that the regulatory rulebook builds up over time, adding layer after layer of requirements that can be quite onerous for small banks.” He added, “If it is clear that a regulation is unduly burdensome, and if we have authority to make changes to eliminate that burden, we will act.” Curry further encouraged Congress to make three legislative changes: allow banks with up to $750 million in assets to qualify for an 18-month examination cycle, exempt all banks with less than $10 billion in assets from the Volcker Rule, and authorize greater charter flexibility for thrifts to change business strategies without changing their charter.
Lael Brainard, Fed governor, agreed with many of Curry’s comments on regulatory burden. In his opening remarks, Brainard highlighted that “it is important to tailor rules whenever possible to clearly differentiate expectations for different portfolios of banks and reduce undue burden on community banks.”
The next outreach meeting is scheduled for Feb. 4, 2015, at the Federal Reserve Bank of Dallas.
OCC Semiannual Risk Perspective Report Released
In its “Semiannual Risk Perspective” report for fall 2014, released on Dec. 17, 2014, the OCC notes that credit risk has increased for federal savings associations and national banks. Significant findings from this report include:
- Loosening underwriting standards, particularly in direct and indirect auto lending, leveraged lending, asset-based lending, commercial real estate lending, and commercial and industrial loans, are the result of intensified competition for limited lending opportunities.
- The low-interest-rate environment continues to expose banks to vulnerability. Banks that extend asset maturities to pick up yield, especially if they are relying on nonmaturity deposit funding stability in a rising-rate environment, could face significant earnings pressure and capital erosion.
- Many banks are re-evaluating their business models and risk appetites in an attempt to generate returns in the low-interest-rate environment. OCC examiners will focus on the appropriateness of banks’ strategic planning and risk management processes.
- Banks are expected to raise their awareness of evolving cyberthreats and IT vulnerabilities and implement third-party risk management controls to identify and mitigate those risks.
- Risks related to the Bank Secrecy Act and anti-money laundering remain prevalent as money-laundering methods evolve and the sophistication and volume of electronic bank fraud grow. Banks are expected to incorporate appropriate controls to oversee new products and services as well as higher-risk customers.
Bank Accounting Advisory Series UpdatedOn Dec. 12, 2014, the OCC announced the release of the updated “Bank Accounting Advisory Series” (BAAS), which provides the OCC’s interpretations of accounting topics, including standards, for national banks and federal savings associations. This version of the BAAS includes new information on loans held for sale, acquired loans, allowance for loan and lease losses, other real estate owned, and other borrowings.
Mortgage Performance Report Issued
The OCC issued, on Dec. 19, 2014, the “OCC Mortgage Metrics Report: Third Quarter 2014.” This report covers a loan portfolio comprising 46 percent of all outstanding residential mortgages in the U.S. and shows a general improvement in performance during the third quarter of 2014. Specific details and statistics related to mortgage activity include aging of the portfolios, seriously delinquent mortgages, foreclosure activity, and home retention actions including modifications, trial-period plans, and shorter-term payment plans.
“Bank Secrecy Act/Anti-Money Laundering Examination Manual” Updated
On Dec. 2, 2014, the Federal Financial Institutions Examination Council (FFIEC) released an updated version of the “Bank Secrecy Act/Anti-Money Laundering Examination Manual.” The extensive updates from FFIEC member agencies and the Financial Crimes Enforcement Network include guidance on:
- Foreign correspondent accounts
- Bulk currency shipments
- International automated clearinghouse transactions
- Prepaid card access
- Third-party payment processors
- Foreign diplomats
- Money services businesses
Capital Surcharge Rule for Largest Banks Proposed by Federal Reserve
The Fed, on Dec. 9, 2014, proposed a rule that would impose a capital surcharge for the largest U.S.-based global systemically important banks (GSIBs). The proposed rule would require substantially higher capital levels for GSIBs than those required by Basel III. Currently, eight U.S. firms would be identified as GSIBs; however, the proposal defines an approach for identifying GSIBs that would require U.S. banks with assets of more than $50 billion to calculate a measure of their potential significance. Estimated surcharges for GSIBs as described in the proposal range from 1.0 to 4.5 percent of a firm's total risk-weighted assets.
If finalized, the rule would be phased in between Jan. 1, 2016, and Jan. 1, 2019. Comments on the proposed rule are due Feb. 28, 2015.
FAQ Guidance on Brokered Deposits Issued by FDIC
In an effort to promote consistency and answer questions that continue to arise, the FDIC released frequently asked questions, updated Dec. 24, 2014, addressing guidance on identifying, accepting, and reporting brokered deposits. The answers provide a definition of “brokered deposit” and examples of who counts as a “deposit broker,” as well as the limited exceptions to the definition of “deposit broker.” They also address listing services, bank networks, interest-rate restrictions, and other related brokered deposit issues.
FDIC Third-Quarter State Profiles Released
The FDIC has issued and made available online the third-quarter 2014 “FDIC State Profiles,” which provide economic and banking conditions in each state.
December Issue of “The NCUA Report” Published
The National Credit Union Administration (NCUA) posted the December 2014 issue of “The NCUA Report” on its website. This issue includes articles that discuss the NCUA budget, how a final rule (Parts 712 and 741) and due diligence improve transparency and reduce potential credit union service organization risks, and how to find a safe harbor with qualified mortgages.
NCUA Supervisory Letter on Money Services Businesses Issued
The NCUA issued supervisory letter 14-CU-10, dated December 2014, to offer guidance to credit unions on the risks related to providing account services to money services businesses (MSBs) and how to mitigate those risks. The letter identifies risks to credit unions such as these:
- For larger MSBs, off-balance-sheet risks caused by generating significant transaction volumes that could overwhelm smaller credit unions
- Risks of MSBs laundering money for drug cartels and terrorist groups
- Insufficient scale, internal controls, and compliance programs to perform the necessary due diligence on MSBs and manage high volumes of cash flows
The supervisory letter describes due diligence steps for a credit union to perform on MSBs to mitigate these risks.
From the Financial Accounting Standards Board (FASB)
Guidance Published on Simplifying Income Statement Presentation
The FASB issued Accounting Standards Update (ASU) No. 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items,” on Jan. 9, 2015. This ASU amends U.S. generally accepted accounting principles (GAAP) by removing the concept of extraordinary items, including deleting the definition of “extraordinary items” from the FASB Master Glossary. The revised guidance provides that “the nature and financial effects of each event or transaction that is unusual in nature or occurs infrequently or both shall be presented as a separate component of income from continuing operations or, alternatively, disclosed in notes to the financial statements.
The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2015, with early adoption permitted. A reporting entity may apply the amendments prospectively or retrospectively. Guidance on such applications is provided in the ASU.
Guidance Published on Private Company Accounting Alternative on Intangible Assets in Business Combinations
On Dec. 23, 2014, the FASB issued ASU 2014-18, “Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination,” which provides a private company the option to elect an accounting alternative for the recognition of certain intangible assets acquired in a business combination. Under this alternative, customer-related intangible assets that are incapable of being sold or licensed independently from the business’s other assets and noncompetition agreements would not be recognized separately from goodwill. If the private entity elects this alternative, it also must adopt the private-company alternative to amortize goodwill as provided by ASU 2014-02, “Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill.”
The decision to adopt this accounting alternative must be made upon the first occurrence of a transaction within the scope of this guidance in fiscal years beginning after Dec. 15, 2015. Early application is permitted. Once this alternative is elected, the method is applicable to all future in-scope transactions.
2015 GAAP Financial Reporting Taxonomy Released
On Dec. 18, 2014, the FASB released the “2015 U.S. GAAP Financial Reporting Taxonomy.” The 2015 Taxonomy, which is still awaiting final acceptance by the Securities and Exchange Commission (SEC), provides an updated list of computer-readable tags in eXtensible Business Reporting Language (XBRL) for companies that file with the SEC. Companies use these to label specific financial data included in their financial statements and footnote disclosures. The 2015 version includes updates for newly issued accounting standards and other enhancements from the 2014 version.
From the Financial Accounting Foundation (FAF)
FAF, FASB, and GASB Strategic Plan Developed
The FAF, the FASB, and the Governmental Accounting Standards Board (GASB) have developed a strategic plan that clarifies their vision and mission. The “Financial Accounting Foundation Strategic Plan” identifies four top priorities with related goals as well as information on how to achieve these objectives and how to measure achievement. The four top priorities, as stated in the plan, are: 1) practicing and promoting continued excellence in standard setting, 2) demonstrating a commitment to leadership in standard setting, 3) building and maintaining trust with stakeholders, and 4) contributing to the public discourse on current and future financial reporting issues.
From the Securities and Exchange Commission (SEC)
Amendments Proposed to Implement JOBS Act Mandate for Exchange Act Registration Requirements
In accordance with a mandate of the Jumpstart Our Business Startups Act (JOBS Act), the SEC has proposed amendments to revise the rules related to the thresholds for registration (to apply the higher thresholds established by the JOBS Act for banks and bank holding companies to savings and loan holding companies), termination of registration, and suspension of reporting under Section 12(g) of the Securities Exchange Act of 1934 as delineated in its release titled “Changes to Exchange Act Registration Requirements to Implement Title V and Title VI of the JOBS Act.”
Comments on the proposed amendments are due March 2, 2015.
Pilot Program to Facilitate Analysis of Corporate Filings Launched
The SEC introduced on Dec. 30, 2014, a new program designed to assist in investor analysis and comparisons of public-company financial statement data. Information that companies report in structured formats, such as XBRL, will be aggregated and organized into data sets and posted for downloads on the SEC’s website for use by investors and academics. At first the data sets will include financial statement data from XBRL exhibits filed with the SEC; eventually, information will be increased to include data in footnotes to the financial statements.