President Trump nominates FRB Governor Powell to be next Chair

Following President Trump’s nomination of FRB Governor Jay Powell to succeed Janet Yellen as the next Chair, many questions have arisen about the implications for regulatory policy.

Although Governor Powell’s views on specific financial regulatory policy issues will become clearer in the coming days and weeks—especially during his nomination hearing before the Senate Banking Committee—a look at his previous statements on key issues may provide important context for his outlook and approach.

Below is our take on Governor Powell’s “top ten” most significant recent statements covering the post-crisis regulatory framework (including possible amendments), capital planning and stress testing, the enhanced supplementary leverage ratio, resolution planning, the Volcker Rule, housing finance reform, and expectations for bank boards, among others.

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The future of fintechs

“We are not financial institutions” historically has been a core fintech mantra heard around the industry. Unconstrained by many regulatory requirements applicable to banks and other financial institutions, fintechs pride themselves on creating deep customer connections, navigating market trends agilely, and creating disruption for traditional competitors.

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Dealing with divergence

Despite the work that banks currently have underway from building regulatory infrastructure and processes to sustaining and streamlining them, one potential headwind is the threat of regulatory divergence in substance and timing across jurisdictions.  For banks with a global presence, divergence adds to uncertainty and complexity, fosters an unlevel playing field, and hampers the ability to plan and optimize resources.  Successfully navigating the many challenges of regulatory divergence requires a deliberate disciplined approach that recognizes the regional tailoring of regulatory and compliance initiatives, and that regulatory strategy and business strategy should converge.

The growing divergence in regulatory standards is a reversal of previous post-crisis trends.  For example, since 2009, banking regulators around the world have been committed to strengthening the capital, liquidity, and leverage standards for banks. Those efforts embedded an equally strong commitment to address the unevenness and complexity of the global capital framework for internationally-active banks. Regulatory convergence initiatives, such as Basel III and the Financial Stability Board’s (FSB) work on resolution regimes, set the tone for an increasingly consistent banking rulebook across most jurisdictions.

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Navigating “Year Two”: Regulatory landscape and challenges for foreign banks and their IHCs

After the July 1, 2016 compliance deadline for foreign banking organizations (FBOs) to establish US intermediate holding companies (IHCs) and implement the enhanced prudential standards,1 we noted that, although the effective date marked a key milestone on the journey toward effective compliance, the “long road to operationalizing run-the-bank (RtB) functions has just begun.”2 Heading into Year Two, FBOs with their US IHCs and broader combined US operations (CUSO) contend with the reality that there is a significant road yet to be traveled in a regulatory environment focused on local/jurisdictional implementation that challenges the global model.

Four key focus areas underpinning the supervisory strategy

Although FBOs have made notable progress leading up to and after last year’s “go-live” date under Regulation YY, they continue to face substantial challenges across aspects of the Federal Reserve Board’s (FRB) four key supervisory focus areas:

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FFIEC releases updates to HMDA examiner transaction testing guidelines

On August 22, 2017, the Federal Financial Institutions Examination Council (FFIEC) released updated guidelines for testing Home Mortgage Disclosure Act (HMDA) data collected in 2018.

Below are several key observations for covered institutions:

  1. Examiners have flexibility in selecting a sample from the Loan Application Register (LAR). It may be a single random sample or, in the case of multiple data collection/reporting systems, the sample may cover all systems, or focus on specific systems based on risk.
  2. Examiners may review all data fields in the sample, or prioritize and test a designated subset of fields.
  3. Testing will be divided into two stages:
    1. An initial sample (a subset of the total sample), and
    2. If any data field has an error rate above the established threshold for the initial sample, the total sample will be reviewed for that data field (Examiners may choose to review all fields in the full sample)
  4. For institutions with a LAR count greater than 100,000 the following thresholds apply:
Total Sample Size Initial Sample Size Initial Sample Threshold Resubmission Threshold
# %
159 61 2 4 2.5

 The resubmission threshold of 2.5% for specific data fields is more favorable for institutions than previous FFIEC guidelines, which had established a 2% resubmission threshold.

  1. Resubmission is based on data field error rates. If a specific field has an error rate that exceeds the resubmission threshold, the LAR will need to be resubmitted with corrections made to that field. The examiners may also judgmentally direct an institution to make corrections to fields if they believe errors in those fields would make analysis of HMDA data unreliable (even if the error does not reach the resubmission threshold). Notably, this differs from the previous FFIEC approach, where both data field specific (previously 2%) and total error rates (previously 4%) were taken into consideration for resubmission.
  2. An error in any field associated with Applicant Race, Co-applicant Race, Applicant Ethnicity, and Co-applicant Ethnicity will only be counted as one error for that grouping.

Navigating the scope of changes from the new HMDA rule can be challenging and time consuming. The addition of quarterly reporting may cause additional challenges for institutions’ compliance departments.

There are innovative solutions in the marketplace, such as robotics and automated testing that can mitigate the compliance challenge. Deloitte has a proven track record in helping our clients tackle changes in the regulatory landscape. For more information or questions on the final HMDA rule, please contact us.

Contacts

John Graetz
Principal | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Maria Marquez
Senior Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Konstantine Loukos
Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see http://www.deloitte.com/about to learn more about our global network of member firms.

Copyright © 2017 Deloitte Development LLC. All rights reserved.

5 insights on how robotics can drive financial services compliance modernization

Using innovation to lead, navigate risks and opportunities, and disrupt the status quo

Robotic process automation (RPA) is quickly transforming middle- and back-office operations in financial services institutions. Robots (bots) that are at the heart of RPA have been used in the past to mimic rules-based, process oriented human execution activities (e.g., document gathering, data retrieval, calculations), thereby automating workflow and decision-making for a variety of processes, including loan origination and collections. Recently, however, RPA has been implemented more widely across institutions to help drive efficiency and effectiveness. And the benefits are already apparent. By embracing complexity and leveraging this technology in new ways, financial services companies are accelerating their corporate performance (see Benefits of RPA).

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A new ratings framework aligned to regulatory reform priorities

On August 3, 2017, the Federal Reserve Board (Fed) released a notice of proposed rulemaking that would establish a new rating system for large financial institutions (LFIs). Specifically, the new rating system would apply to bank holding companies (BHCs) and non-insurance, non-commercial savings and loan holding companies (SLHCs) with more than $50 billion in total assets, as well as intermediate holding companies (IHCs) of foreign banking organizations.

The proposal includes a new rating scale under which component ratings would be assigned for:

  1. Capital planning and positions,
  2. Liquidity risk management and positions, and
  3. Governance and controls.

In essence, the Fed is revamping its rating system for LFIs to catch up with the Fed’s post-crisis heightened supervisory expectations and approach to LFI supervision.  The Fed proposes to assign initial ratings under the new rating system during 2018.

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A new age for governance

On August 3, 2017, the Federal Reserve Board (Fed) proposed guidance that would significantly revise its expectations for boards of directors by laying out its view of the five key attributes that describe an effective board.  The proposal would also set in motion efforts to better delineate the roles, responsibilities, and accountabilities among senior management and the board by rescinding or revising past guidance and rules.  The proposed guidance on board effectiveness would apply to US bank holding companies (BHCs), savings and loan holding companies (SLHCs), and nonbank financial companies designated by the Financial Stability Oversight Council (FSOC) as systemically important.  The proposed guidance would not apply to intermediate holding companies (IHCs) of foreign banking organizations or state member banks, but the Fed noted that it anticipates proposing guidance on board effectiveness for IHCs at a later date, and requested feedback on how the guidance should be adapted to apply to IHCs and state member banks. The proposed guidance would also be used as part of the Fed’s supervisory assessment of board effectiveness outlined in a companion proposal on a new rating system for large financial institutions (LFIs).1

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OCC requests comment on possible revisions to Volcker Rule

In the weeks following the 2016 Presidential election, members of the incoming Administration clearly expressed their views that certain aspects of Dodd-Frank, including the Volcker Rule, are overly complex.  Specifically, then-Treasury Secretary-nominee Steven Mnuchin argued that the “number one problem with the Volcker Rule is that it’s too complicated and people don’t know how to interpret it.”1

On June 12, 2017, the Treasury Department took a significant step on financial regulatory issues by releasing its first report pursuant to President Trump’s executive order setting forth “Core Principles” for regulating the US financial system.  Among other things, the report argues that the Volcker Rule requires “substantial amendment” and that its implementation has “hindered market-making functions necessary to ensure a healthy level of market liquidity.”2  Accordingly, the report proposes several changes—some of which could be implemented by the regulatory agencies and some of which would require Congressional action to amend the underlying statute—designed to “reduce the scope and complexity” of the rule.3

On August 2, 2017, the Office of the Comptroller of the Currency (OCC) issued a notice and request for comment4 on whether certain aspects of the regulation implementing the Volcker Rule should be revised to “better accomplish the purposes of the statute” while decreasing the compliance burden on banking entities and fostering economic growth.

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FRB, FDIC Release Public Sections of 2017 Resolution Plans of Eight US G-SIBs

On July 5, 2017, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) released the public sections of the 2017 resolution plans submitted by all eight US global systemically important banks (G-SIBs).1 The 2017 public sections are substantially longer than the 2015 public sections submitted in connection with the firms’ last full submissions—863 pages in 2017 compared to 520 pages in 2015—and contain significant new details about the G-SIBs’ completed and forthcoming enhancements to resolution planning capabilities to address regulatory concerns.

The 2017 plans were submitted after the FRB and FDIC (collectively, the “Agencies”) jointly determined that the 2015 plans submitted by five of the eight G-SIBs were “not credible or would not facilitate an order resolution under the Bankruptcy Code.”2 (After the firms submitted remediation plans, the Agencies jointly determined that the firms had adequately remediated the identified deficiencies.) The 2017 public sections make clear that the G-SIBs have benefitted from the Agencies’ increased transparency across the key resolution planning capabilities, as the institutions have demonstrated significant improvements in each of these areas.

Although the Agencies have not yet reviewed either the confidential or public portion of the 2017 plans, the findings related to the 2015 plans illustrate the heightened expectations with respect to resolution planning. If the Agencies determine that a plan is “not credible” and the firm does not remediate an identified deficiency, they may impose more stringent capital, leverage, or liquidity requirements, or restrictions on the firm’s growth, activities, or operations until it submits a plan that remediates the deficiency.

The next full plan submissions for all eight US G-SIBs are due by July 1, 2018.

For a more detailed analysis of the public sections, please click here.

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