Treasury and OCC push for new FinTech tone, direction, and opportunities

The US Treasury Department (Treasury) has issued its fourth report1 in a series on the Administration’s core principles to regulate the US financial system.  It signals a new regulatory approach toward nonbank financial institutions, financial technology (“FinTechs”), and financial innovation.  Coupled with the Office of the Comptroller of the Currency’s (“OCC”) same day announcement2 that it is accepting FinTech special purpose charter applications, FinTechs considering entering the banking environment, through a bank charter themselves or indirectly through partnerships, can take a note of encouragement.  That said, there were no big surprises relative to past statements about underlying regulations and bank charter applications at this time.

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FDIC releases Information Technology Functional Guide Version 2.0 to assist Covered Institutions with Part 370 compliance

On Friday, June 29, the Federal Deposit Insurance Corporation (“FDIC”) released the Information Technology Functional Guide (“Tech Guide”) draft Guide Version 2.0 to assist Covered Institutions (“CIs”) with the implementation of information technology systems capabilities required for Part 370.1 The following provides some context to the provisions that were materially changed from the original guide. Since the Tech Guide is in draft form with comments due August 1st, CIs should be informed by its contents, but cannot make material changes until the Tech Guide is final or having discussed those changes with the FDIC.

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FRB, FDIC release public sections of 2018 Resolution Plans of the four LISCC FBOs

On July 9, 2018, the Board of Governors of the Federal Reserve System (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”) (collectively, the “Agencies”) released the public sections of the resolution plans for the four foreign banking organizations’ (“FBOs”) overseen by the Large Institution Supervision Coordinating Committee (“LISCC”).1 The four FBOs were required to submit their plans by July 1, 2018, which included both private and public sections.

The 2018 public sections are comparatively longer than those submitted in the firms’ last full submissions in 2015—a total of 214 pages in 2018 compared to 162 pages in 2015—and contain significant new details about the FBOs’ completed and forthcoming enhancements to resolution planning capabilities. This expansion was largely expected as this submission marked the FBOs’ first reaction to regulatory guidance published in April 2017 2 and FAQs in September 2017 3 (collectively “2017 FBO Guidance”) that was specifically directed at these four banks.

Background

The 2017 FBO Guidance is generally consistent with the guidance previously issued to the eight US global systemically important banks (“US G-SIBS”) for 2017.4 Most notably in the 2017 FBO Guidance, the Agencies incorporated Supervision and Regulation (SR) Letter 14-1 (Principles and Practices for Recovery and Resolution Preparedness),5 which previously was technically applicable to US-GSIBs only. The guidance contained in SR 14-1 outlines specific and more substantive expectations for resolution capabilities.6 While overall the 2017 FBO guidance follows that for the US G-SIBs, it contains certain modifications and tailoring to address issues unique to FBOs such as the relationship and alignment between the US and group resolution plans, the role of branch entities, and guidance for permissible parent support.
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FRB, FDIC issue proposed additional and consolidated guidance for 2019 GSIB resolution plans

On Friday, June 29, the Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation (collectively, “the Agencies”) issued proposed updated resolution planning guidance to the eight largest and complex US Banking Institutions (“GSIBs” or “firms”) in relation to how the GSIBs should develop their next iteration of the 165 (d) Resolution Plans1 which are due July 1, 2019.2 The GSIBs last submitted their 165(d) Resolution Plans in July 2017.

This proposed guidance is intended to be supplementary to the specific feedback guidance issued in December 2017,3 where the Agencies noted that firms have made progress on enhancing resolvability, including eight areas of common progress, but emphasized further action is needed to address certain shortcomings for four firms, and identified improvement areas for all GSIBs. From the proposed guidance issuance date in the Federal Register, the interested parties and the public have 60 days to provide feedback to the Agencies on the proposed guidance.
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The growing need for regulatory reporting change management processes

Historically, regulatory reporting requirements were relatively static with the changes incremental in nature. For the most part, reporting requirements were initiated by policymakers through written announcements, regulators websites, and notices in the Federal Register. The new reporting requirements typically had long lead times and the changes managed by corporate finance/ regulatory reporting functions. Because of implementation schedules and technology challenges, often the reporting solutions were siloed and tactical, involving manual processes.

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CCAR: A mixed story of surprises and more work to do

The Federal Reserve (“Fed”) released the results of its Comprehensive Capital Analysis and Review (CCAR) for 2018 on June 28.  The results cover 35 bank holding companies (BHCs) and Intermediate Holding Companies (IHCs1) subject to the capital planning and stress test rule.  In addition to the stress test results, the conclusions on the adequacy of the capital planning process for the 18 systemic and complex firms subject to the qualitative portion of the review are also provided.2

Key Facts:

  • The Fed objected to one firm, Deutsche Bank USA, on qualitative grounds, and granted conditional non- objections for three firms, Goldman Sachs, Morgan Stanley and State Street.
  • A record number of firms, six, adjusted their dividend or stock buy-back requests to avoid objection, the so-called mulligan, exceeding the prior record of four firms making adjustments in 2015 (see below).
  • Capital planning internal controls in many instances continue to fall below the Federal Reserve’s supervisory expectations.

The prior week’s release of the Dodd-Frank Act Stress Test (DFAST) results provided more detailed information on the Fed’s stress test.  Compared to CCAR, those results exclude buybacks and capital issuances and hold past common dividends constant.  A link to our take on the DFAST results can be found here.

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2018 Dodd-Frank Act Stress Test (DFAST): Our take

The Federal Reserve (“Fed”) released the results of its Dodd-Frank Act Stress Tests (DFAST) that measure the potential impact of adverse or severely adverse economic conditions on the performance and condition of the 35 Bank Holding Companies (BHCs) and Intermediate Holding Companies (IHCs)1 subject to the rule.  These results will be followed on June 28, 2018 by the Fed’s conclusions regarding the adequacy of bank capital plans as evaluated through the Comprehensive Capital Analysis and Review (CCAR).

Key takeaways for the severely adverse scenario results include:

  • All firms exceeded minimum required capital under stress for the fourth year in a row.
  • This year’s test had a higher stress impact than previous years resulting in lower post-stress minimum capital levels, reversing an improving trend. The increase in stress was evidenced by:
    • Higher loss rates on loans (6.4% vs 5.8%)
    • Higher global market shock (GMS) losses (up 22%)2
    • Lower offsetting tax benefits in loss and recovery periods from the new tax law (32 basis points (bp) on risk-weighted assets (RWA) on average)
    • Declines in other comprehensive income (OCI) (30bp on RWA in aggregate)
  • These more stressful results were somewhat offset by lower growth in risk-weighted assets and higher pre-provision net revenue.
  • Impact from changes in law. In response to provisions in the recently passed regulatory relief legislation (S.2155, Economic Growth, Regulatory Reform, and Consumer Protection Act (“EGRRCPA”)), the Fed excluded the three firms below the $100 billion asset threshold3, and announced they would also exclude those firms from the CCAR results.
  • The supplementary leverage ratio was more constraining than last year. For most firms, post-stress supplemental leverage ratios were closer to minimum levels than last year and all firms exceeded the minimum ratio of 3.0 percent.

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Federal Reserve Board announces final rule to establish SCCL for US BHCs and FBOs – do you know your counterparty exposure?

On June 14, 2018, the Federal Reserve Board (FRB) unanimously voted to pass the final rule to establish single-counterparty credit limits (SCCL) for covered large US bank holding companies (BHCs) and foreign banking organizations (FBOs). The final rule, which aims to limit the amount of exposure that large banks can maintain with a single counterparty, is generally aligned with the proposed rule issued in March 2016. Also, the rule represents the first instance of the FRB applying the new enhanced prudential standard (EPS) thresholds to specific classes of institutions as prescribed in the recently passed regulatory relief legislation (S.2155, Economic Growth, Regulatory Reform, and Consumer Protection Act).1

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Key highlights of the Volcker Rule proposal

On May 30, 2018, the Federal Reserve Board approved a 373 page notice of proposed rulemaking (the “proposal”) to amend the regulations implementing the Volcker Rule (the Rule), a centerpiece of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  The proposal aims to simplify and tailor the compliance requirements of the Rule, which was finalized back in December 2013 to prevent banks from engaging in proprietary trading and from owning hedge funds or private equity funds. The proposed changes were jointly developed and approved by the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Commodity Futures Trading Commission (CFTC), and the Securities and Exchange Commission (SEC).

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Legal entity reporting: Common challenges and banking industry practices

Optimizing your legal entity regulatory reporting process

Background for legal entity reporting

Depending upon the legal entity structure and headquarters of a parent bank, several different reporting forms are used to identify legal entities and associated information, including their purpose and type of legal form. This information is used for monitoring compliance with laws and regulations including by the Federal Reserve Board of Governors (“Federal Reserve”): the Dodd-Frank Act, the Sarbanes-Oxley Act, the Gramm-Leach-Bliley Act, Regulation Y (Bank Holding Companies and Change in Bank Control), Regulation YY (Enhanced Prudential Standards), and Regulation QQ (Resolution Plans).  This information is also an important component in regulators determining an institution’s level of complexity.

As events occur that affect a firm’s organizational structure, a report is filed to record the event driven (FR Y-10, Report of Changes in Organizational Structure).  Annually, the end of the parent company fiscal year, a report is submitted that includes an organization chart and information concerning shareholders and public financial statements (FR Y-6, Annual Report of Holding Companies1, and FR Y-7, Annual Report of Foreign Banking Organizations2).  The information from the event-driven forms are compared to the annual organizational chart. All of this information is commonly referred to as banking structure data.

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