This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.
Fed & FDIC propose reducing living will requirements. A proposal that would effectively put the largest US banks on a four-year schedule to produce full living will plans, rather than the current requirement to file their resolution plans on an annual basis, was announced by the Fed and the FDIC on April 16. US global systemically important banks would be required to file resolution plans every two years, alternating between full and "targeted" plans, under the Notice of Proposed Rulemaking jointly issued by the Fed and the FDIC. Targeted plans would include core areas like capital and liquidity, as well as material changes in other areas. Living wills, required under Dodd-Frank, must describe a firm's strategy for orderly resolution under bankruptcy in the event of material financial distress or failure of the company. The new proposal builds on regulatory agencies' efforts to tailor their rules, consistent with the partial Dodd-Frank rollback law enacted last May, creating four categories of banks with more than $100 billion in total assets and establishing requirements within each category. Most banks in Category IV, including domestic firms with assets between $100 billion and $250 billion, would not be required to file resolution plans at all, due to their limited systemic footprint, according to an April 1 Fed Board memorandum. Domestic and foreign firms in Categories II and III, generally those with at least $250 billion in assets and/or certain risk indicators, would be required to file resolution plans every three years, alternating between full and targeted plans. GSIBs are classified as Category I. Fed Chairman Jerome Powell said, "it makes sense for banks that are more complex and risky to submit resolution plans more frequently than firms that pose less risk," adding that regulators were "not changing our substantive review standards for the largest and most complex banks and we are generally formalizing the current practices that have developed over recent years." The one dissenting voice against the new rule at the Fed's April 8 open Board meeting came from Fed Governor Lael Brainard, who said the proposal went beyond the requirements of last year's regulatory reform law "in ways that may weaken the resolution planning process for very large banking firms and leave the system less safe." June 21 is the deadline for submitting comments on the proposal.
Fed seeks to tailor reg framework for foreign banks based on risk. Also on the agenda of the Fed's April 8 meeting was a proposal that would subject foreign banks with US operations to the same general level of regulatory scrutiny as their US-based counterparts. The Fed Board approved two draft notices of proposed rulemaking that would revise the prudential standards applicable to FBOs based on their US risk profiles. The first draft notice is a Fed proposal that would revise the framework for application of prudential standards to FBOs. The second draft notice, issued jointly with the FDIC and OCC, would modify the application of capital and liquidity requirements to the US operations of FBOs and modify the application of standardized liquidity requirements to certain US depository institution holding companies with $50 billion or more in weighted short-term wholesale funding. Foreign banks with $100 billion or more in US assets would be sorted into four categories of increasingly stringent requirements, based on factors reflecting banks' complexity and risk to the financial system, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets and off-balance sheet exposure. The proposals would continue to focus on the risk profile of the US operations of a foreign banking organization, rather than its global footprint, to determine the stringency of standards, and would not modify the threshold that requires a foreign banking organization to form an IHC, according to an April 1 Fed Board memorandum. The vote on the proposed new framework was 4-1, with Brainard casting the sole vote in opposition. Powell noted that the Fed's proposal on foreign banks is comparable to its proposal, announced last October, to modify regulations for domestic banking firms to account for the size, complexity, business model and risks of each firm. But Brainard said she was concerned that the proposal did not address the unique vulnerabilities to US markets resulting from the "special role of the dollar in the global financial system," and called for the application of standardized liquidity requirements to the branches and agencies of foreign banks. June 21 is the deadline for submitting comments on both proposals.
FDIC proposes changes to IDI rule. The FDIC Board on April 16 approved an Advance Notice of Proposed Rulemaking seeking comment on ways to tailor and improve the agency's rule requiring certain insured depository institutions to submit resolution plans, known as the "IDI Rule." The ANPR is part of a comprehensive review of the rule, which went into effect in 2012. FDIC is inviting comments on several proposed approaches to better tailor the rule, including creation of tiered resolution planning requirements based on institution size and complexity; revisions to the frequency and required content of plan submissions, including eliminating them altogether for smaller and less complex IDIs; and improvements to the process for periodic engagement between the FDIC and institutions on resolution-related matters. The FDIC is also seeking comment on whether to revise the current $50 billion asset size threshold in the IDI Rule. "After several years of reviewing the IDI plans that firms submit, we are interested to learn how we can make this process more tailored and targeted, while continuing to advance the FDIC's important resolution readiness efforts," FDIC Chair Jelena McWilliams said, adding, "We ask a lot of questions and anticipate robust feedback." Comments on the ANPR will be accepted for 60 days after publication in the Federal Register.
Quarles urges banks to accelerate transition away from LIBOR benchmark. Fed Vice Chairman for Supervision Randal Quarles said banks and financial markets must accelerate the move from the controversial London Interbank Offered Rate benchmark to other reference rates. In an April 10 speech before the Financial Stability Board Roundtable on Reforming Major Interest Rate Benchmarks in Washington, Quarles said Fed supervisors "are including the transition away from LIBOR in their monitoring discussions with large firms" and that the Fed "will expect to see an appropriate level of preparedness at the banks it supervises." FSB members were meeting to discuss the transition from LIBOR, scheduled to be phased out by the end of 2021, to the Fed's preferred new benchmark, the Secured Overnight Financing Rate (SOFR). Quarles also chairs the FSB, an international body that makes recommendations to the G20 nations on financial rules. "Banks should conduct at least as much due diligence on the reference rates that they use as they conduct on the creditworthiness of their borrowers," Quarles said. He added that thanks to the industry-led efforts of the Alternative Reference Rates Committee, convened by the Fed and including private-market participants working to help ensure a successful transition from US dollar LIBOR to SOFR, "the transition paths away from LIBOR will become clearer for banks of all sizes."
Treasury releases new round of Opportunity Zone regulations. The Treasury Department on April 17 released what the agency termed the "highly anticipated" second set of Opportunity Zone proposed regulations. Created under the 2017 Tax Cuts and Jobs Act, the tax benefit is "designed to drive economic development and create jobs by encouraging long-term investments in economically distressed communities nationwide," as the department describes it. The program allows investors to reduce their capital gains taxes by investing in areas deemed Qualified Opportunity Zones, but uncertainty over the regulations had delayed many potentially qualifying projects from moving forward following the release of the first set of guidance last October. Treasury said the newly issued guidance will help to ensure compliance with the requirement that a fund have 90 percent of its assets invested in Opportunity Zones; expands the working capital safe harbors; offers more clarity on treatment of gains on long-term investments, ownership and operation of the business; and further clarifies what constitutes Qualified Opportunity Zone Business Property.
Guidance documents will now be reviewed by White House. The Trump Administration has announced a sweeping plan to require federal regulators to submit nonbinding guidance documents to the White House for review. An April 11 memorandum from Russell Vought, acting director of the Office of Management and Budget, spells out requirements for agencies to notify 'Office of Information and Regulatory Affairs of guidance documents they plan to issue and to determine if the proposals qualify as "major" – and thus require notification of Congress under the Congressional Review Act. The OMB directive, which takes effect 30 days after the memorandum was issued, applies to all federal agencies, including independent regulators like the Fed and FDIC, although monetary policy actions by the Fed are supposed to be exempt. Republican members of Congress have recently stepped up their campaign against agency guidance, which they, and many industry representatives, see as a backdoor approach to rulemaking that avoids the process of formal notice and public comment but can have the same practical effect in terms of compelling certain actions. The Congressional Review Act was invoked in 2017 to strike down a 2013 guidance from the CFPB regarding discrimination in auto lending after the Government Accountability Office, in response to Congressional inquiries, determined that the CFPB guidance indeed qualified as a rule.
CFPB's Kraninger discusses bureau's "next phase." Consumer Financial Protection Bureau Director Kathy Kraninger, in her first major policy address since taking office last December, stressed that the bureau would focus on a prevention-first strategy that she said would ultimately lead to less of a need for enforcement actions. In an April 17 speech and moderated discussion at the Bipartisan Policy Center in Washington, Kraninger called for "fostering a culture of compliance and preventing harm." Kraninger said she plans to convene meetings with stakeholders to better clarify the types of "abusive acts or practices" that form the basis of the bureau's mandate under Dodd-Frank. She also said the bureau would be issuing rules on debt collection in the near future, with the goal of bringing the rules in line with how today's communications technology is used in debt collection. Other topics included protecting consumers from bad actors, providing clear rules of the road to financial institutions and non-bank lenders, and empowering consumers to make sound financial choices. "Articulating clear rules for the road for regulated entities will promote competition, increase transparency, and preserve fair markets for financial products and services," said Kraninger. Click here to see video of Kraninger's speech.
Hood named NCUA chairman. President Trump has designated Rodney Hood as the eleventh Chairman of the National Credit Union Administration Board. Hood was sworn in on April 8 by the man he is replacing as chairman, J. Mark McWatters, whose term as a board member expires in August. Hood and Todd Harper were confirmed as board members by the Senate in March and both were sworn in as board members on April 8, giving NCUA its first full three-member board in two years. NCUA board members serve staggered six-year terms and no more than two can be from the same political party.