It's been a busy past several days, with perhaps the largest number of developments emerging from the Federal Reserve.  While many of these are in the too-big-to-fail context, the Federal Reserve chair confirmed the FOMC's commitment to lower interest rates to help spur job growth.  As for other banks, perhaps the most important event was a speech on operational risk by the OCC's Deputy Comptroller for Operational Risk.  This speech is one of the signals that the OCC will focus more intently on such risk in its examinations, and one can expect that the Federal Reserve and the FDIC will follow suit.  Elsewhere, the IRS weighed in on bitcoins, declaring them property rather than currency, with several attendant federal tax consequences.

The full set of developments over the past week is as follows:

The Economy

  • "What the Federal Reserve Is Doing to Promote a Stronger Job Market," remarks by Federal Reserve Chair Yellen at the 2014 National Interagency Community Reinvestment Conference (Chicago, IL, Mar. 31).
    • "By keeping interest rates low, we are trying to make homes more affordable and revive the housing market. We are trying to make it cheaper for businesses to build, expand, and hire. We are trying to lower the costs of buying a car that can carry a worker to a new job and kids to school, and our policies are also spurring the revival of the auto industry."
    • "The U.S. economy is still considerably short of the two goals assigned to the Federal Reserve by the Congress. The first of those goals is maximum sustainable employment, "
    • "Earlier this month, the Fed reiterated its overall commitment to maintain extraordinary support for the recovery for some time to come. This commitment is strong, and I believe the Fed's policies will continue to help sustain progress in the job market."
    • Remarks available at http://www.federalreserve.gov/newsevents/speech/yellen20140331a.htm.     

Appraisals

  • Appraisal management companies – proposed rule from federal agencies (Mar. 24)
    • Requirements for asset management companies.
    • Standards for state agencies to register and supervise asset management companies.
    • States not explicitly required to set up a regulatory framework for these companies, but a company may not provide appraisal management services for federally related transactions in a state that has not established such a regulatory framework.
    • Text available at http://www.federalreserve.gov/newsevents/press/bcreg/20140324a.htm.
    • Comment deadline: 60 days after publication in Federal Register.

Asset-based Lending

  • OCC releases new booklet for Comptroller's Handbook, "Asset-Based Lending" (Mar. 27).
    • Replaces "Accounts Receivable and Inventory Financing" booklet issued in March 2000.
    • Expanded topics include ABL structures, credit analysis, evaluating borrower liquidity, establishing a borrowing base and prudent advance rates, collateral controls and monitoring systems, and credit risk rating considerations.
    • The booklet also includes transaction examples to guide examiners and bankers in the assessment of credit risk.
    • Booklet available at http://www.occ.gov/news-issuances/bulletins/2014/bulletin-2014-11.html.

CFPB

Community Development

Foreign Banks

Housing Reform

Mobile Payments

  • Consumers and Mobile Financial Services 2014, Federal Reserve report, released Mar. 25.
    • Findings:
      • Mobile phones are in widespread use.
      • The ubiquity of mobile phones is changing the way consumers access financial services.
      • Among consumers who do not use mobile financial services, the principal reasons cited for not using the services are perceptions of limited usefulness and benefits, and concerns about security.
      • Smartphones are changing the way people shop and make financial decisions.
    • Report available at http://www.federalreserve.gov/newsevents/press/other/20140325a.htm.

Mortgage Lending

Operational Risk

  • Remarks by Deputy Comptroller for Operational Risk Carolyn DuChene Before OpRisk North America(Mar. 27)
    • Four drivers of operational risk:
      • Volume and velocity of change within individual banks and across industry.
      • Increased reliance on third party providers.
      • Increasing interconnectedness and interdependence.
      • Cybersecurity threats.
    • Risk management responses:
      • Heightened standards for risk management functions performed within business lines.
      • Strengthening of internal risk management function with adequate resources, stable and sound leadership, and extensive rather than narrow engagement.
      • Embedding risk management in firm's culture.
    • Principal sources of guidance:
      • OCC heightened standards for large insured institutions, proposed in Jan. 2014.
      • Basel Committee, Principles for the Sound Management of Operations Risk (June 2011).
    • Remarks available at http://www.occ.gov/news-issuances/news-releases/2014/nr-occ-2014-44.html.

Payday Lending

  • CFPB field hearing, Nashville, TN (Mar. 25)
  • CFPB releases CFPB Data Point: Payday Lending (Mar. 25).
    • Findings:
      • Over 80% of payday loans are rolled over or followed by another loan within 14 days.
      • 15% of new loans are followed by a loan sequence of at least 10 loans long.  Half of all loans are in a sequence at least 10 loans long.
      • Few borrowers amortize, or have reductions in principal amounts, between the first and last loan of a loan sequence.       
      • Monthly borrowers are disproportionately likely to stay in debt for 11 months or longer.
      • Most borrowing involves multiple renewals following an initial loan, rather than multiple distinct borrowing episodes separated by more than 14 days.
    • Report available at http://www.consumerfinance.gov/newsroom/cfpb-finds-four-out-of-five-payday-loans-are-rolled-over-or-renewed/.

Swaps and Derivatives

  • End-users: CFTC public roundtable on effect of Dodd-Frank Act on commercial end-user issues scheduled for April 3.
  • OCC Supplemental Examination Procedures for End-User Derivatives and Trading Activities (Mar. 24).
    • Procedures include:
      • Minimum scope procedures for the policies, procedures, systems, controls, and governance structures related to end-user derivatives and trading activity, including internal audit, the board of directors’ risk committee, market risk management, valuation, and model governance.
      • Ongoing monitoring of portfolios with end-user derivatives and trading positions to identify new and changing risks.
    • OCC Bulletin 2014-8, available at http://www.occ.gov/news-issuances/bulletins/2014/bulletin-2014-8.html.
  • Swap data repositories – interim final rule from CFTC (Mar. 26).
    • Clarifies scope of permissible access by market participants to swap data and information maintained by a registered swap data repository. 
      • Counterparty does not have access to data maintained by a swap data repository on the identity of the other counterparty to swap that is executed anonymously on a swap execution facility or designated contract market and then cleared in accordance with the CFTC's straight-through processing requirements.
    • 79 Fed. Reg. 16672 (Mar. 26, 2014), available at http://comments.cftc.gov/FederalRegister/Final.aspx.
      • Comments due April 25.

TARP

  • Ally Financial files initial prospectus for IPO in which Treasury expected to sell about $5 billion of common stock.
  • Treasury commences modified Dutch auctions for all of its preferred stock and sub debt in four institutions.  Auctions commenced Mar. 31 and will close at 6 pm on April 3.
    • Community First, Inc. (Columbia, TN).
    • Freeport Bancshares, Inc. (Freeport, IL)
    • Great River Holding Company (Baxter, MN)
    • Patriot Bancshares, Inc. (Houston, TX)

Too Big to Fail

  • Capital plans – Federal Reserve approves plans of the 25 of 30 banks that participate in the CCAR program.
    • Banks with approved plans may pay dividends and make other distributions subject only to general regulatory restraints (e.g., distributions relative to net income).
    • Banks without approved plans must:
      • Not pay dividends or make other distributions greater than amounts dividended or distributed in previous calendar year without Federal Reserve approval.
      • Resubmit plans.
    • Results available at http://www.federalreserve.gov/newsevents/press/bcreg/20140326a.htm.
  • Asset management firms – FSOC announces conference on the asset management industry and its activities.
    • Scheduled for May 19.
    • To be streamed live.
  • Supervisory stress tests – Federal Reserve releases results of both supervisory and company-run tests for 30 U.S. bank holding companies (Mar. 20).
  • Corrections to stress test results issued Mar. 21 and 24.
  • Federal Reserve Bank of New York, Economic Policy Review, A Special Issue on Large and Complex Banks (Mar. 26).
    • Findings of 11 articles
      • Bank size has benefits and costs: the upside is the potential for economies of scale and lower operating costs; the downside is the “too-big-to-fail” problem and associated funding advantages and moral hazard.
      • Banks have become less bank-centric and more organizationally complex. Furthermore, the increase in bank complexity may be a natural response to an evolving intermediation technology.
      • Bail-in regimes, where the claims of creditors of the parent company are converted to equity in resolution, are an efficient and superior process for resolving the failure of a large financial firm. Requiring systemically important bank holding companies to issue “bail-inable” long-term debt that converts to equity in resolution would make large bank failures more orderly.
    • Press release available at http://www.newyorkfed.org/newsevents/news/research/2014/rp140325.html.
    • Articles available at http://www.newyorkfed.org/research/epr/index.html.
    • Blogposts available at http://libertystreeteconomics.newyorkfed.org/.

Trading

Virtual Currency

  • Bitcoins are property and not legal tender, per IRS ruling (Mar. 25).
    • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
    • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
    • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
    • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
    • Notice 2014-21 and press release available at http://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance.

Volcker Rule

Bank Closings

  • None.

Congressional Events

Upcoming Events

  • Mar. 30 – Apr. 2
    • Federal Reserve Bank of San Francisco, 2014 National Interagency Community Reinvestment Conference, Chicago.
  • April 2
    • House Financial Services Committee hearing, "Allegations of Discrimination and Retaliation within the Consumer Financial Protection Bureau."
  • April 3
  • April 29
    • Senate Banking Committee mark-up of Johnson-Crapo bill.
  • May 19
    • FSOC conference on asset management industry and its activities.

Regulatory Comment Deadlines

  • April 1 – CFPB: supervision of larger international money transmitters.
  • April 11 – BCBS: Basel III: The Net Stable Funding Ratio.
  • April 15 – Federal Reserve: repeal of Regulation P.
  • April 16 – Federal Reserve: advance notice of proposed rulemaking on physical commodity holdings by financial holding companies.
  • April 21 – Federal Reserve: modification of definition of “creditor” in Identity Theft Red Flags Rule.
  • April 21 – Federal Reserve: repeal of Regulation DD.
  • April 25 – CFTC: interim final rule on access to counterparty data for swap executied anonymously.
  • May 2 – Federal Reserve: Application of Regulation CC to electronic checks and electronic returned checks.
  • May 27 – SEC: standards for covered clearing agencies.
  • May 27 – CFTC: swap reporting and recordkeeping requirements under 17 CFR part 45.
  • 60 days after publication in Federal Register – federal banking agencies: standards for asset management companies and state agencies.