Subordinated debt and stress tests were the subject of two especially important regulatory releases of the past week.  For those national banks considering the issuance of sub debt, the OCC published an interim final rule that takes effect on March 31 that changes the OCC's criteria for the inclusion of sub debt in regulatory capital and the OCC's process for the approval of such issuances.  The agencies also published additional guidance on stress testing by banks with assets between $10 billion and $50 billion.  Community banks with assets of a few billion or more should be sure to review the guidance for their own stress tests.

For the banking industry as a whole, the most important development of last week may be the signs in the February jobs report and the Federal Reserve's Beige Book that employment and the economy continue to improve, notwithstanding winter weather events that have interfered with productivity.

Major developments over the past week include the following:

The Economy

  • February 2014 jobs report
  • Federal Reserve Beige Book for March 2014
    • "Reports from most of the twelve Federal Reserve Districts indicated that economic conditions continued to expand from January to early February. Eight Districts reported improved levels of activity, but in most cases the increases were characterized as modest to moderate. New York and Philadelphia experienced a slight decline in activity, which was mostly attributed to the unusually severe weather experienced in those regions. Growth slowed in Chicago, and Kansas City reported that conditions remained stable during the reporting period.  The outlook among most Districts remained optimistic."
  • Available at http://www.federalreserve.gov/monetarypolicy/beigebook/default.htm.      

Capital

  • OCC releases interim final rule to conform certain regulations to Basel III-based capital rules, OCC Bulletin 2014-6 (Mar. 7).
    • Available at 79 Fed. Reg. 11300 (Feb. 28, 2014), http://www.occ.gov/news-issuances/bulletins/2014/bulletin-2014-6.html.
    • Amendments to rules on subordinated debt (12 CFR 5.47 and 163.81).
      • Criteria for inclusion in regulatory capital to replace identification of specific types of sub debt that are includable.
      • Clarification of requirements for all sub debt, whether or not includable in Tier 2 capital.
      • Changes to OCC approval of issuance and prepayment.
    • Other technical amendments; changes to manuals, appendices, and forms underway.
    • Effective date is Mar. 31.
    • Comment period ends Mar. 31
  • SEC Commissioner Gallagher, Remarks Given at the Institute of International Bankers 25thAnnual Washington Conference (Mar. 3).

CFPB

Consumer Protection

Community Banking

  • Remarks by Comptroller Curry for the Independent Community Bankers of America Annual Convention (Mar. 4).
    • Stress testing and other risk management practices for community banks:
      • Commercial real estate.
      • Agricultural loans.
      • Other loan portfolios.
    • Data security and the use of third party IT service providers.
      • Due diligence.
      • Concern about reliance on foreign-based subcontractors to support critical activities.
      • Concern about third party access to sensitive bank or customer data.
  • Videotaped remarks by FDIC Chairman Gruenberg at the ICBA 2014 National Convention and Techworld (Mar. 4).

CRA

Directors

  • OCC announces four series of workshops for directors. 
    • Two workshops scheduled for April 8-9 in Atlanta.
      • “Risk Assessment Workshop: Directors, Where is the Risk in Your Institution.”
      • “Credit Risk Workshop: A Director's Focus."
    • Two other workshops will be available in other forums.
      • “Mastering the Basics Workshop: A Director's Challenge.” 
      • “Compliance Risk Workshop: What Directors Need to Know.” 
    • Registration and other information available at https://www.seiservices.com/occ/.

Federal Reserve Board

International

  • Remarks of Comptroller Curry before the Institute of International Bankers Annual Washington Conference (Mar. 3)
    • Changes to supervision in light of Fiechter report.
    • Heightened expectations could be applied to Federal branches of foreign banks with highly complex operations or heightened risk, regardless of asset size.
    • Simplification of corporate structure encouraged; multiplicity of legal entities within a banking organization problematic.
    • Available at http://www.occ.gov/news-issuances/index-news-issuances.html.
  • Cross-border regulation of OTC derivatives: remarks of SEC Commissioner Piwowar at the AIMA Global Policy & Regulatory Forum (Mar. 6).

Stress Testing

  • Guidelines for medium-sized firms released by federal banking agencies (Mar. 5).

Swaps and Derivatives

  • Affiliated counterparties: no-action relief extended to Dec. 31, 2014.
  • Cross-border regulation of OTC derivatives: see remarks of SEC Commissioner Piwowar above under International.

Volcker Rule

  • For chronology, see Appendix below.

Bank Closings

  • None.

Congressional Hearings

Upcoming Events

  • Mar. 11
    • Senate Banking Committee hearing, "Finding the Right Capital Regulations for Insurers."
  • Mar. 12
    • Senate Banking Committee hearings
      • "Superstorm Sandy Recovery: Ensuring Strong Coordination among Federal, State, and Local Stakeholders"
      • "The State of U.S. Retirement Security: Can the Middle Class Afford to Retire?"
    • House Financial Services Committee hearing, "Federal Reserve Oversight: Examining the Central Bank's Role in Credit Allocation."
  • Mar. 13
    • SEC closed meeting.
    • Senate Banking Committee, Nominations hearing
      • For Federal Reserve Board: Stanley Fischer (Vice Chairman), Jerome H. Powell, Lael Brainard
      • HUD Ass't Secretary: Gustavo Velasquez Aguilar
      • NCUA Board: J. Mark McWatters
  • Mar. 18-19
    • Federal Open Market Committee
  • Mar. 20
    • Federal Reserve to release results of supervisory stress tests.
  • Mar. 21-24
    • Federal Reserve, International Research Forum on Monetary Policy.
      • Invitation only.
  • Mar. 26
    • Federal Reserve to release CCAR results.
  • Mar. 31
    • OCC Symposium, “Building on 150 Years: The Future of National Banking"
  • Mar. 31 – Apr. 2
    • 2014 National Interagency Community Reinvestment Conference, Chicago
  • Apr. 4
    • CFTC public roundtable to discuss end-user issues under Dodd-Frank.
      • Preliminary information available at http://www.cftc.gov/PressRoom/PressReleases/pr6872-14.

Regulatory Comment Deadlines

  • Mar. 17 – CFPB: Regulation E, list of countries qualifying for safe harbor.
  • Mar. 21 – BCBS: Second consultative paper on securitization framework.
  • Mar. 24 – SEC: amendments to Regulation A.
  • Mar. 28 – OCC: heightened expectations for large national banks and federal savings associations.
  • Mar. 31 - OCC: interim final rule on includability of sub debt in regulatory capital.
  • Mar. 31 – Federal Reserve: amendments to Policy Statement on Payment System Risk and to Regulation HH (financial market utilities) to reflect international Principles for Financial Market Infrastructures.
  • 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.
  • May 2 – Federal Reserve: Application of Regulation CC to electronic checks and electronic returned checks.

Appendix - Volcker Rule

  • Trust preferred securities: prohibition in final Volcker Rule on investments in CDOs extends to investments in pooled TruPS (Dec. 19). 
    • Issues:
      • Important accounting consequence for banks now holding pooled TruPS: prohibition means that the investments have suffered an other-than-temporary impairment and must be written down.
    • Chronology of events:
      • Dec. 10: final Volcker Rule released and available at http://comments.cftc.gov/FederalRegister/Final.aspx.
      • Dec. 19: agencies issue FAQs and related material available, at http://www.federalreserve.gov/newsevents/press/bcreg/20131219d.htm
      • Dec. 23: ABA and 4 banks file suit in D.C. federal district court to block application of Volcker Rule to TruPS holdings and seek emergency relief in D.C. Circuit.
      • Dec. 27: agencies issue statement that they are reviewing application of Volcker Rule to TruPS investment vehicles, partly in light of Collins Amendment.
      • Jan. 8-9: "Fairness for Community Job Creators Act" introduced to prohibit Volcker Rule from requiring banks to divest holdings of pooled TruPS and to prevent banks from having to take write-down.
        • S. 1907
        • H.R. 3819
      • Jan. 9: Senators Manchin and Wicker introduce S. 1912, a bill to "clarify that certain banking entities are not required to divest from collateralized debt obligations backed by trust preferred securities under the Volcker Rule."
        • Narrower relief than S. 1907 or H.R. 3819.
      • Jan. 14: agencies issue interim final rule authorizing retention of interests in and sponsorship of bank-issued CDOs backed by TruPS, available at http://comments.cftc.gov/FederalRegister/Final.aspx
        • Prerequisites:
          • Underlying TruPS issued before May 19, 2010, by bank holding company with less than $15 billion in assets.
          • CDO established and interest issued before May 19, 2010.
          • Interest acquired on or before Dec. 10, 2013.
        • Comment deadline: 30 days after publication in Federal Register.
      • Jan. 15: ABA announces withdrawal of request for emergency relief in D.C. Circuit but reserves judgment on continuing litigation.
      • Jan. 15: House Financial Services Committee hearings, "The Impact of the Volcker Rule on Job Creators, Part I."  
      • Jan. 29: European Commission counterpart proposal.
      • Jan. 30: Agencies announce Mar. 3 as deadline for comments on interim final rule.
      • Feb. 5: House Financial Services Committee hearings, "The Impact of the Volcker Rule on Job Creators, Part II."
      • Feb. 12: ABA announces voluntary dismissal of U.S. district court complaint against regulators.