On Monday, August 24, 2015, the Federal Deposit Insurance Corporation (FDIC) released the Summer 2015 issue of its Supervisory Insights publication. In addition to providing a brief review of recently released regulations and supervisory guidance, the FDIC published two articles which highlight the importance of strategic planning for banks in the challenging earnings environment and the regulatory landscape of bank investments in securitizations. While the articles published by the FDIC in these Supervisory Insights publications should not be considered as supervisory or regulatory guidance, they are a resource and a review of important topics for bankers and bank examiners.
The first article, “Strategic Planning in an Evolving Earnings Environment,” tackles the critical role of a bank’s corporate governance and strategic planning as the operating environment continues to face headwinds, especially with regard to earnings. The FDIC notes that “[s]trategic planning can be viewed as a dynamic process for evaluating the bank’s current status, establishing appropriate business objectives, developing plans and risk tolerances, and ensuring policies and controls are in place to make sure the bank operates within the parameters established by the board.”
A precondition to strategic planning is ensuring the board has an awareness and understanding of the bank’s business model, condition, risk profile, opportunities and challenges. One such challenge identified is that of the current earnings environment, especially with regard to competitive pressures on net interest margin and non-interest income, the low interest rate environment and risks identified with higher future interest rates.
In the second article, “Bank Investment in Securitizations: The New Regulatory Landscape in Brief,” the FDIC summarizes important new requirements and compliance obligations regarding investment in securitizations. As the FDIC indicates, “[t]he gist of these new requirements is simple: banks should understand the risks associated with the securities they buy and should have reasonable assurance of receiving scheduled payments of principal and interest.” In the article, the FDIC reviews the following regulations applicable to bank investment activities, each with its own relevance and importance:
- Office of the Comptroller of the Currency (OCC) regulations at 12 CFR Parts 1, 5, 16, 28, and 60: Alternatives to the Use of External Credit Ratings in the Regulations of the OCC.
- OCC Guidance on Due Diligence Requirements to determine eligibility of an investment
- FDIC Regulations at 12 CFR Part 362: Permissible Investments for Federal and State Savings Associations: Corporate Debt Securities
- FDIC Regulations at 12 CFR Part 324: Regulatory Capital Rules; Implementation of Basel III
- FDIC Regulations at 12 CFR Part 351: Prohibitions on Certain Investments (the Volcker Rule)
Finally, the FDIC includes a helpful, three-step graphic titled “Pre-purchase considerations for prospective securitization investment.” Step 1 is to consider whether the investment is permissible under the Volcker Rule. Step 2 is to determine whether you have a comprehensive understanding of the securitization, including documenting the due diligence and analysis. Finally, Step 3 is to determine the regulatory capital treatment of the securitization.