Hot Topics from Supervision, Regulation, and Credit
Agencies Request Comment on Use of CAMELS Ratings
On October 18, 2019, in keeping with ongoing initiatives to increase transparency and improve efficiency, the Federal Deposit Insurance Corporation and the Federal Reserve Board invited public comment on their use of the Uniform Financial Institutions Rating System, also known as the CAMELS system. The CAMELS system assesses the strength of an institution’s capital, assets, management, and liquidity as well as its sensitivity to market risk.
The agencies are gathering information on the consistency of ratings assigned under the CAMELS system and the use of CAMELS ratings in enforcement actions and in reviewing bank applications and enforcement actions.
Because comments will be made public, submitters should not include confidential rating and examination information. Regulators have extended the comment period until February 28, 2020.__________________________________________________________________________________________________________________________
The Use of Alternative Data in Consumer Credit Underwriting
On December 3, the Federal Reserve, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration released a statement on the use of alternative data in credit underwriting. Alternative data include information not typically provided in credit reports or in consumers’ loan applications. Using alternative data in a manner consistent with consumer protection laws may improve the speed and accuracy of credit decisions because it provides an additional view of a consumer’s ability to repay debt. Alternative data could also help firms evaluate the creditworthiness of consumers who may have difficulty obtaining credit in the mainstream credit system.
The agencies said that a strong compliance-management program ensures that consumer protection is in place whenever underwriting involves alternative data. They stressed that firms must understand opportunities, risks, and compliance requirements before using such data to evaluate creditworthiness. Regulatory agencies may offer additional information as they learn more about the use of alternative data. Firms may choose to consult with the appropriate regulator when planning to use alternative data.
The agencies welcome feedback on this statement. Anyone wishing to send email about this statement can write to the Board of Governors of the Federal Reserve System (firstname.lastname@example.org), the Consumer Financial Protection Bureau (email@example.com), the Federal Deposit Insurance Corporation (firstname.lastname@example.org), the National Credit Union Administration (email@example.com), or the Office of the Comptroller of the Currency (firstname.lastname@example.org).
Federal Agencies, State Bank Supervisors Clarify Requirements for Providing Financial Services to Hemp-Related Businesses
On December 3, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Financial Crimes Enforcement Network (FinCen), and the Conference of State Bank Supervisors issued guidance clarifying the legal status of hemp growth and production and the implications for Bank Secrecy Act compliance. The Agriculture Improvement Act of 2018 removed hemp from the definition of controlled substances and required the U.S. Department of Agriculture (USDA) to develop a regulatory program for hemp production. The notice emphasizes that banks are no longer required to file suspicious activity reports (SAR) for customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. For hemp-related customers, banks are expected to follow standard SAR procedures and only file a SAR when warranted by suspicious activity. The USDA issued an interim final rule regulating hemp production on October 31, 2019. FinCEN will issue additional guidance after further reviewing and evaluating the USDA’s interim final rule.
Vice Chair Quarles Speaks on Supervision
On December 4, 2019, Randal Quarles, the Federal Reserve’s vice chair for supervision, delivered semiannual testimony to Congress regarding the Fed’s bank supervision activities. The testimony was in conjunction with the release of the November 2019 Supervision & Regulation Report. The report provides an overview of banking system conditions and regulatory and supervisory developments.
Agencies Finalize Regulatory Capital Treatment for Some Real Estate Exposures
On November 19, 2019, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency adopted a final rule to revise the definition of “high volatility commercial real estate (HVCRE) exposure” in the regulatory capital rule to conform with the statutory definition of a “high volatility commercial real estate acquisition, development, or construction (HVCRE ADC) loan,” found in section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The EGRRCPA narrowed the definition of HVCRE, reducing the type of loans that require more capital under the risk-based capital requirements for HVCRE lending. The final rule also clarifies the capital treatment for loans that finance the development of land under the revised HVCRE exposure definition. The final rule becomes effective on April 1, 2020, and provides banking organizations with the option to maintain their current capital treatment for acquisition, development, or construction loans originated between January 1, 2015, and the final rule’s effective date. Beginning June 30, 2018, institutions could begin good-faith reporting efforts as defined under the EGRRCPA.__________________________________________________________________________________________________________________________
Community Bank Leverage Ratio Finalized; Early Adoption of Prior Simplifications Permitted
On October 29, 2019, the federal bank regulatory agencies finalized a rule allowing community banks to adopt a simple leverage ratio to measure capital adequacy. The community bank leverage ratio (CBLR) framework removes requirements for calculating and reporting risk-based capital ratios for a qualifying community bank that opts into the framework.
To qualify for the framework, a community bank must have less than $10 billion in total consolidated assets, limited amounts of off-balance-sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9 percent. In response to comments received on the agencies' proposed rule, the final rule incorporates tier 1 capital as the numerator in the CBLR.
The framework will first be available for banking organizations to use in their March 31, 2020, Call Report or Form FR Y-9C, as applicable. The agencies have prepared a compliance guide to accompany the rule.
In addition, the agencies finalized a rule to allow non-advanced approaches banks, including community banks, to elect to adopt simpler regulatory capital requirements for mortgage servicing assets, certain deferred tax assets, and investments in the capital of unconsolidated financial institutions beginning on January 1, 2020, which is a quarter earlier than the mandatory compliance date of April 1, 2020.__________________________________________________________________________________________________________________________
Rules Finalized to Tailor Regulations for Large Domestic and Foreign Banks
On October 10, 2019, the Federal Reserve Board finalized proposals to tailor regulations for domestic and foreign banks with $100 billion or more in total assets. The new rules build on the Board's efforts to reduce compliance requirements for firms with less risk while maintaining the most stringent requirements for the largest and most complex banks. The rules are consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act.
The rules establish a framework that places banks with $100 billion or more in total assets into four different categories based on several factors including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. When a firm's risk profile increases and it moves into a new risk category, regulatory requirements will increase.
The final rules include two changes from the proposed rules:
- Liquidity standards are applied to a foreign bank's U.S. intermediate holding company (IHC) based on the risk profile of the IHC rather than on the combined U.S. operations of the foreign bank, as originally proposed. This change was adopted to provide a level playing field for foreign banks operating in the United States.
- The standardized liquidity requirements for larger banks are at the higher end of the range that was proposed for both domestic and foreign banks.
Agencies update management interlock rules for community banks with less than $10 billion in total assets
On October 2, 2019, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency finalized updates to the rules restricting the ability of a director or other management official to serve at more than one depository institution or depository holding company. The updates respond to comments received during the recent Economic Growth and Regulatory Paperwork Reduction Act review and will provide relief for community banks. The final rule raises the asset thresholds that allow management officials working at a depository institution (DI) or holding company (HC) to work simultaneously at an unaffiliated depository organization (UDI) from $2.5 billion (DI or HC) and $1.5 billion (UDI) to $10 billion or less in total assets for each type of institution. Officials generally remain prohibited from serving with multiple depository organizations that are above the new $10 billion thresholds, limiting the potential risk of anticompetitive conduct at larger institutions.__________________________________________________________________________________________________________________________
Final Rule Increases Residential Appraisal Threshold Requirement
On September 27, 2019, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued a final rule to increase the threshold for appraisal requirements on residential real estate transactions from $250,000 to $400,000. The agencies determined that increasing the appraisal threshold would provide burden relief without posing a threat to the safety and soundness of financial institutions. The Consumer Financial Protection Board released its letter concurring with the agencies that the increased threshold provides reasonable protection for consumers who purchase 1–4 unit single-family residences.
Institutions still must obtain an evaluation with an estimate of the market value of real estate collateral. The final rule incorporates the appraisal exemption for rural residential properties provided by EGRRCPA.__________________________________________________________________________________________________________________________
Interagency Statement on Risk-Focused Approach to Bank Secrecy and Anti-Money Laundering Supervision
On July 22, 2019, an interagency working group, including the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the U.S. Treasury’s Financial Crimes Enforcement Network released a statement on their risk-focused approach to Bank Secrecy Act (BSA)/anti-money laundering (AML) supervision. The approach enables federal agencies to better tailor examination plans and procedures based on the unique risk profile of each bank. The joint statement outlines practices for assessing a bank's money laundering/terrorist financing risk profile, which assists examiners in scoping and planning the examination and in conducting the initial evaluation of the adequacy of a bank’s compliance program. This approach generally allocates more resources to higher-risk areas and fewer resources to lower-risk areas. The working group is focused on improving the effectiveness and efficiency of the BSA/AML regime.
The statement was distributed to institutions supervised by the Federal Reserve in Supervision and Regulation letter SR 19-11.__________________________________________________________________________________________________________________________
The Fed's Board of Governors Releases Its Supervision and Regulation Report
On May 10, the Board of Governors released its second semiannual Supervision and Regulation Report, which covers the Fed's efforts to tailor supervision and regulation according to the size and complexity of banking institutions.
The report includes an overview of
- trends in the banking sector
- regulatory policy work, including pending rules
- key supervisory approaches, findings, and priorities for each supervisory portfolio, including large financial institutions as well as regional and community banking organizations
Supervision and Regulation Reports are provided in conjunction with Vice Chair Randal Quarles's semiannual congressional testimony.
Information Provided on Risk-Focused Supervision Program
- The Board of Governors issued Supervision and Regulation letter SR 19-9, about the Bank Exams Tailored to Risk (BETR) program, on June 3. The letter describes a key aspect of the Federal Reserve's risk-focused supervision program for most community and regional state member banks (SMBs) with less than $100 billion in assets.
- BETR combines data-driven, forward-looking surveillance metrics with examiner judgment to classify the levels of risk at an SMB within individual risk dimensions. These dimensions include credit, liquidity, and operational risk. Examination work programs have been developed for each risk level to assess each risk dimension and align examination staff resources and activities more closely to a bank's risk profile and minimize regulatory burden for the bank.
- The letter includes a description of BETR's objectives, the surveillance metrics used to determine the scope of an examination, the risk-aligned examination work programs, and the implementation of BETR.