9 big items on regulators’ to-do list (including CRA reform)

November 25, 2019 9:30 PM

WASHINGTON — The federal bank regulators are trying to close out 2019 with a bang.

With about a month left until the new year, a proposal to reform the Community Reinvestment Act could be just one piece of a busy rulemaking agenda, according to an administration document predicting regulatory developments.

The fall 2019 unified agenda of regulatory actions, published by the Office of Management and Budget, mentions not only an upcoming proposal to reform CRA policy but also actions on a Federal Reserve capital measure, the Volcker Rule and brokered deposits as items in the docket for the remainder of this year.

Although the unified agenda is typically more reminiscent of goalposts that agencies might hope to meet, as opposed to concrete deadlines, it provides key insight into what the banking regulators are prioritizing going into 2020 and beyond.

That could include finalizing long-standing proposals left over from the Obama administration, wrapping up current rulemakings or issuing entirely new proposals.

Here’s what might be in store over the next several months.

Community Reinvestment Act modernization

Comptroller of the Currency Joseph Otting speaks to attendees of a bus tour organized to highlight Community Reinvestment Act supported projects in the Jamaica, Queens neighborhood of Queens, NY, U.S., on Wednesday August 21, 2019. The tour highlighted challenges in low to moderate income neighborhoods for bankers, activists, and non profit workers. Photograph: Victor J. Blue

Victor J. Blue/Bloomberg

Speculation continues to build that the Office of the Comptroller of the Currency — either with agreement from the Fed and Federal Deposit Insurance Corp. or on its own — will move ahead with a CRA reform proposal.

The OMB report predicted action in December while an article by Politico on Monday was more precise, saying the plan will come out Dec. 12 or Dec. 13.

The regulators have expressed publicly their interest in revamping the 40-year-old law that grades banks on their loans to the communities they serve, with Comptroller of the Currency Joseph Otting being the most vocal advocate of reform. The OCC collected public feedback on possible changes to CRA last year, but since then, it has been unclear if the agencies would move together or not on a proposal.

Last month, FDIC Chairman Jelena McWilliams said that while her hope is that the regulators issue a joint proposal, the possibility that agencies might move independently of one another is still on the table. Since then, a picture has emerged that the OCC and FDIC are ready to move together, but without the Fed on board.

"Between the OCC and the FDIC, we control about 85% of the CRA," Otting said in a speech last week.

Stress capital buffer

Randal Quarles, vice chairman of supervision at the U.S. Federal Reserve, listens during a House Financial Services Committee hearing in Washington, D.C., U.S., on Thursday, May 16, 2019. A top Democratic lawmaker yesterday questioned whether the Federal Reserve Vice Chairman can be trusted when he says leveraged lending isn't a current threat to the financial system, pointing to his failure to foresee similar dangers before the credit crisis a decade earlier. Photographer: Anna Moneymaker/Bloomberg

Anna Moneymaker/Bloomberg

The Trump administration anticipates that the Fed will take further action in December on a 2018 proposal to implement a “stress capital buffer” with the aim of simplifying and modernizing the stress testing program for banks with more than $50 billion of assets.

The proposal would merge the Fed’s capital rule and stress test rules to simplify the overall capital requirements, and would use the agency’s supervisory stress test to determine the size of a bank’s stress capital buffer requirement and stress leverage buffer requirement.

When the Fed proposed the new framework in 2018, it said that banks with $50 billion of assets were currently subject to 24 different post-stress minimum capital standards, implementing the stress capital buffer would reduce the total number to 14.

In a speech in September, Fed Vice Chairman for Supervision Randal Quarles laid out two options that he said would improve the proposed stress capital buffer, suggesting that the final plan could either raise the minimum level of the SCB or raise the Fed’s countercyclical capital buffer, or CCyB, above zero “in normal times.”

Net stable funding ratio

Federal Reserve Board Chairman Jerome Powell

Banks may have to wait until 2020 for long-awaited action on the net stable funding ratio — an agenda item left over from former Fed Chair Janet Yellen’s tenure.

The NSFR governs long-term bank liquidity and, as proposed in 2016, would mandate that systemically significant banks hold enough debt and liquid assets to keep the firms’ operations afloat for at least a year. The NSFR is in line with Basel Committee standards.

At a press conference in September, Fed Chair Jerome Powell said that the agency is looking at finalizing the NSFR in “the relatively near future.”

Banks have been opposed to the NSFR, largely because investment banks and their brokerages have historically depended on wholesale funding, which would be penalized in the proposed NSFR.

Enhanced cyber risk management standards

The consent order between the Federal Reserve and Capital One required the bank to submit progress reports on its efforts to improve its risk management functions.

Michael Nagle/Bloomberg

According to the OMB report, the three bank regulatory agencies may take action to establish enhanced cyber risk management standards for large institutions, as well as those institutions’ service providers.

Enhanced standards would “increase the operational resilience of these entities and reduce the impact on the financial system in case of a cyber event experienced at one of these entities,” according to the agencies' 2016 advance notice of proposed rulemaking.

The administration agenda said further action could come in March 2020.

The agencies had asked the public for feedback on enforcing the proposed standards through a tiered system, with the strictest rules reserved for the institutions that are most critical to the function of the financial system.

The agencies' potential work on a cyber risk framework comes amid periodic reports of more data breaches by large business. Capital One said in July that the data of 100 million customers was illegally accessed, possibly via a misconfigured firewall.

Volcker Rule's "covered fund" definition

The Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S., on Monday, April 8, 2019. The Federal Reserve Board today is considering new rules governing the oversight of foreign banks. Chairman Jerome Powell said the Fed wants foreign lenders treated similarly to U.S. banks. Photographer: Andrew Harrer/Bloomberg

Andrew Harrer/Bloomberg

Although the banking regulators approved changes to the Volcker Rule in August, they left the definition of a “covered fund” under the proprietary trading ban untouched for now, and said they would address it in an upcoming proposal.

That upcoming joint proposal could see the light of day in December, according to the unified agenda, and may also address “certain other matters.”

The original 2013 Volcker Rule limited bank stakes in private equity and hedge funds to prevent the type of short-term risky bets that helped precipitate the financial crisis. However, banks have long argued that the restriction is too broad and confusing and can unnecessarily capture investment activities that lawmakers didn’t intend to prohibit in the original law.

Receiverships of uninsured federal branches and agencies

The Office of the Comptroller of the Currency contends that Industry Bancshares is "in troubled condition," citing outsized vulnerabilities to changes in interest rates and the company's reliance on "funding sources that may not be available in the event of further financial stress."

Andrew Harrer/Bloomberg

The OCC may issue an advance notice of proposed rulemaking in November ahead of an eventual proposal to develop a framework for the receivership of uninsured federal branches and agencies.

In 2016, under former Comptroller of the Currency Thomas Curry, the agency released a plan that would enable it to put uninsured financial institutions — which could include fintechs — into receivership if they were to fail. That proposal would have applied to 52 trust banks.

Some suggested that if the proposal were to be enacted, the OCC could begin regulating non-depository financial institutions without those institutions having to obtain permission from the FDIC. However, the proposal was never finalized.

Brokered deposits

Jelena McWilliams, chairman of the Federal Deposit Insurance Corporation (FDIC), listens during a Financial Stability Oversight Council (FSOC) meeting at the U.S. Treasury in Washington, D.C., U.S., on Wednesday, Dec. 19, 2018. When Treasury Secretary Steven Mnuchin fingered high-frequency trading and the Volcker Rule as factors behind recent misery in the stock market he left out some other possibilities that might be contributing. Namely, the White Houses's ongoing trade conflict with China and President Donald Trump's threat last week to shut down the government. Photographer: Al Drago/Bloomberg

Al Drago/Bloomberg

The FDIC's McWilliams has indicated the agency plans to finish its brokered deposits proposal by the end of the year, which was backed up by the OMB document.

The banking industry has long urged the agency to update its definitions of brokered funds to correspond with changes in online banking. The FDIC has historically viewed brokered deposits warily, since they can move quickly between institutions and hurt a bank’s franchise value in a failure resolution, and in some cases fueled unsustainable growth leading up to the 2008 mortgage crisis.

But financial institutions argue the definition is too broad. Banks considered less than well-capitalized are restricted from accepting brokered deposits.

The FDIC released an advance notice of proposed rulemaking in February on the issue. In September, the agency proposed revisions to how the FDIC sets interest-rate caps on normal deposits for less than well-capitalized banks.

CFPB could address payday lending, HMDA reporting

A man exits the Consumer Financial Protection Bureau (CFPB) headquarters in Washington, D.C., U.S., on Tuesday, March 5, 2019. House Financial Services Committee Chair Maxine Waters will hold a hearing this week on the semi-annual review of the CFPB. Photographer: Andrew Harrer/Bloomberg

Andrew Harrer/Bloomberg

The agenda echoes a recent report by the Consumer Financial Protection Bureau on its upcoming rulemaking docket, including an expected final rule on payday lending by April 2020. The agency proposed in February to eliminate mandatory underwriting requirements for payday lenders that had been imposed in 2017.

The OMB report also predicts a CFPB proposal by next summer to ease Home Mortgage Disclosure Act reporting requirements that had been expanded during the Obama administration. The rulemaking agenda notes that the consumer bureau could at the same time release a notice of proposed rulemaking dealing with the public disclosure of HMDA data.