FDIC issues reg relief proposals tied to custodial funds, deposit records

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WASHINGTON — The Federal Deposit Insurance Corp. board on Friday issued, amid some dissension, several proposals meant to provide regulatory relief from laws written after the financial crisis.

One of the main proposals would exclude certain large banks from having to set aside capital for custodial funds under the supplementary leverage ratio, a change that Congress required when it passed a larger regulatory relief package in May 2018. The other two proposals relate to how banks keep track of deposit insurance coverage in the event of a failure.

Former FDIC Chairman Martin Gruenberg — who still sits on the board, and oversaw implementation of the post-crisis rules at issue when he was chairman — raised concerns about the custody-related proposal. Though he voted for the change to the supplementary leverage ratio, he cautioned against providing any capital relief to globally systemically important banks.

“Preemptively weakening leverage capital requirements applicable to the custodial banks ... unnecessarily places financial stability and the Deposit Insurance Fund at risk,” Gruenberg said before the votes. “For these reasons, I had strong reservations about this provision prior to its enactment into law, and I felt obliged to reiterate them today. Given that the proposed rule appears to implement the law consistent with the law’s clear language, I am prepared to vote for the proposed rule.”

The plan would exclude certain custodial banks from having to set aside capital for those custodial funds. Proponents of the change say these funds are less risky compared with other leverage exposures because they are held at the Federal Reserve or foreign central banks.

Such custodial “deposits are especially low-risk, and, as explained in the proposal, tend to increase during times of market stress,” FDIC Chairman Jelena McWilliams said during the board meeting. “While maintaining robust capital requirements is a key priority of mine, this proposal recognizes the distinctive activities of custodial banks.”

The industry largely favors the proposed exemption but maintains that it should be extended to all banks. Under the current proposal, JPMorgan Chase and Citigroup would not meet the requirements for the exemption, which are tied to the relative size of banks' custody holdings; those two banks would still have to keep setting aside capital for such deposits.

“We appreciate today’s decision by regulators to implement this provision included in the bipartisan regulatory reform legislation Congress approved last year,” said Wayne Abernathy, executive vice president of financial institutions policy and regulatory affairs at the American Bankers Association.

“This proposal acknowledges that low-risk central bank deposits should be excluded from the supplementary leverage ratio for custodial banks,” he added. “Going forward, ABA believes this exclusion should apply to all banks.”

Even though Gruenberg disagreed with the exemption, he ultimately voted for the proposal because Congress required it. However, he voted against one of two proposals related to banks recording deposit insurance to help regulators when banks fail.

One involves a rule that the FDIC finalized in December 2016 requiring large banks to keep track of deposits that qualify for FDIC insurance, which would help in paying out to depositors of a failed bank.

Thirty-six banks must comply with the rule, according to the FDIC, but bankers say there are parts of the recordkeeping that have become complex. The FDIC board responded by issuing a notice of proposed rulemaking Friday aimed at clarifying the requirements; it would also provide a one-year compliance extension for institutions with more than 2 million deposit accounts.

Gruenberg voted against the proposal, saying the current rule already gave banks enough time to comply.

“While I recognize the significant operational challenges associated with compliance with this rule, I believe a three-year compliance period for covered institutions is more than sufficient,” he said. “In addition, we are in the tenth year of an economic expansion that will soon be the longest expansion on record in July. If a large bank should get into difficulty during the next economic downturn, the ability to make timely deposit insurance determinations will be essential to an orderly resolution.”

The other proposal would provide some relief for banks that must get a written signature card, often called a “wet signature,” in order to insure funds that are in a joint account as separate from individually owned accounts. This proposal, which applies to all insured institutions, is partly meant to respond to advancements in technology as banks are accepting more e-signatures. This proposal was passed unanimously by the board.

“The FDIC does not specify that the signature card be in any particular format, and has allowed [insured institutions] to satisfy the requirement through various forms of documentation,” McWilliams said before voting for the proposals. “To give an example, the requirement could be satisfied by evidence that an [insured institution] has issued a debit card to each co-owner of the account.”

Both proposals related to deposit insurance will be open for public comment for 30 days once published in the Federal Register.

The comment period will be 60 days for the proposal tied to custodial funds.

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