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Friday, June 24, 2016

ABA Calls for Simplified Capital, Liquidity Standards

Testifying before the Senate Banking Committee, ABA EVP Wayne Abernathy made the case for reducing the complexity of capital and liquidity rules, which he said would not only enhance bank supervision and management, but benefit bank customers.

Abernathy said,
There are ways to reduce complexity for banks and supervisors that will result in improved application of the regulatory principles involved. We need to begin that conversation. If not, we may find ourselves with a regulatory program that in practice is too complex to realize the supervisory success to which we all aspire.

Over the past several years, new prudential regulations have required banks to keep a higher level of capital in reserve, which Abernathy pointed out leaves banks with less available money to meet the needs of their customers. Abernathy said,
While adequate capital allows a bank to expand its activities, excessive capital requirements mean pulling even more money out of circulation to provide the same amount of financial services.

With the nation’s largest banks tracking more than a dozen different capital requirements, Abernathy questioned whether all capital measures have equal supervisory value, and suggested that if not, regulators might improve efficiency by focusing on those measures that provide the most value to prudential supervision.

Specifically, ABA recommended that regulators recognize highly capitalized banks as already meeting Basel III capital standards without having to go through the complex Basel III calculations; involve the public, Congress and affected industries through the publication of an advanced notice of proposed rulemaking before starting international negotiations on financial standards; withdraw the proposed rules implementing the Basel NSFR liquidity regime; and, with respect to the treatment of trust preferred securities under Basel capital rules, hold existing TruPS issuances and investments harmless, which was Congress’ intent in the Dodd-Frank Act.

Read Abernathy's testimony.

The Week Ahead: June 27 - July 1

  • Comments Due OCC: Reduction of Permanent Capital Notice (PRA) Read more.
  • Comments Due FDIC/OCC/FRB: Correction for Regulatory Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework Read more.
  • Comments Due FDIC: Recordkeeping for Timely Deposit Insurance Determination Read more.
  • Comments Due OCC: Disclosure of Financial and Other Information by National Banks (PRA) Read more.
  • Comments Due OCC: Funding and Liquidity Risk Management (PRA) Read more.
  • Comments Due OCC: Interagency Guidance on Asset Securitization Activities (PRA) Read more.
  • Comments Due OCC: Reduction of Permanent Capital Notice (PRA) Read more.
  • Meeting CFTC: Market Risk Advisory Committee Read more.
  • Effective Date FRB: Liquidity Coverage Ratio: Treatment of U.S. Municipal Securities as High-Quality Liquid Assets Read more.

All times in Eastern Standard Time. See future events on the  Dodd-Frank Calendar.

Large Banks Improve Dodd-Frank Stress Test Results

The largest U.S. banks collectively showed that they can withstand a severe economic downturn and continued to improve their capital positions, according to the results of Dodd-Frank Act-mandated stress tests the Federal Reserve released.

Aggregate Tier 1 capital ratios at the 33 firms subjected to the Fed’s stress-test program would fall from an actual 12.3% in the third quarter of 2015 to the minimum level of 8.4% under the test’s most extreme hypothetical scenario – including, among other things, a spike in unemployment, a 25% decline in home prices and a 50% drop in equity prices.

Even with the hypothetical declines, capital levels at the banks would still be much higher than they were following the 2008 financial crisis, when Tier 1 capital ratios for the firms fell to about 5.5% at the end of that year.

ABA President and CEO Rob Nichols said:
The tremendous effort banks have made to build capital and liquidity has allowed them to perform strongly even under scenarios that are unrealistically severe. Fortunately, banks and regulators are continuing to learn how to make the stress test process more valuable as a forward-looking and flexible supervisory and management tool. This process would benefit even more from increased transparency, as well as involving the public in discussion about how the scenarios are developed and how the tests are administered.

View the stress test methodology and results.

ABA Issues Staff Analysis of CFPB Proposal on Small-Dollar Credit

ABA has issued a staff analysis of the CFPB’s recently proposed rule on small dollar lending. The proposed rule would sharply curtail short-term, small-dollar consumer loans by defining loans as “abusive and unfair” if lenders fail to reasonably determine borrowers’ ability to repay the loan or satisfy an exception.

To demonstrate ability to repay, lenders would be required to verify income, customer debt obligations and housing costs; forecast basic living expenses; and project customers’ income, obligations and expenses over the term of the loan. The proposed rule would also impose limits on re-borrowing.

ABA intends to comment on the proposed rule and is seeking bankers to join its Small Dollar Lending Working Group to provide feedback. Comments are due by Sept. 14.

Read the staff analysis.

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Curry: OCC Committed to Responsible Innovation

Comptroller of the Currency Thomas Curry reaffirmed his agency’s commitment to promoting responsible innovation within the financial industry in a speech at the OCC’s Responsible Innovation Forum in Washington. Curry said that innovation that helps better meet the needs of consumers – whether by banks, fintech firms or partnerships between the two – strengthens the industry as a whole.

Curry said,
At its simplest, a responsible innovation is one that meets the changing needs of consumers, businesses, and communities; is consistent with sound risk management; and aligns with the company’s business strategy. Responsible innovation within the federal banking system helps institutions achieve their public purpose without compromising their safety or soundness, and supports their long term business goals.

During a question and answer session following his speech, Curry said that he sees the need for a “regulatory sandbox” -- that is, “a place for the regulated institutions and fintech firms to have a conversation about what the rules of the road are.” He added that the OCC is carefully considering the potential implications of a limited purpose charter option for fintech firms, after increasing calls from technology companies across the industry. “Our concern is to make sure that consumers are not disadvantaged,” Curry said. “In terms of the potential for chartering limited purpose firms, that’s something that presents legal and policy issues that we are trying to address during this process.”

Curry added that “there is a real opportunity for fintech to close the gap in terms of the unbanked and the underbanked,” since many unbanked or underbanked consumers have access to mobile phones. “The ability to cheaply provide essential banking services is an area where fintech can play a positive role,” Curry said.

Read the speech.

Thursday, June 23, 2016

CFPB Servicing Exams to Emphasize Borrower Requests, Discrimination

The CFPB issued updated exam procedures for its mortgage servicing rules, based on the agency’s experience in the two and a half years since the rules took effect in January 2014. The bureau noted that servicers should expect a “greater emphasis” from bureau examiners on how they handle complaints from borrowers and requests from troubled borrowers, as well as discrimination issues.

Examiners will review “whether the servicer has an adequate process for expedited evaluation of complaints or information requests from borrowers facing foreclosure,” the CFPB said, adding that an appropriate complaint escalation process is “essential” to a compliance management system. Meanwhile, the bureau said
the CFPB is conducting targeted reviews of mortgage servicers’ compliance with fair lending laws. This includes looking at those servicers that are creditors, such as those that participate in a credit decision about whether to approve a mortgage loan modification.

The bureau also released a special edition of its Supervisory Highlights publication focused on servicing. It noted multiple instances where borrowers received late or incorrect information about loan modifications due to technological breakdowns and where borrowers faced runarounds following servicing transfers between companies with incompatible computer systems.

View the updated exam procedures.
Read Supervisory Highlights.