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Friday, November 21, 2014

Tarullo: Liquidity Supervision to Be ‘Context Dependent’

As the prudential regulators implement the Basel III liquidity coverage ratio and write a rule next year for Basel’s net stable funding ratio, they are working on a flexible supervisory approach to minimize strains during stressful periods, Federal Reserve Governor Daniel Tarullo said in a speech.

“It is clear that liquidity regulation has the potential to generate unintended effects,” he said, noting that the Basel liquidity buffers could prod banks to hoard liquid assets during a crunch rather than using it “to relieve the funding needs of households and other firms.”

Thus, supervisors will employ “context-dependent” remedies when bank liquidity falls below regulatory thresholds. Tarullo said:

A firm that falls out of compliance with the LCR or NSFR during a period of generalized stress should not be subject to automatic sanctions, but instead given an opportunity to come back into compliance in a way that does not expose either the firm or the system to greater stress.

He noted that the largest U.S. banks have increased their high-quality liquid assets by about one-third since 2012 while the use of short-term wholesale funding has “dropped considerably.” But he warned that if nonbanks increase their use of such funding, regulators may need to apply liquidity standards “on a market-wide basis.”

Read the speech.

The Week Ahead: November 24-28

  • Comments Due FCA/FDIC/FHFA/FRS/OCC: Proposal to Establish Swap Margin and Capital Requirements Read more.
  • Comments Due OCC/FRS/FDIC/FCA/FHFA: Swaps Rule: Read more.
  • Final Rule FDIC: Rescinds and amends FDIC rules concerning registration requirements for securities of State savings associations Read more.
  • Final Rule SEC: Asset-Backed Securities Disclosure and Registration Read more.
  • Final Rule FRS: Final amendments to capital plan and stress test rules Read more.

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

Fannie, Freddie Announce New Buyback Terms

Fannie Mae and Freddie Mac announced changes in the terms under which they would require mortgage loans to be bought back by the originator. The life-of-loan exclusions have been narrowed to give originators more predictability about whether they will be required to repurchase a loan. The new terms take effect immediately and apply retroactively to loans sold since Jan. 1, 2013, that have not been subject to a buyback.

In cases of misrepresentations, misstatements or omissions, the GSEs will determine whether the lender has made three or more loans to the GSE with a common pattern of activity and whether the misrepresentation is significant enough that the GSE would not have initially bought the loan. Only if all these conditions are met will the GSE require repurchase.

Likewise, in cases of inaccurate data, the GSEs will determine whether the inaccuracies affect at least five loans whose data differs from that in the lender’s files and whether the inaccuracy is significant enough. The GSEs may also reprice the loan based on more accurate information rather than require a buyback.

If Fannie and Freddie determine a lender failed to comply with relevant laws, they will seek repurchase only if the compliance failure impairs the GSEs’ ability to enforce the mortgage, results in liability for the GSE or violates consumer protection rules.

Lenders are generally protected from buybacks if the borrower stays current for the first three years of the loan — or for one year under certain refinance programs — and if the loan passes Fannie or Freddie’s quality review. Yesterday’s changes clarify exceptions to that rule that would expose banks to potential buybacks for a loan’s entire duration.

Read Fannie’s bulletin.
Read Freddie’s bulletin.

FDIC Issues Guidance on Deposit Insurance Applications

The FDIC issued question-and-answer guidance to banks applying for deposit insurance. The guidance applies both to de novo banks and to banks that seek to leave the Federal Reserve System or that convert from mutual to stock ownership via an interim savings association.

The Q&A document covers pre-filing meetings, application processing timelines, initial capitalization and business plans. The FDIC said that applications are generally acted on four to six months after complete submission and that initial capital raised for banks with a “traditional risk profile” should be sufficient to meet an 8% leverage ratio throughout the first three years of operation.

Read the FDIC’s policy statement on applications.
Read the Q&A guidance.

Keating: Congress Must Engage before Basel Negotiations

Given the massive U.S. economic effects of the international Basel Committee agreements, Congress must engage early on in the process, ABA President and CEO Frank Keating said in an op-ed for Investor’s Business Daily. Take as an example the Basel III capital standards, Keating said, in anticipation of which U.S. banks raised their capital levels to an all-time high of $1.7 trillion. He explained:

Every dollar in capital that is unnecessary for bank safety and soundness limits credit in communities across the country. Basel III is instructive as to how damaging international agreements can be without appropriate congressional scrutiny and public engagement before our regulators go to Switzerland to hammer out these agreements.

Specifically, Keating wrote, Congress should require U.S. regulators to disclose in advance what they are seeking to negotiate in Basel and request public feedback — which can help them better represent America’s thousands of hometown banks at the negotiating table. Keating added:

International agreements can play an important role in strengthening banks. But if we want them to work better, Congress must demand transparency from regulators. Anything less — no matter the good intentions of the Basel crowd — will not pass our democratic test.

Read the op-ed.

Cordray Discusses Consumer Protections in Payments

CFPB Director Richard Cordray urged banks and payments system administrators to prioritize consumer protection in the processing of payments through the Automated Clearing House and emerging payments platforms.

In a speech to the Clearing House in New York, Cordray highlighted unauthorized automated debits and uncertainty about when transactions will be credited or debited as particular challenges. He remarked:

We have seen good practices by some banks and credit unions that have developed screening mechanisms to detect abuse before authorizing charges. But more needs to be done.

In response, ABA VP Steve Kenneally commented:

ACH rules and the CFPB’s own Regulation E provide extensive protections against unauthorized transactions. A consumer who reports unauthorized ACH transactions within 60 days of receiving a statement has no liability.

Cordray also praised the Clearing House’s initiative to develop a real-time payments system. He cautioned that this system should allow faster access to deposited funds, real-time access to balance information and robust protections for unauthorized debits in order “to work for consumers as well as for financial institutions and their commercial clients.”

Read the speech.