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Agencies issue NPRM on incentive-based compensation
On May 6, the FDIC, OCC, NCUA and the FHFA issued a NPRM (proposed rule) on incentive-based compensation, pursuant to Dodd-Frank’s Section 956 (Section 956), which required federal regulators to prescribe regulations or guidelines regarding incentive-based compensation at covered financial institutions. Regulators first proposed a rule to implement Section 956 in 2011, and again in 2016. Now, regulators are reproposing the 2016 version without change, albeit with certain alternatives. The current proposal, however, will be published without involvement from the Fed or SEC.
Section 956 defined “covered financial institutions” as institutions with at least $1 billion in assets and include the following: depository institutions or depository institution holding companies, registered broker-dealers, credit unions, investment advisers, Fannie Mae, and Freddie Mac (or any other financial institution that federal regulators determined should be treated as a covered financial institution). Dodd-Frank required regulators to prohibit incentive-based compensation arrangements that encouraged “inappropriate risks.” The proposed rule included prohibitions intended to make these compensation arrangements more sensitive to risk, such as a ban on incentive-based compensation arrangements that do not include risk adjustment of awards, deferral of payments, or forfeiture and clawback provisions. In addition, the proposed rule set forth recordkeeping and disclosure requirements to help federal regulators monitor potential issues.
The agencies will review both new comments and those received in 2016 for the prior proposed rule. The agencies invited those who previously submitted comments and resubmit their comments to explain how their viewpoint may have changed from their prior comments. The agencies also requested comments on the compliance date and disclosures, like the recordkeeping and clawback requirements. Comments will be due no later than 60 days following publication in the Federal Register.
GAO calls for the FDIC to address outstanding recommendations
On April 30, GAO sent a letter to the FDIC on its outstanding recommendations, emphasizing the importance of two priority recommendations, which pertained to blockchain technology and fintech. Regarding blockchain technology, the letter stressed the need for the FDIC and other financial regulators to establish a formal mechanism to identify and address blockchain-related risks. Despite the regulator's coordination, the response to crypto-asset risks had been criticized as untimely. With respect to fintech, this recommendation would have the FDIC and relevant agencies clarify the appropriate use of alternative data in loan underwriting for banks that partner with fintech lenders. The letter also called for the FDIC's attention to additional high-risk areas, including IT management, human capital, federal real property, cybersecurity, and the personnel security clearance process.
Fed releases April SLOOS on bank lending practices from Q1 2024
On May 6, the Fed released its quarterly survey of the Senior Loan Officer Opinion Survey (SLOOS) on bank lending practices for the first quarter of the year which revealed tightened lending standards and a decrease in demand across loans. Regarding business lending, the survey asked banks about commercial and industrial lending (C&I) and commercial real estate lending (CRE). For C&I loans, banks reported stricter standards and a decline in demand from firms of all sizes. Banks reported tightening due to a less favorable economic outlook, reduced tolerance for risk, and a worsening of industry-specific problems. For CRE loans, banks reported a tightening of standards for all types of loans. A significant share of banks reported weaker demand for nonfarm nonresidential and multifamily residential lending. For household lending, banks also tightened residential real estate (RRE) loan standards, while demand for all RRE loan types declined. Home equity lines of credit also faced stricter standards. Banks also tightened consumer lending standards for credit card, auto, and other consumer loans. Demand for these loans decreased as well, with a significant drop in auto loan inquiries.
OCC and FDIC release CRA evaluations on 69 banks
On May 2, the OCC released its CRA performance evaluations for April and the FDIC released its evaluations for February. The OCC evaluated 13 national banks, federal savings associations, and insured federal branches of foreign banks. Of the 13 evaluations, most entities were rated “Satisfactory,” one entity was rated “Outstanding,” and one entity was rated as “Needs to Improve.” The FDIC released its May list of state nonmember banks of assigned CRA ratings in February. Out of 56 evaluations, two banks were rated “Outstanding,” 52 were rated as “Satisfactory,” one bank was rated as “Needs to Improve,” and one bank was rated as “Substantial Noncompliance.”
FDIC closes Philadelphia-based bank and receives it for another bank
On April 26, the FDIC announced that the Pennsylvania Department of Banking and Securities had closed a Philadelphia-based bank and appointed the FDIC as receiver, noting that this is the first bank to “fail” this year and the first closure of a bank since November 2023. The FDIC reported that as of the end of January, the closed bank had $6 billion in total assets and $4 billion in total deposits. The FDIC entered into an agreement with a different bank from Lancaster, Pennsylvania whereby that bank will assume substantially all deposits and assets of the closed bank. All 32 branches of the failed bank became branches of the assuming bank, and customers of the failed bank became customers of the assuming bank. The FDIC estimated that the bank failure will cost the Deposit Insurance Fund $667 million.
OIG releases CFPB and Fed list of open recommendations
On April 22, the OIG, which oversees the CFPB and the Fed, released two audit and evaluation reports that noted previously identified recommendations to improve or correct issues that remain open as of March 31, including some recommendations that have been open for more than six months. With respect to the CFPB, the OIG identified 18 recommendations that remain open; with respect to the Fed, the OIG identified 65 open recommendations. The open recommendations made to the CFPB stem from OIG reports on strengthening its offboarding process in 2018, auditing the Bureau’s information security program in 2018, 2022, and 2023, and technical testing results for the Bureau’s legal enclave in 2020. The open recommendations to the Fed stem from OIG reports relating to, among others (i) information security; (ii) cybersecurity; (iii) security control of the Fed’s public website; (iv) the Fed’s Financial Market Utility Supervision Program; and (v) enterprise risk management. Notably, a small subset of the recommendations that remain open are nonpublic.
OCC releases enforcement actions for April 2024
On April 18, the OCC released a list of recent enforcement actions against national banks, federal savings associations, and individuals affiliated with such entities (defined as institution-affiliated parties, or IAPs). The actions against banks include two formal agreements and one cease and desist order against three individual banks. In each instance, the OCC alleged that the banks engaged in unsafe or unsound practices related to some combination of board oversight, liquidity management, capital requirements, or credit risk. With respect to IAPs, the announcement included four enforcement actions against IAPs to “deter, encourage correction, or prevent violations, unsafe or unsound practices, or breaches of fiduciary duty,” The OCC issued prohibition orders, which prohibit the IAP from any participation in affairs of a bank or other institution), for all four IAPs and assessed civil money penalties ranging from $40,000 to $400,000 against three of them. The announcement also included two more prohibition orders against two additional IAPs for criminal activities. More information on the OCC’s enforcement action types can be found here.
Fed’s Bowman discusses risk management and bank supervision
On April 18, Fed governor Michelle Bowman delivered opening remarks at the Regional and Community Banking Conference in New York. During her speech, Bowman acknowledged the recent challenges that have impacted the U.S. banking system. She pointed out that recent events, including the pandemic, a rapid rise in inflation and interest rates, market uncertainties, and bank failures, have brought traditional risks, such as liquidity and interest rate risks, to the forefront, while other risks, like cybersecurity and third-party risks, “continue to evolve and pose new challenges.”
Bowman emphasized the importance of banks having robust risk management frameworks to identify and control both existing and emerging risks. She also stressed the need for banks to innovate responsibly and adapt their risk management as new products and services are introduced, while cautioning that regulators must balance supervision and regulation so as not to stifle responsible innovation. In light of the recent bank failures, Bowman also underscored the need for banks to have of contingency funding plans in place, which may include borrowing from the Federal Home Loan Banks or the Fed’s discount window. While regulators can encourage banks to maintain and test these plans, she noted that they should not overstep their role and interfere with management decisions.
Highlighting that these evolving risks can be exacerbated by inadequate bank supervision and acknowledging the need for a review and potential adjustments in supervision following the recent bank failures, Bowman stressed that supervision should remain commensurate to a bank’s size, complexity, and risk profile, and should focus on core and emerging risks so as not to impair the long-term viability of the banking system, including mid-sized and smaller banks.
OCC seeks input on LCR and NSFR reporting and recordkeeping requirements
On April 16, the OCC released a request for comment on proposed revisions to its “Reporting and Recordkeeping Requirements Associated with Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and Monitoring” to account for three new recordkeeping requirements to be included in 12 CFR part 50, which applies to large national banks and Federal savings associations. The notice outlined steps that such institutions should take to ensure they properly document compliance with the “liquidity coverage ratio” (LCR), which is designed to “promote the short-term resilience” of a bank’s liquidity risk profile, and the “net stable funding ratio” (NSFR), which is designed to reduce disruptions to a bank’s funding sources. The revised reporting obligations require covered institutions to self-report when LCR falls below the minimum threshold or when there is an NSFR shortfall and, in some cases, to submit a liquidity or remediation plan, including estimated time frame for resuming compliance with LCR or NSFR requirements. The recordkeeping revisions require covered entities to, among other things, establish and maintain written policies and procedures for a number of processes, including monitoring changes in relevant laws related to master netting agreements, determine the composition of its eligible high-quality liquid assets (HQLA), and ensure consistent treatment for determining eligible HQLA. Comments must be received by June 17.
OCC’s Hsu discusses creating economic opportunity for “new Americans”
On April 10, Acting Comptroller of the Currency, Michael J. Hsu, delivered prepared remarks, during a public meeting of the Financial Literacy and Education Commission (FLEC). During his remarks, Hsu underscored the significance of financial literacy and inclusion for “new Americans,” drawing from his own experience as a child of immigrants. Acknowledging the substantial contributions of immigrant communities to the U.S. economy, including through entrepreneurship and innovation, Hsu urged financial institutions to support a system that is inclusive and equitable. Hsu called for banks to expand services offered in languages other than English and to explore innovative means of accepting diverse forms of identification within the regulatory framework to facilitate greater access to financial services for foreign-born individuals who are more likely to be unbanked. The speech also highlighted the need for mortgage financing options that cater to the unique requirements of immigrant populations, including extending access to credit for individuals without traditional credit scores. Hsu specifically emphasized special purpose credit programs and community partnerships as a means to extend credit to new Americans. Hsu concluded by pointing to the OCC's resources aimed at bolstering the efforts of banks and their community partners in enhancing financial capability among immigrant populations.