IBA E-News 5-17-19
STATE GOVERNMENT RELATIONS
IBA Regional Meeting Dates
Don’t miss out on this summer’s IBA regional meetings! Make plans to join your banking peers and local lawmakers for lunch and conversation at one of eight regional meetings. The IBA is delighted to host this important grassroots advocacy series once again in the cities of Bloomington (July 31), Evansville (June 3), Fort Wayne (July 9), Indianapolis (July 10), West Lafayette (June 11), Merrillville (July 18), New Albany (July 29) and Richmond (June 19). For more information click here or contact Michelle Long at 317-333-7148.
FEDERAL GOVERNMENT RELATIONS
FASB Issues Limited CECL Transition Guidance
Responding to requests from certain specialty lenders, FASB Wednesday said it would allow such companies to avoid CECL by electing a “fair value option” for certain assets. The fair value option is normally allowed only at the time of acquisition and, thus, is generally unavailable for assets held prior to the effective date, which is January 1, 2020, for SEC registrants. Under the amendment, companies may now elect the fair value option for those loans.
FASB’s action is likely to have little impact on banks, as most lenders interested in the fair value option originate subprime loans with high loss expectations and are typically outside of the regulated banking industry.
Otting, McWilliams: Agencies Moving Toward More Risk-Based AML Approach
The federal banking agencies plan to reintroduce the examination manual for anti-money laundering/Bank Secrecy Act compliance later this year, Comptroller of the Currency Joseph Otting told the Senate Banking Committee Wednesday. The agencies are “looking to move toward a risk-based approach to that process,” he said.
FDIC Chairman Jelena McWilliams added that the agencies—which supervise and examine for BSA compliance but do not have rulemaking authority—are working closely with the Financial Crimes Enforcement Network to address changes to the BSA regulatory framework. “We get comments on these regulations from community banks,” she explained. “We hear them complain about how difficult it is to do what they need to do by cutting lawful access, but at the same time our hands are tied because we can’t amend the regulations. By bringing FinCEN to the table, we believe we can come to a better outcome soon.”
Regulators also addressed the Current Expected Credit Loss accounting standard, which Federal Reserve Vice Chairman for Supervision Randal Quarles said is “very much on our radar.” He noted the agencies’ phase-in period for CECL’s effects on regulatory capital. “If we see some of these adverse consequences that have been proposed, we have the tools to be able to address them by adjusting other aspects of the regulatory system to ensure it’s not a burden on the bank,” he added.
Senate Banking Committee Chairman Mike Crapo (R-Idaho) called on federal regulators to revisit the Community Bank Leverage Ratio, which implements exemptions from risk-based capital requirements.
Leading off a hearing featuring testimony from top regulators, Crapo noted that he and committee member Jerry Moran (R-Kan.) recently encouraged the agencies to set the CBLR at 8 percent, which would include roughly 600 highly capitalized community banks that would otherwise be ineligible for relief. Their letter also urged regulators to ensure the proposed Prompt Corrective Action framework does not deter community banks from using the CBLR.
To implement a provision of the S. 2155 regulatory relief law, the agencies are proposing a 9 percent leverage ratio that banks with less than $10 billion in assets must meet to be exempt from risk-based capital rules, including Basel III.
In prepared testimony, FDIC Chairman Jelena McWilliams said her agency is reviewing comments on the proposal, while Comptroller of the Currency Joseph Otting said the 9 percent ratio would include roughly 84 percent of insured banks under $10 billion in assets.
The hearing touched on various other current banking issues, including examiners’ use of guidance, Community Reinvestment Act and Bank Secrecy Act modernization, megabank leveraged loans, the BB&T-SunTrust merger, and more.
House Approves Six-Month NFIP Extension
With authorization for the National Flood Insurance Program set to expire at the end of the month, the House Tuesday night voted to reauthorize the program through Sept. 30, 2019.
Citing Economic Risk, Senators Call for CECL Delay, Study
Led by Sens. Thom Tillis (R-N.C.) and Doug Jones (D-Ala.), a bipartisan group of 15 senators wrote to the Federal Reserve and FDIC on Friday urging a delay in the implementation of the Current Expected Credit Loss model for loan loss accounting until after the agencies can study CECL’s economic effects. The senators highlighted concerns raised by some that CECL may reduce credit availability and exacerbate economic cycles, arguing that the “potential economic disruptions of the new standard mandate careful study before it goes into effect for any bank.”
“Bankers with deep knowledge of the local communities they serve should make lending decisions based on their judgments and supported by sound risk management practices,” the group of seven Republicans and eight Democrats wrote. “They should not be artificially constrained by sophisticated, yet imprecise, forward-looking models that cannot accurately predict the future.” The letter follows a similar bipartisan letter to the Securities and Exchange Commission from House members last week.
New Federal Housing Finance Agency Director Mark Calabria said he is working with the Treasury and Housing and Urban Development departments to develop concrete plans for Fannie Mae and Freddie Mac by mid-summer.
Speaking in Washington before the National Association of Realtors, Calabria said he is working to end the conservatorship of the government-sponsored enterprises by setting milestones for recapitalization and developing a robust post-conservatorship supervisory framework. President Trump is slated to address NAR on Friday.
Calabria was sworn in as FHFA director last month, citing a “sense of urgency” to address vulnerabilities in the housing-finance system. ICBA has met with Calabria several times prior to his nomination and continues calling on policymakers to end the net-worth sweep of Fannie and Freddie earnings and recapitalize the enterprises.
A move by the National Credit Union Administration to quadruple the appraisal threshold for nonresidential real estate loans could have broad-reaching consequences for the financial system, according to an op-ed by Appraisal Institute President Stephen Wagner published in American Banker last week. The op-ed came ahead of NCUA’s May 23 meeting, where the board is expected to consider the proposal increasing the threshold from $250,000 to $1 million.
Should the proposal be approved, two-thirds of commercial loans by credit unions would be exempt from the appraisal requirement, Wagner noted. He added that such an increase would put pressure on other financial regulatory agencies to reconsider their thresholds. “At that point, the NCUA—the agency with the least direct experience in overseeing business and commercial real estate lending—effectively would be driving the appraisal policies for the financial regulatory system.”
Read the op-ed.
Fed: Bank Capital ‘Well Above Regulatory Requirements’
The Federal Reserve on Friday released its second report on its regulatory and supervisory activities for banking companies. The report demonstrates the continued health and soundness of the banking industry. Figures in the report show that industry profitability ratios remain high, driven in part by the industry’s net interest margin reaching a six-year high.
Nonperforming loans reached a new 12-year low at roughly 1% by the end of 2018. While capital ratios edged down slightly at some large banks, driven in part by growth in total banking assets, the industry’s capital levels “remain well above regulatory requirements” and in line with post-crisis figures, the report noted. However, it showed that capital ratios climbed in 2018 for the 12 large firms in the Fed’s Large Institution Supervision Coordinating Committee portfolio, as well as for community banks.
The report also outlined 2019 supervisory priorities for firms in different Fed supervisory portfolios. For LISSC firms, the Fed is focusing on governance of capital planning, model sensitivity analysis, wholesale credit underwriting standards, risk exposure to nonbanks, cash flow forecasting, liquidity risk limits, intraday liquidity risk, operational resilience, business line management, board effectiveness and resolution planning. At other large U.S. and foreign banks, the focus will be on loss-estimation methodologies for real estate portfolios, liquidity buffers, contingency funding and AI for fraud and anti-money laundering, among other topics.
For regional and community banks, the Fed is looking at credit concentrations in CRE and construction, cybersecurity and AML/BSA compliance. At regional banks, the Fed will also focus on underwriting practices, M&A risks and internal audit; community banks will see focus on ag lending and liquidity risk.