Headlines
- Federal Banking Agencies Adopt Simplified Capital Calculation for Community Banks
- Federal Court Ruling Bars OCC from Accepting Fintech Charter Applications
- FASB Delays Implementation of CECL for Certain Small Institutions and Others
- OCC Amends OREO Property Rules for National Banks and Federal Savings Associations
- Other Developments: BSA/AML, Volcker Rule and Management Interlocks
1. Federal Banking Agencies Adopt Simplified Capital Calculation for Community Banks
The federal banking agencies have issued a final rule that will simplify capital requirements for community banks by allowing them to adopt a single leverage ratio to measure capital adequacy: the community bank leverage ratio. The final community bank leverage ratio framework released on October 29 removes requirements for calculating and reporting risk-based capital ratios for a qualifying community banking organization that opts into the framework. To qualify for the community bank leverage ratio framework, a depository institution or holding company must have less than $10 billion in total consolidated assets, limited amounts of off-balance-sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9%. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the risk-based and leverage capital requirements in the agencies’ generally applicable capital rules. The agencies have also published a compliance guide to help community banking organizations understand the optional community bank leverage ratio framework. The final rule will become effective on January 1, 2020. Click here for a copy of the final rule and here for a copy of the community bank compliance guide.
Nutter Notes: The final rule implements Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which required the federal banking agencies to develop a community bank leverage ratio for qualifying community banking organizations of not less than 8% and not more than 10%. In response to public comments, the final rule differs from the November 2018 proposal by using tier 1 capital as the numerator to simplify the calculation of the community bank leverage ratio rather than the previously proposed new measure of capital, tangible equity. In addition, a bank that elects to use the community bank leverage ratio framework and later falls out of compliance with the framework will have a two-quarter grace period to come back into compliance, provided that its leverage ratio remains above 8%. The bank will be deemed well-capitalized during the grace period under the final rule. The final rule also removes the qualifying criteria for mortgage servicing assets and deferred tax assets arising from temporary differences, and the prompt corrective action proxy levels that were included in the previously proposed rule. The community bank leverage ratio framework will first be available for banking organizations to use in their March 31, 2020, Call Report or Form FR Y-9C, as applicable. Banking organizations can opt into or out of the community bank leverage ratio framework in a subsequent Call Report or Form FR Y-9C, as applicable.
2. Federal Court Ruling Bars OCC from Accepting Fintech Charter Applications
A U.S. District Court has issued a final decision barring the OCC from accepting all applications for special purpose national bank charters from financial technology (“fintech”) companies that are engaged in the business of banking but do not take deposits. The court’s October 21 ruling comes in the challenge by the New York State Department of Financial Services (“NYDFS”) to the OCC’s statutory authority to grant special purpose national bank charters to fintechs. Previously, in a May 2, 2019 ruling on the OCC’s Motion to Dismiss, the court found that the NYDFS’s challenge was ripe and also found that the NYDFS’s arguments that the OCC exceeded its authority under the National Bank Act had merit. The court’s final decision rejected the OCC’s request to limit the order to applications from the State of New York. The nationwide ruling effectively nullifies the outcome of a federal court decision in D.C. last month that agreed with the OCC that the issues here are not yet ripe to be entertained by the courts. The OCC is expected to appeal the court’s decision. Click here for a copy of the court’s decision.
Nutter Notes: The decision creates uncertainty over the future of the OCC’s fintech charter framework, which will not be resolved until appeals to the U.S. Court of Appeals for the Second Circuit, and possibly the U.S. Supreme Court, are resolved. Until then, a fintech’s options for a federal charter are limited to seeking a full-service bank charter or an FDIC-insured Utah industrial loan company charter depending on, among other factors, the nature of the fintech’s business activities. Another option is to remain state regulated on a state-by-state basis under multiple types of financial services licenses and statutory regimes. However, without a bank charter and a Federal Reserve account, fintechs typically cannot directly access electronic payments networks, such as the Automated Clearing House network or the Fedwire Funds Service.
3. FASB Delays Implementation of CECL for Certain Small Institutions and Others
The Financial Accounting Standards Board (“FASB”) has voted to delay the implementation of its credit losses accounting standard, which introduces the current expected credit losses (“CECL”) accounting methodology for certain institutions, including certain banking organizations. The delay approved by FASB on October 16 applies to small reporting companies (as defined by the SEC), non-SEC public companies, and private companies, and pushes the implementation date back from January 2021 to January 2023 for these companies. In addition, the federal financial regulatory agencies have requested comment on a proposed Interagency Policy Statement on Allowances for Credit Losses. According to the agencies, the proposed policy statement released on October 17 is intended to promote consistency in the interpretation and application of FASB’s credit losses accounting standard and the CECL methodology. Public comments on the proposed policy statement are due by December 16, 2019. Click here for a copy of the proposed policy statement.
Nutter Notes: The proposed interagency policy statement describes the measurement of expected credit losses using the CECL methodology and updates concepts and practices detailed in existing supervisory guidance that remain applicable. The policy statement also describes the accounting for impairment on available-for-sale debt securities in accordance with FASB ASC Topic 326, supervisory expectations for designing, documenting, and validating expected credit loss estimation processes, including the internal controls over these processes, and maintaining appropriate allowances for credit losses. The policy statement also clarifies supervisory expectations for the responsibilities of boards of directors for overseeing management’s processes for assessing and reporting allowances for credit losses. The CECL methodology will become effective for most public (i.e., SEC-reporting) financial institutions beginning in 2020. The proposed interagency policy statement would apply at the time of each institution’s adoption of the credit losses accounting standard.
4. OCC Amends OREO Property Rules for National Banks and Federal Savings Associations
The OCC has issued final amendments to its rule governing other real estate owned (“OREO”) to clarify and streamline requirements for national banks and update the regulatory framework for OREO activities at federal savings associations. Under the amended rule released on October 22, the OCC is adding flexibility for national banks and federal savings associations to dispose of OREO property. The disposal methods permitted under the current rule allow for the disposal of OREO property by sale of the property outright or over a period of time, using the property as bank premises or affiliate premises, or entering into subleases of OREO leases. The amended rule provides that OREO may be disposed of in other ways approved by the OCC consistent with safe and sound banking practices. For example, the OCC previously has approved national banks and federal savings associations to dispose of OREO property in certain circumstances by donating or escheating the property or by negotiating early terminations of OREO leases. The amended rule also recognizes that, unlike a national bank, a federal savings association also may transfer OREO property to a service corporation subsidiary. The final amendments to the OREO rule become effective on December 1. Click here for a copy of the final amendments to the rule.
Nutter Notes: Federal savings associations, unlike national banks, are not subject to statutory provisions governing the disposal of OREO property. While capital regulations and handbooks formerly issued by the OTS generally established requirements and supervisory expectations for OREO activities, the OCC rescinded many of those publications. The amended OREO rule adopts a framework for federal savings associations that generally is consistent with the OTS’s previous OREO framework. For example, during the initial five-year holding period for any OREO property (and any subsequently approved holding period), a federal savings association would be required to make reasonable efforts to dispose of the OREO property under the amended OREO rule. This is consistent with prior OTS expectations. Also consistent with the previous OTS framework, the amended OREO rule will require federal savings associations to deduct from regulatory capital the value of OREO held for more than five years, or a longer period with OCC approval, as an equity investment. According to the OCC, this provision creates incentives for federal savings associations to dispose of OREO within five years, or such longer period as may be approved by the OCC.
5. Other Developments: BSA/AML, Volcker Rule and Management Interlocks
- BSA/AML Bill Would Create a National Beneficial Ownership Registry
The U.S. House of Representatives voted on October 22 to approve H.R. 2513, the Corporate Transparency Act of 2019, which would amend the Bank Secrecy Act to require certain new and existing corporations and limited liability companies to file beneficial ownership information with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). The bill would also require that such beneficial ownership information be updated regularly, and would direct FinCEN to establish a national database for beneficial ownership information that would be available to insured depository institutions. Click here for a copy of the bill.
Nutter Notes: The bill would require existing corporations and limited liability companies to file beneficial ownership information with FinCEN within two years after the implementation of the effective date of the implementing regulations required under the bill. Certain public companies and financial institutions already subject to beneficial ownership reporting requirements would be exempt from the new reporting requirements under the bill. The bill would impose civil and criminal penalties for providing false or fraudulent beneficial ownership information or for willfully failing to provide complete or updated beneficial ownership information. The bill has been sent to the Senate for consideration and has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.
- Federal Agencies Approve Changes to Volcker Rule and Management Interlocks Rule
The federal financial regulatory agencies have adopted final rules to simplify compliance requirements under the so-called Volcker Rule and to raise the asset thresholds that trigger restrictions under the rules governing management interlocks. We first reported on the final rule amending the Volcker Rule to tailor compliance requirements based on the size of an organization’s trading assets and liabilities in the August edition of the Nutter Bank Report when only the FDIC and OCC had approved the final rule. The agencies announced on October 8 that the Fed, the SEC and the CFTC have approved the final rule, and that the amendments to the Volcker Rule will become effective on January 1, 2020, with a compliance date of January 1, 2021. Click here for a copy of the final rule.
Nutter Notes: We also reported on a final rule that will raise the asset threshold at which directors or other management officials of a bank or holding company are prohibited from serving at more than one bank or holding company in the August edition of the Nutter Bank Report when only the FDIC had approved the change. Federal law prohibits a management official of a bank or holding company with total assets exceeding $2.5 billion from also serving as a management official of an unaffiliated bank or holding company with total assets exceeding $1.5 billion. The final rule will increase both major assets prohibition thresholds to $10 billion. The federal banking agencies announced on October 2 that the Fed and the OCC have approved the final rule. The new asset thresholds became effective on October 10. Click here for a copy of the final rule.
