Nutter Bank Report, December 2018

Nutter McClennen & Fish LLP


  1. FDIC Approves 3-Year Phase-In for Adverse Effects on Capital from CECL
  2. FDIC Launches Initiative to Encourage De Novo Bank Formations
  3. Federal Agencies Issue Joint Guidance on Innovative BSA/AML Solutions
  4. FDIC Adopts Final Rule to Implement Expanded Exam Cycle for Smaller Banks
  5. Other Developments: Brokered Deposits and Volcker Rule

1. FDIC Approves 3-Year Phase-In for Adverse Effects on Capital from CECL

The FDIC has approved a final rule that will provide banks with the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new current expected credit losses (“CECL”) methodology accounting standard. The final rule approved by the FDIC on December 18 is still being considered by the OCC and the Federal Reserve, and will not become effective until those agencies have approved it. According to the FDIC, the three-year phase-in is expected to help banks adjust for any higher-than-anticipated increases in allowances due to unexpected economic conditions at the time that CECL becomes mandatory. The FDIC explained that CECL requires banks to consider current and future expected economic conditions to estimate allowances, and banks will not be able to anticipate these conditions until closer to the CECL effective date. The final rule will also revise the federal banking agencies’ regulatory capital rule, stress testing rules, and regulatory disclosure requirements to reflect CECL, and make conforming amendments to other regulations that reference credit loss allowances. Click here for a copy of the final rule.

Nutter Notes: The Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses, Topic 326, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which introduced CECL to U.S. GAAP, in 2016. The effective date of ASU 2016-13, and therefore the mandatory use of the CECL methodology, varies for different banking organizations. For banking organizations that are U.S. Securities and Exchange Commission (“SEC”) filers, CECL will be mandatory for the first fiscal year beginning after December 15, 2019, including interim periods within that fiscal year. For banking organizations that are public business entities but not SEC filers, CECL will become mandatory for the first fiscal year beginning after December 15, 2020. For all other banking organizations, CECL will become mandatory for the first fiscal year beginning after December 15, 2021. Under the final rule, a bank that experiences a reduction in retained earnings due to CECL adoption as of the beginning of the fiscal year in which the bank must adopt CECL may elect to phase in the regulatory capital impact of adopting CECL over a three-year transition period. The bank will be required to begin applying the CECL transition provision as of the applicable CECL effective date. The rule requires that the bank indicate its election to use the three-year phase in its Call Report for the quarter in which the bank first reports its credit loss allowances as measured under CECL.

2. FDIC Launches Initiative to Encourage De Novo Bank Formations

The FDIC has announced a number of new measures and resources related to the deposit insurance application process that are meant to encourage the formation of new, or de novo, banks. The FDIC’s announcement on December 6, 2018 includes a new voluntary process that gives organizers of new banks the option to request feedback from the FDIC on a draft deposit insurance proposal before filing a formal application. In connection with the initiative, the FDIC has requested public comments on all aspects of the deposit insurance application process, and has updated two publications related to the deposit insurance application process: Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions and the Deposit Insurance Applications Procedures Manual. The FDIC also has updated and is re-publishing its timeframe guidelines for deposit insurance and other applications, and has created a new, designated email address for bankers, applicants, and other interested parties to submit questions about specific applications or the application process in general. Click here to access the documents related to the FDIC’s de novo bank initiative.

Nutter Notes: According to the FDIC, the new draft review process for deposit insurance applications is intended to provide the organizers and the FDIC staff the opportunity to better understand and consider possible solutions to challenges that a de novo bank proposal may pose before a formal application is filed. The process may be initiated by submitting a written request to the applicable FDIC regional office, including a draft of the deposit insurance application. The FDIC expects to provide initial feedback to the organizers within 30 days, and will provide an overall review within 60 days. The FDIC’s request for comments on the deposit insurance application process includes a request for feedback on ways in which the FDIC could or should support the continuing evolution of emerging technology and fintech companies. The FDIC is also requesting information about aspects of the deposit insurance application process that may discourage potential applications, suggestions for changes to the application process for traditional community bank proposals, and suggestions for improving the effectiveness, efficiency, or transparency of the application process generally. Public comments are due by February 11, 2019.

3. Federal Agencies Issue Joint Guidance on Innovative BSA/AML Solutions

The federal banking agencies, along with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) and the NCUA, have jointly issued a statement to encourage banks to develop innovative approaches to meet their Bank Secrecy Act/anti-money laundering (“BSA/AML”) compliance obligations. The types of innovative BSA/AML tools discussed in the December 3 joint statement include building or enhancing innovative internal financial intelligence units within a bank that are devoted to identifying complex and strategic illicit finance, artificial intelligence-based transaction monitoring systems, and digital identity technologies. The joint statement clarifies that examiners will not penalize or criticize banks that maintain effective BSA/AML compliance programs commensurate with their risk profiles even if they do not implement the types of innovative approaches described in the statement. According to the joint statement, the agencies will not advocate a particular method or technology for banks to meet their BSA/AML obligations. Click here for a copy of the joint statement.

Nutter Notes: The joint statement also invites bank management to discuss pilot programs for innovative BSA/AML approaches with their regulators. According to the statement, the agencies believe that engaging with regulators early in the process of making changes to a BSA/AML program can promote a better understanding of the new approaches by regulators, and provide feedback to the bank about the regulators’ compliance and risk management expectations. As part of the agencies’ initiative, the joint statement announced that FinCEN will consider requests for exceptions to the requirements of its customer identification program and anti-money laundering regulations to support the testing and use of new technologies and methods, as long as banks maintain the overall effectiveness of their BSA/AML compliance programs. The joint statement also announced that FinCEN plans to launch an innovation initiative to “foster a better understanding of the opportunities and challenges of BSA/AML-related innovation in the financial services sector.” According to the statement, FinCEN and the other agencies have established, or will establish, projects or offices dedicated to supporting the implementation of responsible innovation and new technologies.

4. FDIC Adopts Final Rule to Implement Expanded Exam Cycle for Smaller Banks

The FDIC has adopted a final rule to permit the on-site examination of qualifying banks with under $3 billion in total assets at least once every 18 months, rather than once every 12 months. The final rule adopted on December 18 will implement section 210 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), which amended section 10(d) of the Federal Deposit Insurance Act (“FDI Act”) to permit the federal banking agencies to examine qualifying banks (generally, those that are well capitalized and well managed) with under $3 billion in total assets not less than once during each 18-month period. The Federal Reserve and OCC are still considering the final rule, and it will not become effective until those agencies have approved it. However, the federal banking agencies jointly issued interim final rules to permit an 18-month examination cycle for qualifying banks with under $3 billion in total assets, which is currently effective. Click here for a copy of the final rule.

Nutter Notes: To qualify for an 18-month on-site examination cycle, a bank must have total assets of less than $3 billion, be well capitalized (within the meaning of the applicable federal banking agency’s prompt corrective action rules), be well managed as of its most recent examination, and have a composite condition of “outstanding” or, in the case of a bank with total assets of not more than $200 million, “outstanding” or “good.” In addition, a bank will not qualify for an extended 18-month examination cycle if it is subject to a formal enforcement proceeding or order by the FDIC or its primary federal bank regulator, or if it has undergone a change in control during the previous 12-month period in which a full-scope, on-site examination otherwise would have been required. Prior to enactment of section 210 of the EGRRCPA, only qualifying banks with less than $1 billion in total assets were eligible for an 18-month examination cycle.

5. Other Developments: Brokered Deposits and Volcker Rule

  • FDIC Adopts Final Rule on Exception for Reciprocal Brokered Deposits

The FDIC adopted a final rule on December 18 that amends its regulations that implement brokered deposits and interest rate restrictions to create an exception for a capped amount of reciprocal brokered deposits from treatment as brokered deposits. The final rule implements section 202 of the EGRRCPA, which amended section 29 of the FDI Act related to reciprocal deposits. The final rule will become effective 30 days after it is published in the Federal Register, which is expected shortly. Click here for a copy of the final rule.

Nutter Notes: The FDIC has also invited the public to comment on, and submit proposed changes to all aspects of, the FDIC’s brokered deposit and interest rate regulations in an advance notice of proposed rulemaking issued on December 18. Public comments will be due 90 days after publication in the Federal Register, which is expected shortly. Click here for a copy of the advance notice of proposed rulemaking.

  • Agencies Propose Rule to Ease Volcker Rule Restrictions on Community Banks

The federal banking agencies, along with the SEC and the U.S. Commodity Futures Trading Commission, have issued a proposed rule to exclude certain community banks from the Volcker Rule. The proposed rule issued on December 18 would exclude a bank from the restrictions of the Volcker Rule if the bank, and every entity that controls it, has total consolidated assets equal to or less than $10 billion, and trading assets and liabilities equal to or less than 5% of its total consolidated assets.

Nutter Notes: The proposed rule would also implement section 204 of the EGRRCPA by permitting banking organizations subject to the Volcker Rule to share a name with a hedge fund or private equity fund that it organizes and offers under certain circumstances. Public comments on the proposed rule will be due 30 days after publication in the Federal Register, which is expected shortly. Click here for a copy of the proposed rule.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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