US Federal Banking Agencies Introduce Further Measures to Address Continuing COVID-19-Related Risks

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Latham & Watkins LLPThe three US federal banking agencies continue to take additional steps to promote the functioning of the financial system in the face of the pandemic.

The three US federal banking agencies — the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) — have continued to take additional measures to support the public and private sectors as a result of the market volatility caused by the ongoing impact of COVID-19.  These latest economic and regulatory relief measures, which are intended to enhance the steps taken during the past month (discussed in our previous posts on March 19 and March 24), include the following:

  • Establishment of FIMA Repo Facility: To help ease strains in the global US dollar funding markets, the Federal Reserve will establish a temporary repurchase agreement facility for foreign and international monetary authorities (FIMA Repo Facility), which will be operational for at least six months beginning on April 6. The FIMA Repo Facility will allow foreign central banks and other international monetary authorities to exchange their US Treasury securities held with the Federal Reserve for a readily available supply of US dollars. The FIMA Repo Facility will work in tandem with the Federal Reserve’s dollar liquidity swap lines to mitigate potential strains in the global US dollar funding markets. The Federal Reserve released FAQs to provide further details regarding the FIMA Repo Facility.
  • Revision to Supplementary Leverage Ratio Rule: The Federal Reserve Board released an interim final rule on April 1 that temporarily amends its supplemental leverage ratio rule. The supplementary leverage ratio generally applies to financial institutions with more than US$250 billion in total consolidated assets. Market conditions driven by COVID-19 are causing the reserve levels and balance sheets of financial institutions to increase unexpectedly, and the regulatory restrictions that would otherwise result from this growth may impair the operational efficiency of individual institutions and the functioning of the banking system generally. To address this concern, the interim final rule will exclude from the calculation of total leverage exposure (which is the denominator of the supplementary leverage ratio in the Federal Reserve’s capital rule) the on-balance sheet amounts of US Treasury securities and deposits at Federal Reserve Banks. The change will be effective immediately and will remain in effect through March 31, 2021.
  • Changes to Community Bank Leverage Ratio: The federal banking agencies announced two interim final rules to temporarily modify the community bank leverage ratio in order to implement Section 4012 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which requires the agencies to temporarily lower the community bank leverage ratio from 9% to 8%. The first rule will modify the community bank leverage ratio so that, beginning in the second quarter of 2020 through the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the community bank leverage ratio framework. The second rule will allow community banking organizations to have until January 1, 2022 to transition back to the 9% leverage ratio requirement previously established by the agencies.
  • Early Adoption of SA-CCR: The “standardized approach for measuring counterparty credit risk” rule (SA-CCR), is a new methodology to determine how certain banking organizations are required to measure counterparty credit risk derivatives contracts. The new rule, adopted by the federal banking agencies in November 2019, reflects improvements made to the derivatives market since the 2007-2008 financial crisis, such as central clearing and margin requirements. Banking organizations are now permitted to adopt one-quarter early, and on a best-efforts basis, SA-CCR for the reporting period ending March 31, 2020, to improve liquidity and reduce market disruptions.
  • Optional Extension of Regulatory Capital Transition for New Credit Loss Accounting Standard: The federal banking agencies issued an interim final rule that allows banking organizations to mitigate the effects of the “current expected credit loss” (CECL) accounting standard in their regulatory capital. Banking organizations that are required under US accounting standards to adopt CECL this year can mitigate the estimated cumulative regulatory capital effects for up to two additional years, on top of the three-year transition period that is already in place.
  • Postponement of Effective Date for the Revised Control Framework: The Federal Reserve announced that it will delay the effective date for its revised control framework by six months to September 30, 2020. The framework, which was set to become effective on April 1, is intended to simplify the Federal Reserve’s rules and regulations for determining when one company controls another for purposes of the Bank Holding Company Act and Home Owners’ Loan Act. The delay is intended to reduce the operational burden on financial institutions that are otherwise focused on mitigating current COVID-19 risks and conditions.
  • Extension to Consider Comments to Volcker Rule Modifications: The federal banking agencies, along with the Securities Exchange Commission and the Commodity Futures Trading Commission, announced that they will consider comments to the proposal to modify the Volcker rule’s general prohibition on banking entities investing in or sponsoring hedge funds or private equity funds (covered funds) until May 1, 2020. The proposal had requested that comments be submitted by April 1, 2020.
  • Comment Period Extended for Brokered Deposit Regulations: The FDIC has extended by 60 days, through June 9, 2020, the public comment period for its proposed rule to revise its regulations relating to the brokered deposits restrictions that apply to less than well-capitalized insured depository institutions. The proposed rule is intended to establish a new framework for analyzing whether deposits placed through deposit placement arrangements qualify as brokered deposits.
  • Small-Dollar Lending to Consumers and Small Businesses: The federal banking agencies released an interagency statement to encourage financial institutions to offer “responsible small-dollar loans” in response to COVID-19 to low- and moderate-income individuals, small businesses, and small farms. The joint statement demonstrates a recognition of the importance of retail banking and lending activities to these market participants. A variety of loan and repayment structures should be considered, according to the statement, including open-end lines of credit, closed-end installment loans, single payment loans, or short-term, unsecured credit products for creditworthy borrowers.
  • Relief from TDR Classification: The federal banking agencies — along with the Consumer Financial Protection Bureau (CFPB), the National Credit Union Administration (NCUA), and the Conference of State Banking Supervisors (CSBS) — released a revised interagency statement to clarify the relationship between the previous statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the CARES Act. As per Section 4013, financial institutions are allowed to suspend the requirements to classify certain loan modifications as troubled debt restructurings (TDRs). The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. Consistent with the previous statement, the federal banking agencies, the CFPB, the NCUA, and the CSBS are encouraging financial institutions to work prudently with borrowers who may be unable to meet contractual payment obligations as a result of the pandemic.

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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