“To the extent foreigners keep buying Treasuries, it is because Europe's problems are worse. In short, we are the best-looking horse in the glue factory.”
– Former FDIC Chairman Sheila Bair in April 30 Fortune magazine.
Ms. Bair was correctly noting the extent to which many countries’ economies (including ours) seem to be mired down. Speaking for ourselves, we think the trends right now – however sluggish they may be – are heading in a positive direction. However, if things continue to improve, inflation may eventually rear its ugly head. Which reminds us of a remark made by a former colleague back during the stagflation of the 1970s: “Fortunately over the years, my wife and I have accumulated no savings to be ravaged by inflation.”
Munn, Cotney will Serve another Term on State Liaison Committee
The Federal Financial Institutions Examination Council (FFIEC) announced this week the re-election of John Munn, Director of the Nebraska Department of Banking and Finance, as Chairman of the State Liaison Committee (SLC) and the reappointment of David J. Cotney, Commissioner of the Massachusetts Division of Banks, as a member of the SLC.
Munn was re-elected Chair of the SLC for the period of May 1, 2012 through April 30, 2013. He was first elected as Chairman of the SLC in February 2008 for a partial term created when the previous chairman resigned. Since May of 2008, Munn has subsequently been re-elected to five one-year terms.
Commissioner Cotney’s SLC nomination was first confirmed by the FFIEC in October 2010 to complete a partial term created by the resignation of Sarah Bloom Raskin, upon her appointment to the Board of Governors of the Federal Reserve System. His first full term will continue through April 30, 2014. Cotney currently serves as a member of the Consumer Compliance Task Force, and chaired the Task Force from April 1, 2010 to March 31, 2012.
The SLC was established by the FFIEC pursuant to Section 1007 of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 to encourage the application of uniform examination principles and standards by state and federal agencies and to allow state regulators to participate in the development of those principles and standards. The Financial Services Regulatory Relief Act of 2006 made the Chairman of the SLC a voting member of the FFIEC. The SLC consists of five representatives of state regulatory agencies that supervise financial institutions whose membership currently includes: David Cotney, Commissioner, Massachusetts Division of Banks; Harold Feeney, Commissioner, Texas Credit Union Department; Douglas Foster, Commissioner, Texas Department of Savings and Mortgage Lending; and Charles Vice, Commissioner, Kentucky Department of Financial Institutions.
The Federal Reserve’s Enhanced Prudential Standards Proposal: An In-Depth Look with Georgia Senior Deputy Commissioner Steve Pleger
The Conference of State Bank Supervisors (CSBS) submitted a comment letter to the Federal Reserve Board of Governors (FRB) Monday, in response to its proposed rule on Sections 165 and 166 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The proposed rule establishes enhanced prudential standards for bank holding companies (BHCs) with assets above $50 billion, other non-bank financial companies deemed systemically significant, and applies some enhanced standards for institutions over $10 billion in assets. In the letter, CSBS expresses general support for the proposed rule on behalf of state banking regulators. CSBS also lays out concerns with the potentially conflicting interaction between certain aspects of the proposal and existing standards under the jurisdiction of chartering authorities.
In this in-depth look at the FRB’s Enhanced Prudential Standards proposal, CSBS asks Steve Pleger, Senior Deputy Commissioner of the Georgia Department of Banking and Finance, questions regarding some of the chief concerns among state regulators regarding the proposal. Pleger is a member of the CSBS state regulator working group charged with analyzing the proposed rule and developing CSBS’s position on the proposed rule.
CSBS Examiner: Enhanced risk-based capital standards and liquidity requirements are two fundamental pieces of the Dodd-Frank mandate calling for increased prudential standards. How do you envision the FRB’s proposed measures to implement enhanced capital and liquidity requirements will impact the institutions the states regulate?
Pleger: Generally, as a state regulator I applaud the FRB for its work on this complex issue, and I support the mandate as one of Dodd-Frank’s key measures to combat systemic risk. Specifically related to the FRB’s capital planning and liquidity proposals, I believe they are largely appropriate for the institutions that are covered. However, I think it’s important that the FRB coordinate with certain state banking regulators when determining capital needs and restrictions. The states have a good sense of the capital position of the institutions we regulate, and I think we can offer valuable input and be a valuable partner to the FRB in this area.
With regard to the liquidity requirements, most of the provisions seem prudent and well-rounded. In fact, I do not think a lot of them, like Contingency Funding Planning, are new concepts. Others, like the requirement to periodically test those plans, do seem innovative and helpful. On the whole, I think it is critical that the FRB enforce these requirements in a manner appropriate to the size and complexity of the specific institution. Some provisions, like the frequency of liquidity stress testing, might be tough to comply with for institutions on the smaller end of the covered scope.
If I may, this is one point which deserves additional explanation. While the specific liquidity stress testing proposal applies to “covered companies,” other stress testing provisions in the proposal cover banks all the way down to $10 billion in assets. We need to recognize this is a very broad range. The banks on the lower end of the spectrum may need to have certain aspects of the proposal tailored to their size and complexity, or should be given more time to comply with the rules. In my view, it would be an undesirable outcome for the regulatory burden associated with these standards to cause institutions to become larger or to sell to a larger bank just to reach a scale of operations sufficient to cover the cost of compliance.
CSBS Examiner: In the CSBS comment letter to the FRB, a concern was raised regarding the single-counterparty credit limit measure that prohibits a covered company from having credit exposure to an unaffiliated company beyond 25 percent of the company’s capital stock and surplus. What is the primary concern here?
Pleger: The concern is two-fold. Above all, state lending limits address many of the components captured in these single-counterparty limits. So, the primary concern here is interference with state legal lending limits. I understand this was a direct mandate by the Dodd-Frank Act, and the proposed rule is intended to act as a net for systemic events, but what this ultimately means is that certain institutions will have to keep up with two separate, overlapping standards. Unless the federal and state regulators work together to sort out differences in state and federal law, this rule may cause confusion and unnecessarily increase the regulatory burden on these institutions.
The second part of our concern in this area deals with measuring credit exposure on a “net” instead of on a “gross” basis. The proposal advocates using an aggregate net exposure, which allows an institution to reduce its gross exposure for measurement purposes by netting out certain types of qualifying collateral, guarantees, etc. We believe that there really needs to be a gross overlay in the credit exposure limits. Because these limits are geared toward systemic events, a gross measurement would better capture potential risks. It appears that many of the proposal’s qualifying instruments might not hold up and may be overly correlated in a crisis.
CSBS Examiner: When it comes to the mandate requiring bank holding companies with assets of more than $10 billion to establish stand-alone risk committees, state regulators fully endorsed this idea in the comment letter and offered suggestions for making risk committees even more effective. What were some of those recommendations?
Pleger: We absolutely endorse the enhanced risk-management standards proposed by the FRB. In response to questions posed by the FRB, we stated our support for the idea of requiring more than one independent director on the risk committee and suggested that there be a requirement for ongoing director training and education related to risk management. We also recommended that the risk committee be given full access to all aspects of a company’s business activities.
CSBS Examiner: The FRB has proposed a four-step process for providing early remediation of financial distress at covered companies, pursuant to section 166 of the Dodd-Frank Act. In its proposal, the FRB also asks whether it should use a quantitative liquidity measurement as a trigger in the early remediation framework. Do state regulators support a quantitative trigger?
Pleger: I think the FRB has proposed a pretty workable framework for the early remediation standards. This was a really interesting aspect of the proposed rule. It looks a lot like an enhanced PCA [Prompt Corrective Action] framework. I think most of the proposed stages will do a good job of detecting early issues in institutions. I will say that some of the proposed capital levels seem low for certain stages; but on the whole, other measures in the various stages should capture a lot of the risk. Certainly, the crisis reiterated that capital is a lagging indicator of performance. When it comes to the question of using a quantitative liquidity trigger, we support the FRB’s initial consideration not to include this type of trigger in the remediation framework. We believe that other aspects of the rule incorporate this aspect adequately.
On May 18, in a follow-up to this piece, the CSBS Examiner will interview Mike Stevens, Senior Executive Vice President, and Jeff Allen, Senior Manager of Policy Development, for a CSBS staff analysis of the FRB’s proposed rule and its implications for the entire financial industry.
The full CSBS comment letter is available here.
CFPB Extends Comment Period for Overdraft Practices
The Consumer Financial Protection Bureau (CFPB) has extended the comment period for its public inquiry into overdraft practices to June 29.
In an announcement made last week, the CFPB said it would extend the public comment deadline by 60 days to ensure all stakeholders have sufficient time to respond to the agency’s questions. “While we've already netted a tremendous number of responses, we've also received requests for more time," Gary Stein, the CFPB's deposit markets program manager, wrote in a blog post. The original deadline was April 30.
The CFPB launched the inquiry into overdraft practices in February. It issued a notice and request for information from consumers, and also requested data from a number of banks on their policies, terms and marketing of overdraft programs.
The inquiry is focused on four main areas of concern: reordering transactions from high-to-low to increase consumer costs; missing or confusing information about the terms of overdraft programs; misleading marketing materials; and the disproportionate impact the programs have on low-income and young consumers.
The CFPB’s announcement to extend the comment period for its public inquiry into overdraft practices is available here.
Around the States
NY: Benjamin M. Lawsky, Superintendent of the Department of Financial Services, announced this week that public hearings will begin May 17, 2012 in New York City to review whether rates for force-placed insurance are appropriate or excessive, and to examine the relationships between payments to and from insurers, banks, mortgage servicers and insurance agents and brokers. The public hearings relate to a Department investigation into whether homeowners and investors in mortgage-backed securities are harmed by high premium charges when banks and servicers "force-place" insurance on the properties they service. Read more.
WV: The West Virginia Division of Banking has changed its name. Effective May 11, the Division of Banking will be the West Virginia Division of Financial Institutions. The Division will also have a new address and website. Read more.
Around the Agencies
FINCEN: James H. Freis, Jr., the Director of the Financial Crimes Enforcement Network (FinCEN), and Dave Jones, California’s Insurance Commissioner, have signed a Memorandum of Understanding (MOU) that will allow the federal anti-money laundering (AML) regulator and the state insurance regulator to share important information enabling both parties to better protect the industry and consumers from criminal activity and fraud. “FinCEN has a solid record of working with State financial regulators, and California is a key partner for us,” said Director Freis. “Our efforts with State insurance commissioners are intended to further build on the impressive results we have experienced and the mutual benefit we have received through our strong relationships at the State level.” Read more.
FINRA: The Financial Industry Regulatory Authority (FINRA) announced that it has sanctioned Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse exchange-traded funds (ETFs) without reasonable supervision and for not having a reasonable basis for recommending the securities. The firms were fined more than $7.3 million and are required to pay a total of $1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases. Read more.
FRB: The FRB on Tuesday published comparative information on the average debit card interchange fees that each payment card network charges acquirers, and merchants, indirectly, and provides to debit card issuers. The FRB cleared a final rule last year that limits swipe fees on debit card transactions, setting a base cap of 21 cents per transaction. The rule, Regulation II, was required by the Dodd-Frank Act. As part of the rulemaking process, the Board collected 2009 data from payment card networks which indicated that the average interchange fee for all issuers was 43 cents at the time. Data collected after the rule took effect show that the average interchange fee per transaction received by nonexempt issuers in the fourth quarter of 2011 declined substantially to 24 cents while the average interchange fee received by exempt issuers was 43 cents. Read more.
May 7-11: The CSBS Credit Evaluation School will be held in San Diego. The school follows a blended learning model and is delivered over a five-month period utilizing the most effective and efficient delivery channels. Read more.
May 7-11: The CSBS Certified Operations Examiner School will be held in San Diego. The full program is delivered over a seven-to-nine month period utilizing all of the CSBS Education Foundation delivery channels. Over this period examiners will receive all of the required training and experience necessary to be in charge of an operations examination. Read more.
"If we do not complete rigorous implementation of this complementary set of reforms, we will have lost the opportunity to reverse the pre-crisis trajectory of increasing 'too big to fail' risks."
– Federal Reserve Governor Daniel Tarullo, in prepared remarks before the Council on Foreign Relations in New York.
Catherine Woody, Editor
Rockhelle Johnson, Writer
Edward Smith, Contributing Editor