The oversight body of the Basel Committee on Banking Supervision (“BCBS”), and the Group of Central Bank Governors and Heads of Supervision (“GHOS”), approved final revisions to the market risk framework. Separately, GHOS also approved the BCBS’s strategic priorities and work program for 2019.
The revised Minimum Capital Requirements for Market Risk replaced an earlier version published in January 2016. The January 2016 market risk framework, which was intended to enhance consistency of implementation, as well as lower arbitrage opportunities between capital requirements for market risk and credit risk, outlined the scope of application for market risk capital requirements. The revised market risk framework will become effective on January 1, 2022.
The revisions to the January 2016 market risk framework include:
- a simplified standard approach to be used by banks that have smaller or non-complex trading portfolios;
- clarifications as to the scope of exposures subject to market risk capital requirements;
- improvements in the standardized approach to treatments of foreign exchange risk and index instruments;
- changes to the standardized approach risk weights applicable to general interest rate risk and foreign exchange risk, as well as specific exposures subject to credit spread risk;
- adjustments to the assessment process to determine whether a bank’s internal risk management models appropriately reflect trading risks; and
- changes to the requirements for the identification of risk factors for internal modeling.
The BCBS maintains a two-year work program that outlines strategic priorities for its policy, supervision and implementation activities. The BCBS strategic priorities and work program for 2019 will focus on four central themes: (i) finalizing policy reforms and tackling new policy initiatives, (ii) assessing and monitoring the effect of post-crisis reforms, (iii) fostering strong supervision and (iv) ensuring the “full, timely and consistent implementation of the Committee’s post-crisis reforms.”
In its latest issue of Supervisory Insights, the FDIC Division of Risk Management Supervision (“DRMS”) reported that strong credit grading systems typically have “identifiable processes” and a “sound governance framework.”
The article, “Credit Risk Grading Systems: Observations from a Horizontal Assessment,” was drawn from examiner observations about the loan risk grading systems at certain state nonmember banks. The FDIC DRMS discovered that:
- smaller institutions used “expert judgment”-based systems, in which a loan officer or relationship manager gives a grade based on his or her knowledge of the credit;
- as banks grew bigger, management would switch from an expert judgment-based system to a quantitative scorecard or modeled approach consisting of qualitative adjustments;
- certain institutions buy credit grading scorecard and statistical models from external vendors;
- various institutions that depended on internal data were not retaining their “historical borrower information in a database or other centralized repository”;
- certain banks were able to “assess grade accuracy well by comparing key borrower financial metrics and the internal grades across loans of a similar type”;
- credit risk grading systems differ across the banking system;
- risk grading can help in the implementation of the Current Expected Credit Loss accounting standard; and
- efficient credit risk grading systems depend on timely and accurate data, among other things.
In a joint press release, the Federal Reserve Board, the Office of the Comptroller of the Currency, the FDIC, the Consumer Financial Protection Bureau, the National Credit Union Administration and the Conference of State Bank Supervisors encouraged financial institutions to work with consumers impacted by the federal government shutdown. The agencies noted that affected borrowers may face hardship with regard to making payments on financial obligations, including mortgages, student loans, car loans, credit cards and other types of debt.
The FDIC, the Federal Reserve Board, the Office of the Comptroller of the Currency, the SEC and the CFTC (collectively, the “agencies”) proposed excluding certain community banks from the Volcker Rule. In addition, the proposal would permit a banking entity to share a name with a covered fund that it organizes and offers under certain circumstances. The proposal would amend the regulations implementing the Volcker Rule, consistent with the statutory amendments made pursuant to Sections 203 and 204 of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”).
Pursuant to Section 203 of the EGRRCPA, the proposal would exclude a community bank from the restrictions of the Volcker Rule if both of the following conditions are met: (i) it has total consolidated assets equal to or less than $10 billion, and (ii) its trading assets and liabilities are equal to or less than five percent of its total consolidated assets.
In addition, pursuant to Section 204 of the EGRRCPA, the proposal would allow a covered fund to share “the same name or a variation of the same name with . . . an investment adviser to the fund, subject to the conditions” that (i) the investment adviser is not, and does not share the same name as, “an insured depository institution, a company that controls an insured depository institution, or a company that is treated as a bank holding company”; and (ii) the name does not contain the word “bank.”
Comments on the proposal must be received no more than 30 days following its publication in the Federal Register.
The Comptroller of the Currency, Federal Reserve Board and FDIC proposal allowing “advanced-approaches” banking organizations (i.e., those with $250 billion or more in total consolidated assets, or $10 billion or more in on-balance sheet foreign exposure) to use an alternative approach for calculating derivative exposures under regulatory capital rules was published in the Federal Register. Comments must be received before February 15, 2019.
As previously covered, the proposed approach – the standardized approach for counterparty credit risk (“SA-CCR”) – would replace the current exposure methodology (“CEM”). If adopted, the proposal would (i) require advanced-approaches banking organizations to use SA-CCR to calculate their standardized total risk-weighted assets by July 1, 2020 and (ii) allow non-advanced-approaches banking organizations to use either CEM or SA-CCR when calculating standardized total risk-weighted assets.
Barbara Novick (BlackRock Vice Chairman and CFS Advisory Board Member) discussed financial industry transitions at the recent CFS Global Markets Workshop.
Presentation highlights include:
– Indexed equity strategies remain relatively small,
– Challenges of applying macroprudential tools to market finance,
– Potential risks to the US financial system from the future of Libor to bondholder rights to pension underfunding, among others.
For accompanying slides:
Federal banking agencies urged banks to pursue innovative approaches to meeting Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) compliance obligations.
In a joint statement, the Federal Reserve Board, the FDIC, FinCEN, the National Credit Union Administration and the Office of the Comptroller of the Currency (the “agencies”) stated that innovation – including the use of artificial intelligence, digital identity technologies and internal financial intelligence units – has the potential to augment banks’ programs for risk identification, transaction monitoring, and suspicious activity reporting.
The agencies encouraged banks to test innovative programs, stating that a pilot program that fails, or a program that identifies suspicious activity that otherwise would have been overlooked, should not subject the bank to supervisory action, as long as the bank’s existing BSA/AML processes are adequate. According to the statement, FinCEN will consider requests for exceptive relief from BSA/AML regulations in order to facilitate the testing and potential use of new technologies and other innovations.
The agencies added that the implementation of innovative approaches to BSA/AML compliance will not result in additional regulatory expectations.
Lofchie Comment: The regulators’ joint statement may reflect an acknowledgment of the enormous expenses to which financial institutions have been put in complying with AML obligations and the fines that have been imposed for even unwitting failures to fulfill those obligations.
CFTC Chair J. Christopher Giancarlo recommended (i) reducing the number of obstacles to swaps clearing and (ii) transitioning away from LIBOR to alternative risk-free rates.
In remarks before the 2018 Financial Stability Conference in Washington, Mr. Giancarlo discussed two aspects of the CFTC approach to G-20 reforms: swap trading and clearing. He highlighted the CFTC’s recent proposal to amend its swap trading rules, saying that the changes would have the rules “encompass a wider scope of trading activity while enabling greater transactional flexibility.” In addition, Mr. Giancarlo discussed efforts to remove impediments to clearing. He cited the findings of a recent study sponsored by the Financial Stability Board on incentives to clearing (noting the CFTC co-chaired the study), and indicated that the CFTC will continue working with banking regulators to “educate them about the regulatory framework in place for cleared derivatives.” In particular, Mr. Giancarlo noted U.S. legal impediments preventing the use of client clearing margin.
As to benchmark reform, Mr. Giancarlo stressed the complexity of the process and warned that it “cannot be done through heavy-handed regulatory rulemaking.” He highlighted the work of the Alternate Reference Rates Committee (“ARRC”) and the importance of the public-private partnership driving that process. Regarding next steps, Mr. Giancarlo noted the actions taken by the ARRC, ISDA and others, and also urged market participants to consider the use of SOFR-linked derivatives, given both the impact of LIBOR going away and the potential benefits of what Mr. Giancarlo referred to as the “quite successful” clearing of SOFR swaps on LCH and CME.
The Federal Reserve Board, FDIC and Office of the Comptroller of the Currency (collectively, the “agencies”) proposed a rule that would simplify capital requirements for qualifying community banking organizations that opt into a community bank leverage ratio (“CBLR”) framework. According to the agencies, the proposed CBLR framework is a “simple alternative methodology to measure capital adequacy” and would provide substantial regulatory relief to smaller banking organizations, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act.
Under the proposal, a qualifying community banking organization would be defined as a depository institution or depository institution holding company that meets the following criteria:
- total consolidated assets of less than $10 billion;
- total off-balance sheet exposures of 25 percent or less of total consolidated assets;
- total trading assets and trading liabilities of five percent or less of the total consolidated assets;
- mortgage servicing assets of less than 25 percent of CBLR tangible equity; and
- deferred tax assets from temporary differences that the institution could not realize through net operating loss carrybacks, net of any related valuation allowances, of 25 percent or less of CBLR tangible equity.
Banking organizations that elect to use the CBLR and maintain a CBLR of over nine percent generally would be exempt from complying with other risk-based and leverage capital requirements and would be considered to have met the “well capitalized” ratio requirements for purposes of Section 38 of the Federal Deposit Insurance Act.
The Federal Reserve Board (“FRB”) rule adopting a new supervisory rating system for large financial institutions was published in the Federal Register. The final rule is effective starting on February 1, 2019.
As previously covered, the FRB will enforce a new rating system for large financial institutions (“LFI”). The new LFI rating system will apply to (i) all domestic bank holding companies and non-insurance, non-commercial savings and loan holding companies (“SLHCs”) with $100 billion or more in total consolidated assets and (ii) U.S. intermediate holding companies of foreign banking organizations with $50 billion or more in total consolidated assets. The existing RFI/C(D) rating system will continue to be applied to community and regional bank holding companies with less than $100 billion in consolidated assets. In addition, the RFI/C(D) rating system will be expanded to apply to certain SLHCs with less than $100 billion in total consolidated assets on February 1, 2019.