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.

FDIC Chair Jelena McWilliams outlined the risks and benefits associated with the migration of financial products and services from banks to nonbanks.

In remarks at the Finance, Law and Policy Fourth Annual Financial Stability Conference, Ms. McWilliams stated that a substantial migration of mortgage origination and servicing to nonbanks occurred since the last financial crisis. Ms. McWilliams noted that the nonbank migration will, among other benefits, help consumers by expanding access to the banking system, lowering transaction costs and increasing credit availability.

Ms. McWilliams stated that while these activities migrated to nonbanks, some of the risks remain with banks and could adversely affect the stability of the banking system. The FDIC reported that bank lending to nonbanks increased by 636 percent from 2010 to June 2018. The FDIC also found that, based on supervisory experience, nonbank mortgage originators receive funding from bank loans. She said that a similar trend can be seen in mortgage servicing where 60 percent of outstanding mortgage loans guaranteed by Ginnie Mae are serviced by nonbanks.

Ms. McWilliams also advised regulators and policymakers to consider the potential risks and benefits of nonbank financial activity. She stated that regulators should encourage banks to innovate, and added that banks will attempt to keep pace with nonbank technological and service developments.

Lofchie Comment: This answers the question of why nobody starts a new bank.  And why the price of NYC taxi medallions has crashed.  It’s the Uberization of financial services.

How do, and should, regulators respond?  More specifically from a regulatory standpoint, should the banking regulators consider whether regulations have made starting or maintaining a bank so unattractive from a business standpoint that the exodus from the banking industry becomes a material systemic risk? It’s not an easy question to answer; it’s not even remotely obvious how one would approach the question.  That said, if you have a political mindset that treats banks as inherently bad, this is the way the markets will go. And that might very well be ok, or even better, but politicians and regulators should be mindful of the direction of change and of the extent to which they are accelerating that change.

Federal Reserve Board (“FRB”) Governor Lael Brainard argued that more needs to be done to encourage financial inclusion and to improve access to credit for underserved families and small businesses. She stated that FinTech developments “may be combined in powerful ways to bring end-to-end solutions to financial inclusion.”

In a speech at the FinTech, Financial Inclusion Conference, Ms. Brainard stated that while access to accounts and credit are lowering transaction costs, such developments are not sufficient. She argued that continued progress toward financial inclusion is likely to require solutions that are designed with an understanding of issues that the underserved face (e.g., many unbanked or underbanked people in the U.S. are deliberately choosing not to maintain a bank account). According to Ms. Brainard, access to credit is important in mitigating financial vulnerability.

Ms. Brainard said that policymakers and financial services providers are assessing “financial inclusion” in a more holistic and nuanced manner, with a greater emphasis on “financial health.” In particular, she said that innovative platforms, such as faster payment services, can be combined with other technological developments (e.g., cheap access to cloud computing) to establish a more robust solution to fostering financial inclusion. Ms. Brainard said that the FRB has “a role and, potentially, a responsibility” to help build an “infrastructure that facilitates safe, innovative, and ubiquitous faster payment services.” For those who are struggling financially, she observed, the “difference between waiting for a payment to clear and receiving a payment in real time is not merely an inconvenience; it could tip the balance toward overdraft fees, bounced checks, or collection fees.”