Matters of importance from the federal financial institution regulators
FDIC releases advisory on deposit insurance and crypto companies
The Federal Deposit Insurance Corp. (FDIC) on July 29, 2022, issued an advisory to FDIC-insured institutions to address misrepresentations by some crypto companies that claim their products are eligible for FDIC deposit insurance coverage or that customers are FDIC-insured if the crypto company fails.
In the release, the FDIC clarifies that it insures only deposits held in insured banks and savings associations in the event of a bank failure and that the FDIC does not insure assets issued by nonbank entities, such as crypto companies. It adds that in dealings with crypto companies, “FDIC-insured banks should confirm and monitor that these companies do not misrepresent the availability of deposit insurance.”
The FDIC also issued a two-page Crypto Advisory and Deposit Insurance fact sheet reminding the public of the scope of the FDIC’s coverage. The fact sheet also provides useful resources for bankers and the public to use to become better educated on deposit insurance coverage.
Agencies issue proposed updates to policy statement on CRE loan workouts
The Office of the Comptroller of the Currency (OCC), FDIC, and National Credit Union Administration (NCUA) on Aug. 2, 2022, issued a proposed updated policy statement for prudent commercial real estate (CRE) loan accommodations and workouts. The updated policy would build on existing guidance on the need for financial institutions to work prudently and constructively with creditworthy borrowers during times of financial stress, update existing guidance on CRE loan workouts, and add a new section on short-term loan accommodations. In developing the proposal, the agencies consulted with state banking and credit union supervisors. If finalized, the proposed statement would supersede the previous interagency statement on CRE loan workouts that was issued in 2009.
The proposed statement addresses supervisory expectations with respect to a financial institution’s handling of loan accommodations and loan workouts on matters including risk management elements, loan classification, regulatory reporting, and accounting considerations.
In addition to the new section on short-term loan accommodations, the proposed statement reflects changes in GAAP since 2009, including those related to current expected credit losses (CECL). It also includes revisions and additions to examples of CRE loan workouts. Among other things, the agencies are seeking input on how the document reflects sound practices in CRE loan accommodation and what additional information it can include to optimize the guidance for managing CRE loan portfolios.
Comments are due Oct. 3, 2022.
FDIC issues summer supervisory insights
On Aug. 3, 2022, the FDIC published its summer 2022 “Supervisory Insights,” which includes articles on CRE lending risk management practices and subordinated debt considerations.
In the CRE lending article, the FDIC notes several potential uncertainties facing the CRE market, including pandemic-induced societal changes such as lower pressure for office space as more employees worked remotely, increased hotel vacancies, and a reduction in shopping at brick-and-mortar retailers. The FDIC also cites inflation, rising interest rates, and supply chain challenges as potentially increasing risk. Given those uncertainties, FDIC examiners will be increasing their focus on CRE transaction testing in upcoming examination cycles. In particular, examiners will be testing newer CRE credits, credits stressed within subcategories and geographies, and credits with payments vulnerable to rising rates and rising costs. The FDIC also notes that banks with well-developed risk management practices generally adapted better during the pandemic. “For banks substantively involved in CRE lending, this was especially true when robust contingency planning and stress testing/scenario analysis processes were in place.”
In the article on considerations with subordinated debt issuances and investments, the FDIC recognizes that the issuance of subordinated debt has benefits and risks for banking organizations, and it says financial institutions should remain aware of the generally applicable capital rule’s requirements.
The article provides a comprehensive discussion on the definition and examples of subordinated debt, required capital deductions and risk weights, regulatory reporting requirements, and the treatment of subordinated debt for deposit insurance assessment purposes.
The FDIC highlights the capital rules including deductions from regulatory capital for certain investments in subordinated debt instruments issued by financial institutions. The FDIC reminds institutions that invest in subordinated debt to consider the credit quality and repayment capacity of the issuer as well as how such investments might affect an institution’s risk profile.
FDIC clarifies brokered deposit reporting rules
The FDIC on July 15, 2022, issued a statement and updated its related FAQ document to clarify the circumstances under which deposits are required to be reported as brokered deposits. The Brokered Deposits Final Rule took effect on April 1, 2021, but the statement says call report data after that suggests that some insured depository institutions (IDIs) “receiving sweep deposits from unaffiliated broker-dealers appear to be reporting the sweep deposits as non-brokered, despite the involvement of a third party that engages in facilitating the placement of deposits, including through engaging in matchmaking activities.”
In the statement, the FDIC recognizes that an institution may not have a direct relationship with an additional third party providing services to a broker-dealer with a primary purpose execution. However, when reporting sweep deposits, it is the institution’s responsibility to file accurate call report data, and therefore it might be necessary for the institution to review the agreements between the broker-dealer and any additional third party to evaluate and determine whether the additional third party is facilitating the placement of deposits, including by engaging in matchmaking activities.
The agency reminds banks that they must be aware of any additional third parties involved when receiving sweep deposits from an unaffiliated broker-dealer with a primary purpose exception.
The FDIC adds that it will not require banks to refile previous call reports “if, after good faith efforts, certain deposits were not previously reported as brokered by the IDI due to a misunderstanding of how the facilitation aspect of the deposit broker definition applies when additional third parties are involved.” However, institutions are encouraged to consult with their accountants and attorneys to discuss whether refiling of call reports might be appropriate and whether other regulatory filings might be affected.
FHFA creates new fintech office, issues RFI on fintech in housing finance
The Federal Housing Finance Agency (FHFA) on July 18, 2022, announced the creation of an Office of Financial Technology, which will be a centralized source of information to support FHFA in addressing emerging risks and advancing agency priorities related to the adoption and deployment of fintech. The new office also will facilitate interagency collaboration.
In conjunction with the establishment of the new fintech office, the FHFA also issued a request for information (RFI) seeking public input on the role of technology in finance. Through the RFI the agency is broadly seeking to understand the current innovation landscape throughout the mortgage life cycle and related processes, risks, and opportunities.
Comments are due Oct. 16, 2022.
Treasury issues request for comment on digital asset development
The U.S. Department of the Treasury on July 8, 2022, issued a request for comment on ensuring responsible development of digital assets. The notice was sent pursuant to executive order 14067, issued in March 2022, which directed relevant agencies to report on the implications of the development and adoption of digital assets and on changes in financial market and payment infrastructures for U.S. consumers, investors, and businesses.
As part of the request, Treasury also sought feedback on potential risks associated with digital asset markets and how digital assets might benefit or pose risk to vulnerable populations.
The comment period closed Aug. 8, 2022.
