Matters of importance from the federal financial institution regulators
FDIC issues quarterly banking profile for fourth quarter 2021
The Federal Deposit Insurance Corp. (FDIC) released, on March 1, 2022, the quarterly banking profile covering the fourth quarter of 2021. According to the report, FDIC-insured banks and savings institutions reported $63.9 billion quarterly net income, an increase of $4.4 billion or 7.4% from a year ago. Full-year net income increased $132.0 billion or 89.7% from 2020. The increase is attributable primarily to negative provision expenses coupled with improved economic conditions and stronger credit quality.
The report provides these additional fourth quarter statistics:
- Net interest income increased 4.4% from the previous year, totaling $137.2 billion. From the previous year, the average net interest margin decreased 12 basis points to 2.56%.
- Noninterest income, compared to the previous year, grew 3.4%, driven by higher trading revenue and investment banking fees.
- Total loans and leases increased $326.0 billion (3.0%) from the previous quarter.
- Net charge-offs decreased by $5.6 billion (49.5%) from a year ago, and the total net charge-off rate declined 21 basis points to 0.21%.
- From the previous quarter, the noncurrent loan rate declined by 5 basis points to 0.89%. Noncurrent loan balances (those 90 days or more past due) declined $3.1 billion (3.0%).
- Community banks’ net income increased 7.1% year over year.
The total number of FDIC-insured commercial banks and savings institutions declined to 4,839 from 4,914 the previous quarter. During the fourth quarter no new banks were chartered, 74 banks were absorbed by mergers, and no banks failed. The number of institutions on the FDIC’s problem bank list declined by two from the third quarter, to 44.
NCUA issues fourth quarter 2021 performance data
The National Credit Union Administration (NCUA) reported, on March 7, 2022, quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the fourth quarter of 2021. Highlights include:
- The number of federally insured credit unions declined to 4,942 from 5,099 in the fourth quarter of 2020. In the fourth quarter of 2021, 3,100 federal credit unions and 1,842 federally insured, state-chartered credit unions existed.
- Total assets reported for federally insured credit unions rose by 11.7% to $2.06 trillion, up $215.8 billion from a year ago.
- Net income at an annual rate totaled $20.9 billion, up $8.9 billion (74.6%) from the previous year.
- The return on average assets increased significantly from 70 to 107 basis points compared to a year ago.
- The credit union system’s net worth increased by $21.2 billion, or 11.1% over the year to $211.6 billion. The aggregate net worth ratio was 10.26% in the fourth quarter of 2021, down from 10.32% in the fourth quarter of 2020.
OFAC imposes sanctions on Russia, FinCEN issues alert
As a result of the current situation in Ukraine, the U.S. and the global community have enacted a striking number of financial sanctions in a short period of time. The Office of Foreign Assets Control (OFAC) has imposed a variety of complex sanctions and export controls targeting individuals and entities as specially designated nationals and has placed certain areas of the Russian economy on the Sectoral Sanctions Identifications List. Adding to the complexity of these sanctions is the rise in popularity of crypto assets and their potential use in evading sanctions.
U.S. regulators and government representatives have warned financial markets and organizations about managing the impact of the OFAC sanctions and the risk of entities using crypto assets to skirt the sanctions. On March 7, 2022, the Financial Crimes Enforcement Network (FinCEN) published a FinCEN Alert (FIN-2022-Alert001), “FinCEN Advises Increased Vigilance for Potential Russian Sanction Evasion Attempts,” which specifically highlights risk related to convertible virtual currency, a term that includes crypto assets. Additionally, the alert identifies 13 red flags that institutions should be aware of as they work to comply with the new sanctions.
The Crowe article “Heeding the Call to Manage Crypto and OFAC Sanctions Risk” includes more details on how institutions can manage hidden risks of crypto sanctions.
FDIC acting chair announces 2022 priorities
With the resignation of Chair Jelena McWilliams from the FDIC effective Feb. 4, 2022, Martin Gruenberg took over as acting chair, and on Feb. 7 he promptly outlined FDIC priorities for the remainder of 2022. Gruenberg noted five primary focus areas for the FDIC in 2022:
- Strengthening the Community Reinvestment Act, working jointly with the Federal Reserve (Fed) and the Office of the Comptroller of the Currency (OCC)
- Addressing financial risks posed by climate change
- Reviewing the bank merger process
- Evaluating crypto asset risk to determine the extent to which banking organizations can safely engage in activities related to crypto assets
- Finalizing the revised regulatory capital framework that was delayed by the pandemic
Specific to climate change, Gruenberg said the agency will seek public comment on guidance to help banks prudently manage those risks, establish an FDIC working group on climate-related financial risks, and join the international Network of Central Banks and Supervisors for Greening the Financial System.
FSB warns of crypto asset risk to global financial stability
The Financial Stability Board (FSB) released a comprehensive report on Feb. 16, 2022, which concludes that the fast-evolving crypto asset market could present a threat to global financial stability.
The report examines vulnerabilities relating to three segments of crypto asset markets: unbacked crypto assets (such as bitcoin), stablecoins, and decentralized finance (DeFi) and crypto asset trading platforms. The FSB points out the “close, complex, and constantly evolving interrelationship between these three segments, which need to be considered holistically when assessing related financial stability risks.”
In the report, the FSB acknowledges some significant data gaps that impede risk assessments of crypto assets because of trading and lending platforms falling outside of regulatory boundaries and reporting requirements. The FSB also warned that crypto asset participants, products, and markets “may be failing to comply with applicable laws and regulations.”
Fed expands proposal for master account applications
The Fed, on March 1, 2022, issued a proposal for a tiered framework for reviewing applications for master accounts that provide access to the Fed’s payment services. The Fed originally issued a proposal in May 2021, amid growing requests from fintech firms and other nonbank providers to gain access to the payments system.
In the supplemental March 1 notice, the Fed is re-proposing its principles for evaluating requests for accounts and services and is providing more clarity on the process. The Fed is proposing to establish a three-tiered review framework for different types of entities requesting a Fed master account. Tier 1 would consist of eligible federally insured institutions and would be a streamlined review. Tier 2 would be an intermediate-level review for eligible institutions that are not federally insured but are subject to supervision by a federal banking agency and for any holding company that would be subject to Fed oversight by statute or by commitments.
Tier 3 would consist of eligible institutions that are not federally insured and not subject to prudential supervision by a federal banking agency at the institution or holding company level and thus “would receive the strictest level of review.”
Comments are due April 22, 2022.
CFPB outlines options for automated valuation models
The Consumer Financial Protection Bureau (CFPB), on Feb. 23, 2022, outlined options to ensure that computer models used to help determine home valuations are accurate and fair and that they help prevent algorithmic bias. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the CFPB, working jointly with other federal regulators, to provide rules to strengthen oversight of the models to “ensure a high level of confidence in the estimates,” “protect against the manipulation of data,” “avoid conflicts of interest,” and “require random sample testing and reviews.”
The CFPB recognizes that computer models and algorithms are valuable tools for mortgage lenders and appraisers to improve valuation accuracy. However, the bureau noted that automated valuation models also could pose fair lending risks to homebuyers and homeowners. The CFPB is particularly concerned that without proper safeguards in place, “flawed versions of these models could digitally redline certain neighborhoods and further embed and perpetuate historical lending, wealth, and home value disparities.”
The options will be reviewed to determine their potential impact on small businesses and financial institutions as required by the Small Business Regulatory Enforcement Review Act.
CFPB highlights focus on auto lending market
In a blog post on Feb. 24, 2022, the CFPB signaled that it intends to increase its focus on auto lending activities. The authors noted that prices for new and used cars have increased significantly over the past year and that they “expect that both the total amount of debt and the average loan size will continue to increase and that larger car loans will put increased pressure on some consumers’ budgets for much of the next decade.”
Given the increase in loan amounts, the extended length of loan terms, and the uncertainty around the ongoing economic recovery, the CFPB will closely monitor lender practices and consumer outcomes. In particular, the bureau will continue to evaluate lending structures in which lenders seem to rely on high interest rates and fees to profit whether or not consumers fail.
In a related issuance, a Feb. 28, 2022, CFPB compliance bulletin signaled that the CFPB will hold auto loan holders and servicers “accountable for [unfair, deceptive, or abusive acts and practices] related to the repossession of consumers’ vehicles.” The bulletin reminds lenders and servicers of existing laws regarding auto repossessions and provides examples of conduct that might violate the law.
