From the federal financial institution regulators
Federal Reserve issues financial stability report
On April 19, 2024, the Federal Reserve (Fed) issued its semiannual report on the stability and vulnerabilities of the U.S. financial system. The report notes the Fed’s assessment of overall continued resilience of the banking system, citing risk-based capital ratios well above regulatory requirements, high levels of liquid assets and stable funding of domestic banks, declining levels of private debt relative to gross domestic product (GDP) approaching historical averages, and modest levels of household debt relative to GDP. Conversely, the report also cites continued vulnerabilities arising from significant fair value losses on fixed-rate assets, funding pressures due to uninsured deposit levels, and strains in commercial real estate (CRE), among other factors.
The report summarizes responses to a survey by the Federal Reserve Bank (FRB) of New York on near-term risks to U.S. financial stability, including inflation and monetary tightening, policy uncertainty, commercial and residential real estate, banking sector stress, and fiscal debt sustainability. Notably, 60% of respondents cited policy uncertainty as a stability risk, compared to 24% in the previous report published in October 2023.
In addition, the report includes an analysis of the beneficiaries of – and the liquidity provided by – the Bank Term Funding Program, established by the Fed in the wake of the failures of Silicon Valley Bank and Signature Bank in early 2023.
Fed governor speaks on proposed regulations and challenges for banks
On April 18, 2024, at the New York FRB’s regional and community banking conference, Fed governor Michelle Bowman spoke on the challenges faced by banks and on evolving supervisory expectations. Bowman described the current environment as an inflection point, citing the prevalence of continuing traditional risks like rising inflation and interest rates, alongside emerging risks such as third-party risk and cybersecurity risk. She urged banks to innovate responsibly and ensure that their risk management frameworks continue to evolve to address these risks. In addition, she encouraged regulators to support banks’ responsible innovation while fulfilling their regulatory oversight responsibilities.
Emphasizing the importance of maintaining and testing contingency funding plans, Bowman stated that liquidity planning should include access to all sources that can be used in time of need – such as borrowing from the discount window if warranted. She also stated that supervisors should not act as members of a bank’s management team, nor should they interfere in management’s decision-making process.
Finally, Bowman commented on the responsibility of supervisors to conduct efficient, effective, and consistent supervision and establish clear expectations and processes. She urged supervisors to maintain a focus on the core and emerging risks to the financial system amid the high volume of recent regulatory reforms and proposals.
Kansas City FRB issues bulletin on commercial real estate exposures
On April 18, 2024, economists at the Kansas City FRB issued a bulletin detailing their findings on CRE risks. While noting that investors might focus on loan concentration to assess risk exposure, the economists highlighted other factors that significantly affect a bank’s exposure to CRE lending risk. Such factors include a bank’s underwriting practices, monitoring of existing borrowers, and capital and loan loss provisions. The report includes additional discussion on the risk associated with characteristics of underlying properties, such as property class, size, and geographic location.
FinCEN updates beneficial ownership FAQ, addressing timeline for access to BOI database
On April 18, 2024, the Financial Crimes Enforcement Network (FinCEN) updated its list of FAQ on beneficial ownership information (BOI), adding responses on the applicability of BOI reporting requirements, the request and use of BOI, and other topics. Specifically, the new FAQ clarify that a previously exempt entity that loses its exempt status in 2024 will have until 2025 to file an initial report. In addition, access to BOI by authorized recipients will begin with a limited pilot program for select federal agency users in spring 2024. Access will be phased in for various offices and agencies until the fifth phase extends access to applicable financial institutions in spring 2025.
CFPB reports on mortgage servicing
On April 24, 2024, the Consumer Financial Protection Bureau (CFPB) issued its supervisory highlights report on mortgage servicing, covering examinations completed from April through December of 2023. The report summarizes supervisory findings of what the CFPB deems exploitative and unlawful “junk fees”; unfair, deceptive, and abusive acts or practices (UDAAP); and other regulatory violations. Such findings include unfair charges for property inspections and late fee overcharges, deceptive loss mitigation and delinquency notices, inadequate fee descriptions, and lack of compliance with loss mitigation rules, among other issues. The CFPB continues to scrutinize junk fees and UDAAP. It also is considering a proposal to simplify and streamline mortgage servicing rules.
Agencies issue guide on third-party risk management for community banks
On May 3, 2024, the Fed, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC) jointly issued “Third-Party Risk Management: A Guide for Community Banks” to help community banks identify, monitor, and manage risks arising from third-party relationships. The agencies remind institutions that engaging a third party does not diminish or remove a bank’s responsibility to operate in a safe and sound manner and comply with applicable legal and regulatory requirements.
The guide includes risk management and governance considerations, an explanation of the third-party relationship life cycle with illustrative examples, and additional resources for community banks when developing and enhancing their third-party risk management practices. The agencies have provided the guide as a complement to existing guidance, including the interagency policy statement on third-party relationships issued in June 2023.
Agencies revise proposal on incentive-based compensation arrangements
On May 6, 2024, the FDIC, OCC, and Federal Housing Finance Agency (FHFA) jointly issued for public comment proposed rulemaking on incentive-based compensation arrangements. On the same date, the National Credit Union Administration (NCUA) issued a press release indicating that the agency will act on the proposal in the near future.
First proposed in 2016, it would place prohibitions on incentive-based compensation arrangements that do not “appropriately balance risk and financial rewards” or that otherwise fail to support appropriate and effective risk management and corporate governance. It also introduces additional recordkeeping and disclosure requirements to allow for enhanced risk monitoring and identification by federal regulators.
The proposed rule uses a tiered approach and identifies three categories of covered financial institutions based on average total consolidated assets – from $1 billion to less than $50 billion, from $50 billion to less than $250 billion, and $250 billion and greater – with the largest institutions subject to the most prescriptive requirements.
Under Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, this regulation would require joint issuance by the FDIC, OCC, FHFA, NCUA, Securities and Exchange Commission (SEC), and the Fed. Once the proposed rule is adopted by all six agencies, it will be published in the Federal Register with a comment period of 60 days. Until then, each adopting agency has indicated that the proposal is available for public review and comment through their respective websites.
