FDIC Issues Proposed Rule to Implement Unlimited Deposit Insurance Coverage on Noninterest-Bearing Transaction Accounts
The FDIC Board of Directors issued a proposed rule (the “Proposed Rule”) to implement Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) that provides temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts. The separate coverage for noninterest-bearing transaction accounts becomes effective on December 31, 2010, and terminates on December 31, 2012. The Proposed Rule also serves as formal notice that the FDIC will not be extending the Transaction Account Guarantee Program (“TAGP”) beyond its scheduled expiration date of December 31, 2010. Comments are due on the Proposed Rule by October 15, 2010. The FDIC noted that the shorter than usual comment period is necessary to give insured depository institutions adequate time to implement the notice and disclosure requirements set forth in the proposed rule by December 31, 2010. [Read more →]
September 30, 2010 No Comments
The OTS issued an updated Examination Handbook Section on Capital Adequacy (“New Section 120”), providing extensive revisions from the previous version. Changes include, among other things, (1) an expanded discussion on assessing compliance with minimum regulatory capital requirements, and (2) updates on the Basel International Accord. New Section 120 also significantly expands the discussion on assessing overall capital adequacy to include: (a) a review of an institution’s own capital adequacy assessment process; (b) factors that affect capital, including material risks; (c) an assessment of the quality of capital; and (d) an assessment of capital adequacy relative to an institution’s unique risk profile. [Read more →]
September 30, 2010 No Comments
The Basel Committee on Banking Supervision (the “Basel Committee”) announced that the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, agreed on new, higher capital standards for banking organizations at its meeting on September 12, 2010. The President of the European Central Bank and Chairman of the Group of Governors and Heads of Supervision, Jean-Claude Trichet, noted that “the agreements reached today are a fundamental strengthening of global capital standards,” and that “their contribution to long term financial stability and growth will be substantial.”
The new standards will include a minimum common equity requirement of 4.5% (compared to the current requirement of 2%). The phase-in period for this requirement will begin on January 1, 2013, with full implementation effective January 1, 2015. The Tier 1 capital requirement, which includes common equity and other qualifying financial instruments, will increase from 4% to 6% over the same period. The total capital requirement will remain at the existing level of 8%, and therefore will not need to be phased in. [Read more →]
September 15, 2010 No Comments
The FDIC, the OCC and the FRB (the “Agencies”) issued a joint advance notice of proposed rulemaking (the “ANPR”) regarding alternatives to the use of credit ratings in the Agencies’ risk-based capital rules for banking organizations. The ANPR was issued in response to Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the Agencies to review, by July 21, 2011, (1) their regulations requiring the use of an assessment of the credit-worthiness of a security or money market instrument and (2) any references to or requirements in such regulations regarding credit ratings. The Agencies must “modify any such regulations identified by the review to remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness as [the Agencies] shall determine as appropriate for such regulations.” In making such determination, the Agencies must “seek to establish, to the extent feasible, uniform standards of credit-worthiness” for use by the Agencies, taking into account the entities they regulate and the purposes for which such entities would rely on such standards of credit-worthiness. [Read more →]
August 18, 2010 No Comments
The FDIC issued proposed guidance on automated overdraft payment programs (the “Proposal”), which outlines additional expectations for the banks it supervises. The Proposal would supplement the FRB’s overdraft rules under Regulation E, which are discussed in more detail in the June 1, 2010 and November 17, 2009 Consumer Financial Services Alerts. Whereas the new Regulation E opt-in requirement addresses only paying overdrafts resulting from one-time debit card and ATM transactions, the Proposal provides that customers should have an opportunity to opt out of the payment of overdrafts resulting from non-electronic transactions (e.g., checks). The Proposal also provides that banks should not process transactions in a manner designed to maximize the cost to customers. In addition, the Proposal calls for banks to monitor accounts and take meaningful and effective action to limit customer use of overdraft coverage as a form of short-term, high-cost credit, including, for example, by giving customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling 12-month period a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage. Moreover, the Proposal states that the FDIC expects banks to institute appropriate daily limits on overdraft fees. The Proposal notes that overdraft payment programs will be reviewed at FDIC examinations. Comments on the Proposal are due no later than September 27, 2010.
August 18, 2010 No Comments
FDIC Adopts Final Rule to Conform FDIC Regulations on Deposit Insurance Coverage and Advertisements to Permanent Standard Maximum Deposit Insurance Amount of $250,000
The FDIC Board of Directors adopted a final rule (discussed in FDIC Financial Institution Letter, FIL 49-2010) amending its deposit insurance and advertising of FDIC membership regulations to conform with provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permanently increase the standard maximum deposit insurance amount, effective July 22, 2010, from $100,000 to $250,000.
August 18, 2010 No Comments
The SEC published a request for public comment to assist it in preparing a study examining the legal and regulatory standards of care for broker-dealers, investment advisers and their personnel when providing personalized investment advice and recommendations about securities to retail investors. The study is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The SEC must submit a report on the study to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services no later than January 21, 2011. The Dodd-Frank Act also gives the SEC express authority to address the foregoing standards of care, but does not mandate rulemaking based on the study. Comments must be submitted no later than 30 days after publication of the SEC request for comment in the Federal Register.
July 28, 2010 No Comments
The Basel Committee on Banking Supervision (the “BCBS”) issued a consultative document regarding its proposal for a countercyclical capital buffer (the “Proposal”). The Proposal provides that a buffer would be “deployed when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk to ensure the banking system has a buffer of capital to protect it against future potential losses.” Accordingly, such countercyclical capital buffers are expected to be deployed in a given jurisdiction only on an infrequent basis, “perhaps as infrequently as once every 10 to 20 years.” In general, national bank regulators would inform banks 12 months in advance of their judgment of any necessary “buffer add-on” in order to give banks time to meet the additional capital requirements, while reductions in a buffer would take effect immediately to help reduce the risk that the supply of credit would be constrained by regulatory capital requirements.
Under the Proposal, internationally active banks would look at the geographic location of their credit exposures and calculate their buffer add-on for each exposure on the basis of the buffer in effect in the jurisdiction in which the exposure is located. (In other words, an internationally active bank’s buffer would effectively be equal to a weighted average of the buffer add-ons applied in jurisdictions to which it has exposures.) Accordingly, internationally active banks “will likely find themselves carrying a small buffer on a more frequent basis, since credit cycles are not always highly correlated across the jurisdictions to which they have credit exposures.” The Proposal also notes that the BCBS is continuing to consider the home-host aspects of the Proposal. [Read more →]
July 21, 2010 No Comments
FDIC Board Approves Revisions to FDIC’s MOU with Other Primary Federal Banking Agencies Concerning FDIC’s Backup Supervision Authority
The FDIC Board of Directors approved, by a vote of 5 to 0, revisions to its backup supervision and information sharing Memorandum of Understanding (the “Revised MOU”) with the other primary federal banking regulatory agencies, the FRB, OCC and OTS (the “Banking Agencies”). The Revised MOU would enhance the FDIC’s backup authorities over insured depository institutions (“IDIs”) that the FDIC does not directly supervise. The FDIC stated that the Revised MOU will “improve the FDIC’s ability to access information necessary to understand, evaluate and mitigate its exposure to [IDIs], especially the largest and most complex firms.” The Revised MOU updates a 2002 accord among the Banking Agencies and clarifies and confirms the FDIC’s authority and ability to assess risk at weakening IDIs and to prepare and implement effective strategies to resolve IDIs after they fail.
The Revised MOU broadens the list of covered IDIs to include: (1) Problem IDIs with a composite rating of “3,” “4” or “5” or which are undercapitalized; (2) Heightened Insurance Risk IDIs where the FDIC’s insurance pricing system suggests higher risk; (3) Large IDIs (including mandatory Basel II “Advanced Approach” financial institutions and IDI subsidiaries of a non-bank financial company or large interconnected bank holding company recommended by the Financial Stability Oversight Council for heightened prudential standards; and (4) IDIs that are affiliated with entities that have had greater than $5 billion of borrowings under the FDIC’s Temporary Liquidity Guarantee Program.
The Revised MOU also covers: (a) the scope of special examinations and FDIC on-site presence; (b) how the FDIC and the other Banking Agencies will coordinate activities, including, among other things, targeted reviews and sharing of information) and (c) how the Banking Agencies will address differences in CAMELS ratings.
July 14, 2010 No Comments
The FDIC staff recommended that the FDIC Board of Directors postpone additional planned premium increases beyond the increase of three basis points scheduled for January 1, 2011. At their June 22, 2010 meeting, each of the five members of the FDIC Board of Directors concurred with the FDIC staff’s recommendation. For background on the FDIC premium increases and prepayment requirements, please see the November 24, 2009 Alert.
July 1, 2010 No Comments
Federal Banking Agencies Release Interagency Guidance on Bargain Purchases and FDIC- and NCUA-Assisted Acquisitions
The OCC, FRB, FDIC, NCUA and OTS (the “Agencies”) jointly issued guidance (the “Guidance”) addressing supervisory considerations related to bargain purchase gains and the impact such gains have on the application approval process. The Guidance clarifies that all business combinations, including bargain purchase transactions and assisted transactions, should be accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805. With limited exceptions, ASC Topic 805 requires all recognized assets acquired and liabilities assumed in a business combination to be measured at their acquisition-date fair values in accordance with ASC Topic 820.
The Guidance notes that an acquiring institution’s regulatory capital is subject to retrospective adjustments made during the “measurement period” – the period of time after the acquisition date that is required to identify and measure the fair value of the assets acquired and liabilities assumed in a business combination. Because of this uncertainty, an acquiring institution’s primary federal regulator will review the significance of any gain expected to be recognized from a bargain purchase (for example, relative to the pro forma capital structure of the acquiring institution) when evaluating an application in connection with a business combination. To facilitate this review of the pro forma capital calculations, an acquiring institution is encouraged by the Agencies to include one pro forma balance sheet with two sets of pro forma capital calculations in any application requesting approval of a business combination that results in a bargain purchase. The first set of pro forma capital calculations should include a preliminary estimate of the gain from a bargain purchase, and the second set should eliminate that gain.
The Agencies may impose any of the following conditions in their approvals of business combinations where a bargain purchase gain is contemplated:
- Capital Preservation – An acquiring institution may be required to hold capital in excess of regulatory minimums in an amount commensurate with its asset quality and overall risk profile.
- Dividend Limitations – An acquiring institution may be required to exclude the bargain purchase from its dividend-paying capacity calculation until the end of the conditional period.
- Independent Audits – An acquiring institution, if not subject to an annual audit requirement, may be required to obtain an independent audit of its financial statements for the year in which a business combination occurs (and the subsequent year, if the measurement period is expected to continue into that year).
- Independent Valuations – An acquiring institution may be required to obtain independent valuations from a reputable and experienced third party valuation expert deemed acceptable to the agency for some or all of the identifiable assets acquired and liabilities assumed.
- Legal Lending Limit – An acquiring institution may be required to exclude any bargain purchase gain from the calculation of its legal lending limit until the end of the conditional period.
The Guidance does not add to or modify existing regulatory reporting requirements issued by the Agencies or current accounting requirements under GAAP.
June 17, 2010 No Comments
The FDIC issued guidance (FIL-29-2010) (the “Guidance”) for depository institutions and others involved in deposit placement and collection activities. In the Guidance, the FDIC outlines steps to be taken by insured depository institutions to ensure that depositors are appropriately notified regarding (a) whether their deposits are insured and (b) the steps that institutions and affiliates should take to ensure that deposits qualify for “pass-through” insurance. Citing existing insurance rules, the FDIC notes that to receive pass-through insurance, (1) the institution’s records must expressly disclose the fiduciary relationship on behalf of others, (2) the records maintained by either the institution, the fiduciary, or an authorized third party must identify the actual owner or owners of the funds in the account and their respective ownership interests in the account, and (3) the funds must be owned by the customer(s) and not the entity performing in a fiduciary capacity.
For institutions that accept deposits with the intent to place some or all of the deposits with other institutions, the Guidance notes that depository institutions or their affiliates should:
- Maintain sufficient documentation for pass-through insurance coverage and a detailed listing of the name and location of receiving institutions, the owner of the funds, and the amount, interest rate, and maturity date of the deposits.
- Provide the depositors with the deposit amount and the name of the receiving insured depository institution at which their deposits are ultimately placed.
- Ensure the accuracy of marketing materials, customer statements, and disclosures regarding FDIC deposit insurance coverage on the accounts.
- Provide training for all personnel involved in collecting and placing deposits.
- Ensure deposit collection and placement activities comply with applicable consumer protection laws, regulations, and supervisory guidance.
The FDIC also states that deposits accepted from agents or custodians generally are considered brokered deposits, the receipt of which requires a waiver from the FDIC for an adequately capitalized institution and is prohibited for an undercapitalized institution.
June 17, 2010 No Comments
On May 11, 2010, the FDIC’s board of directors issued a Notice of Proposed Rulemaking (the “NPR”) regarding proposed revisions (the “Proposed Rule”) to the safe harbor provided at 12 C.F.R. §360.6 (the “Safe Harbor”).
The original Safe Harbor, which was established by the FDIC in 2000 as a “clarification” of existing rules, offered federally insured depository institution (“IDI”) sponsors of securitizations, as well as investors and rating agencies, assurance that the FDIC would not use its powers as a conservator or receiver for a failed IDI to disaffirm or repudiate contracts in order to reclaim, recover or recharacterize as property of the failed IDI any financial assets transferred by that IDI in connection with a securitization or participated, so long as the transfer or participation satisfied the conditions for sale treatment under generally accepted accounting principles (the “GAAP”).
Revisions to the Safe Harbor became necessary because of changes to GAAP, for sale treatment of certain transactions and for consolidation of certain entities, threatened the effectiveness of the Safe Harbor – specifically, FAS No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (“FAS 166”) and FAS No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”), which are effective for reporting periods that begin after November 15, 2009. (For more information on FAS 166 and FAS 167, see the June 16, 2009 Alert.) In response, the FDIC issued an interim rule (initially in November and subsequently extended in March) (the “Interim Rule”) that continues until September 30, 2010 the protections afforded to transactions that comply with the Safe Harbor under the prior accounting rules. (For more information on the Interim Rule and the need for revisions to the Safe Harbor, see the November 17, 2009 Alert and the March 16, 2010 Alert). [Read more →]
May 20, 2010 No Comments
The FDIC issued a Notice of Proposed Rulemaking (the “NPR”) that would require certain insured depository institutions (“IDIs”) to submit a contingent resolution plan outlining how the IDI could be separated from its parent structure and wound down in an orderly and timely manner. The requirement would apply to IDIs with greater than $10 billion in total assets and that are subsidiaries of a holding company with total assets of more than $100 billion. As of the fourth quarter of 2009, 40 institutions were identified as meeting the criteria and together represent 47.9% of all deposits insured by the FDIC.
The FDIC noted that IDIs that are part of complex organizations pose unique issues during the receivership process, as the relationships between the parent holding company, IDI and the IDI’s affiliates often affect resolution strategies. The information provided as part of the contingent resolution plan is intended to assist the FDIC in preserving franchise value, maximizing recovery to creditors and minimizing systemic impacts on the financial system during the resolution process through an understanding of the IDI’s business lines, operations, risks and activities, the interrelationships between the IDI and its affiliates, and the non-obvious risks embedded within the distinct business entities. [Read more →]
May 20, 2010 No Comments
The FDIC, FRB, OCC and OTS (the “Agencies”) jointly issued final guidance (the “Guidance”) concerning correspondent concentration risks. A proposed version of the Guidance (the “Proposed Guidance”) was discussed in the September 29, 2009 Alert. The Agencies state that concentration risks can occur in correspondent relationships when a financial institution (“FI”) engages in a significant volume of activities with another FI. The Guidance focuses on the need for FIs to identify, monitor and manage correspondent concentration risk on a stand-alone and enterprise-wide basis. Appropriate due diligence should be performed, say the Agencies, “on all credit exposures to, and funding transactions with, other [FIs] as part of their risk management policies and procedures.” Correspondent relationships can result in credit (asset) concentration risks and funding (liability) concentration risks. The Agencies note that correspondent risks represent a lack of risk diversification, and the Guidance states that the Agencies generally consider credit exposures equal to or more than 25% of total capital as concentrations and funding exposures as low as 5% of an FI’s liabilities as concentrations. In the Proposed Guidance, 25% or more of Tier 1 capital (rather than total capital) was regarded as a concentration. The Guidance provides that management of FIs should (1) identify an FI’s aggregate credit and funding exposures to other FIs and their respective affiliates; (2) specify what information, ratios or trends will be monitored for each correspondent; (3) set prudent correspondent concentration limits and tolerances for factors being monitored and plan for managing concentrations in excess of those limits; and (4) conduct an independent analysis before entering into any credit or funding transactions with another FI. FIs should be in a position to react quickly to changing circumstances in the level of risk posed by a correspondent relationship. The Guidance supplements rather than supersedes prior regulatory guidance. The Guidance is effective May 4, 2010.
May 6, 2010 No Comments