Read Between the Lines

Each month Bank Insights reviews news from regulators and others to give perspective on regulatory challenges.

OCC to Focus on Strategic Planning, Credit Risk and Stress Planning

Don’t be surprised if examiners ask tough questions about your strategic plans, how you are managing concentrations, interest rate risk management and stress testing.  The Office of the Comptroller of the Currency released its 2016 Mid-Cycle Operating Plan Status Report this month, and it reveals the OCC’s supervisory priorities for the remainder of the year.  Besides compliance and cybersecurity issues,   examiners will be evaluating credit risk management, particularly concentrations, underwriting practices, loan growth strategies, allowance for loan and lease losses methodology and stress testing. They “will assess the spillover effect of continued low oil prices and evaluate the banks’ practices for stress testing affected loans.” The OCC also says it wants to make sure that executives and boards understand “the benefits and risks of their overall business strategies and strategic changes” before introducing new products, changing business models or taking part in M&A activities.

CSBS Highlights ‘Right-Sized Regulation’in Report

Promoting “right-sized regulation and supervision of banks consistent with their size, complexity, overall risk profile, and risk to the financial system” is one of the main strategic objectives for the Conference of State Banks Supervisors, according to its recently released 2015 annual report. The report says CSBS will equip state supervisors with the right tools “to challenge the inappropriate or disproportionate application of federal regulation.” The 68-page report highlights CSBS achievements in 2015, including certifying 1,004 bank examiners from 43 agencies.

Hoenig: Banks Need More Equity Capital

FDIC Vice Chair Thomas M. Hoenig, long a proponent of higher capital ratios for banks, told a Paris audience this month that there is “compelling evidence” that “more equity capital—not less—is the better choice to attain sound banks and sustained economic growth.”  Hoenig’s speech, titled “A Capital Conflict,” criticized the banking industry for lobbying for exemptions from capital requirements in the leverage ratio calculations. “If accepted, the effect of such proposals would be to again lower acceptable capital standards for this most important industry,” he said. In April, Hoenig outlined a plan for community banks to obtain regulatory relief – as long as they maintained a 10 percent tangible equity-to-assets ratio.

Incentive Pay Rules Would Affect Community Banks

Certain community banks with $1 billion or more in assets will need to pay attention to restrictions on incentive-based compensation that encourage risk-taking. Federal regulators have released a long-delayed proposal that was required under the Dodd-Frank law. The proposal notes that of the 65 banks that failed during the crisis with total assets of $1 billion or more, 18 had issues related to incentive compensation. Under the proposal, regulators would consider “the activities, complexity of operations, risk profile, and compensation practices” at banks with assets greater than $1 billion to determine whether they should have to comply with the heightened standards. It notes that some of these banks “might be involved in particular high-risk business lines, such as lending to distressed borrowers or investing or trading in illiquid assets, and make significant use of incentive-based compensation to reward risk-takers.”

CFPB Unveils its Regulatory Agenda

Get ready for new rules on checking account overdrafts and tweaks to mortgage disclosure regulations. That’s the message from the Consumer Financial Protection Bureau, which has published its rulemaking agenda. The CFPB says it has been concerned about overdraft fees on checking accounts since 2013.

Fed Issues FAQ on TruPS

The Federal Reserve has clarified its guidance on the treatment of trust preferred securities under the Volcker Rule.  The Fed added a question about whether banks were required to deduct from Tier 1 Capital an investment in a CDO backed by TruPs as part of the Volcker rule.  The simple answer, which is quite long: No.