Read Between the Lines

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

While Under Fire, CFPB Wins Key Court Ruling

The U.S. Court of Appeals for the D.C. Circuit will hear oral arguments in May about whether the Consumer Financial Protection Bureau is constitutional in its current form. The decision to hear the case is a victory for the embattled bureau, recently deemed “the most powerful, least accountable agency in U.S. history” by Republican House Financial Services Chair Jeb Hensarling of Texas. A previous court order had ruled against the independent agency, which was established under the Dodd-Frank Act, giving the president the right to fire its director at will. The CFPB appealed. For now, CFBP Director Richard Cordray cannot be removed for any reason other than “for cause.” The ruling is significant because President Trump can shape the future of bank regulation by choosing who leads the various bank supervisory agencies. Cordray’s term ends next year. Comptroller of the Currency Thomas J. Curry’s term ends in April, and FDIC Chairman Martin J. Gruenberg’s term ends in November. Also key is who Trump will choose to replace Federal Reserve governor Daniel K. Tarullo, whose resignation is effective in April.

Community Bank Takeaways from 2017 Dodd-Frank Stress Test Scenarios

While Dodd-Frank stress tests are not required for banks with less than $10 billion in assets, the scenarios often signal regulatory interests and direction that can be valuable for community banks. Of note: The 2017 stress test scenarios specifically mention multi-family loans. Regulators indicate that “declines in aggregate U.S. commercial and residential real estate prices should be assumed to be concentrated in regions and property types that have experienced rapid price gains over the past several years. In particular, given that prices of multifamily properties have risen rapidly in recent years, they should be assumed to decline by more than the CRE index.”

Banks More Competitive Because of High Regulatory Standards: Curry

Despite the new anti-regulatory sentiments in Washington, Comptroller Thomas J. Curry gave a resounding defense of strong bank regulation in a speech at the Clearing House Annual Conference. He said the nation’s largest banks are stronger than their European counterparts because U.S. regulators acted quickly to enforce tougher safety and soundness rules after the financial crisis. And he warned community banks not to get complacent. Small banks “should be careful not to undo the progress they’ve made since the crisis,” he said. “To remain strong and healthy, community banks, and their examiners, need to focus on strategic risk, rising credit risk from stretching for yield while relaxing underwriting standards, expansion of new technologies, and compliance issues.” Noting that he has spent more than 30 years in bank regulation, Curry stressed that “supervision is the regulators’ best tool to affect behavior and promote strong risk management at the institutions we oversee; and while it is appropriate to reassess banking laws and regulations periodically, we must never settle for “light-touch” supervision. If we do, the OCC and the industry will suffer.”

Regulators to Focus on Interest Rate Risk and Credit Risk

The FDIC has “heightened its focus on forward-looking supervision,” according to the FDIC 2016 Annual Report. The report reveals that the Division of Risk Management Supervision initiated 170 formal enforcement actions and 121 informal ones in 2016. Additionally, 395 banks that had a CAMELS rating of 2 also were issued Matters Requiring Board Attention during exams. Chairman Gruenberg noted that while the banking industry is improving, “evidence of growing interest-rate risk and credit risk merit attention.”

FDIC Issues De Novo Guide

Continuing its effort to attract investors in new banks, the FDIC has issued a new handbook to guide applicants through the deposit insurance process. The guide includes answers to questions that were asked during de novo outreach meetings conducted by the FDIC in the fall of 2016. It also includes advice from CEOs at successful de novos. To win approval for a new bank, it’s important to develop a business plan, determine the right amount of capital that must be raised, and secure a good team of directors, officers and management.