Following enactment of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) in May 2018, the Board of Governors of the Federal Reserve System (“FRB”), the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC” and collectively, the “Agencies”), have begun the process of implementing the regulatory relief required under the law.
Most recently, the Agencies issued two interim final rules under EGRRCPA, and Senate Republicans submitted a letter to FRB Vice Chairman for Supervision Randal Quarles expressing concern about recent public comments by FRB leadership.
Interim Final Rule Regarding High-Quality Liquid Assets – Municipal Securities
On August 22, 2018, the Agencies issued an interim final rule to treat certain municipal securities as high-quality liquid assets. EGRRCPA required the Agencies to amend their liquidity coverage ratio (LCR) rule to treat municipal obligations that are “liquid and readily-marketable” and “investment grade” as high-quality liquid assets, and the interim rule implements this requirement.
The interim rule also adds a definition of “municipal obligation” – which the agencies have requested comment on – defining the term as an obligation of (1) a state or any political subdivision thereof or (2) any agency or instrumentality of a state or any political subdivision thereof. The definition appears to cover both general obligation and revenue bonds.
Under previously existing rules, an “investment grade” security is one for which “the issuer of a security has an adequate capacity to meet financial commitments under the security for the projected life of the asset or exposure.” Further, “[a]n issuer has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely repayment of principal and interest is expected.”
In addition, a “liquid and readily-marketable” security is defined as one that is traded in an active secondary market with: (1) more than two committed market makers; (2) a large number of non-market maker participants on both the buying and selling sides of transactions; (3) timely and observable market prices; and (4) a high trading volume.
The interim final rule becomes effective as of publication in the Federal Register, which has not yet occurred. Comments are due within 60 days of publication.
Interim Final Rule Extending Examination Cycles for Banks Under $3 Billion
Further, on August 23, 2018, the Agencies issued an interim final rule that generally allows qualifying insured depository institutions and branches and agencies of foreign banks with less than $3 billion in total assets to move from the standard 12-month examination cycle to an extended 18-month examination cycle. This interim final rule implements section 210 of EGRRCPA. Previously, only institutions with less than $1 billion in total assets were eligible for the extended cycle.
The interim final rule becomes effective as of publication in the Federal Register, which has not yet occurred. Comments are due within 60 days of publication. The rule does not appear to affect the timing of any examinations that already have been scheduled.
Letter to Vice Chairman Quarles
On August 17, 2018, Sen. David Perdue and six other Republican senators submitted a letter to FRB Vice Chairman Quarles, expressing “concern” regarding recent public remarks by Quarles and Chairman Jerome Powell, particularly with respect to the application of the Comprehensive Capital Analysis and Review (CCAR) stress test to bank holding companies with between $100 billion and $250 billion in total assets.
EGRRCPA generally raised the threshold for application of enhanced prudential standards under the Dodd-Frank Act from $50 billion to $250 billion in assets, with the caveat that the FRB could re-impose enhanced standards on a bank holding company with between $100 billion and $250 billion in total assets to prevent or mitigate risks to financial stability or to promote safety and soundness of the company.The letter states that the senators are “confused” by the FRB’s “intent to continue to broadly apply” the CCAR tests and other enhanced supervisory measures to bank holding companies between $100 billion and $250 billion in total assets.
The senators appear to be referring to statements made by Chairman Powell before the Senate Banking Committee last month, as well as speeches Vice Chairman Quarles made before the American Bankers Association and the Utah Bankers Association following passage of EGRRCPA. For example, before the ABA, Vice Chairman Quarles discussed the factors the FRB will consider in determining whether to apply enhanced prudential standards to banking organizations with assets between $100 billion and $250 billion, and stated more generally that “[s]tress testing should continue to play an important role in assessing potential losses that large firms would suffer under a severely adverse economic scenario.” Before the UBA, Quarles similarly stated as follows: “The law . . . exempts bank holding companies with $50 billion to $100 billion in assets from enhanced prudential standards and exempts banks with less than $100 billion in assets from future stress testing.”
In contrast, the senators expressed their understanding that EGRRCPA created an assumption that bank holding companies with assets between $100 billion and $250 billion are not systemically risky. The senators further “urge[d]” the FRB “to reduce regulations so that all non-systemic firms are treated accordingly.”