Supervision Policy
The goal of supervision policy is to provide clear, consistent, meaningful, and timely information to financial institutions.
Risk-Focused Supervision Program
During 2018, RMS undertook initiatives to enhance its risk-focused supervision program, including a study of post-crisis bank failures and an in-depth evaluation of examination processes.
RMS studied post-crisis bank failures for lessons that could be used to enhance risk-focused supervision activities going forward. The study reinforced the importance of a comprehensive and vigilant approach to continuous risk-focused, forward-looking supervision. As a result, case study analyses were presented to supervisory staff, and training sessions were held to communicate lessons learned from the study that would help examiners identify deficiencies or weaknesses and work with institutions to correct their root causes.
The FDIC also initiated an Examination Workstream project to review risk-focused examination practices. The Conference of State Bank Supervisors (CSBS) participated in the initiative, which also leveraged feedback from other sources, and developed numerous recommendations to enhance the risk-focused supervision program.
Current Expected Credit Losses Implementation
In June 2016, the Financial Accounting Standards Board (FASB) introduced the CECL methodology for estimating allowances for credit losses, replacing the current incurred-loss methodology.
Since then, the FDIC has worked collaboratively with the other federal banking agencies, the FASB, the Securities and Exchange Commission (SEC), and the CSBS to answer questions regarding the implementation of CECL.
- In February 2018, the FDIC and FRB, in conjunction with the FASB, SEC, and CSBS, jointly hosted two CECL webinars—one for examiners and another for bankers—entitled "Practical Examples of How Smaller, Less Complex Community Banks Can Implement the Current Expected Credit Losses Methodology." The webinars addressed loan loss rate methods that such institutions can use to implement CECL, as well as related data considerations and controls. The banker webinar had more than 8,000 participants. Materials have been archived for viewing, and a transcript of the banker webinar is available.
- In May 2018, the FDIC, FRB, and OCC issued a notice of proposed rulemaking (the CECL NPR) that proposed a revision to the regulatory capital rules for the implementation of, and capital transition to, the CECL methodology.
- In July 2018, the three banking agencies, together with the FASB, SEC, and CSBS, conducted a Q&A webinar that addressed various CECL questions the agencies have received from community bankers. The July webinar had more than 3,300 participants. The webinar materials and a transcript of the presentation have also been archived for viewing.
In September 2018, the FDIC, jointly with the other federal banking agencies, published a Federal Register notice requesting comment on proposed revisions to the Call Report and other regulatory reports to address, among other things, changes in the accounting for credit losses under the CECL methodology. The notice also proposed changes to the Call Report’s regulatory capital schedule and changes to another report to align these reports with the agencies’ May 14, 2018, CECL NPR. The agencies issued the CECL final rule in December 2018. The final rule allows banks to transition the day one effects of the CECL accounting standard on regulatory capital over three years. The final rule also revises the agencies’ regulatory capital rule and other rules to take into consideration differences between the new accounting standard and existing U.S. generally accepted accounting principles.
Alternative Reference Rates
The FDIC, along with the other FFIEC members, launched an initiative to raise awareness and educate supervised financial institutions and examiners about reference rate alternatives to the London Inter-bank Offered Rate (LIBOR). The FFIEC members hosted an introductory webinar in December 2018, and plan to follow with additional outreach via webinars and other efforts as new information develops.
Credit Risk, Liquidity Risk, and Interest-Rate Risk
Loan volume continues to grow as the economy expands for the tenth consecutive year. A large majority of insured institutions grew their loan portfolios over the past year, and some institutions have further increased existing concentrations. Loan growth, accompanied by a reduction in holdings of liquid assets and increased reliance on funding sources other than traditionally stable deposits, is particularly prevalent among institutions with rising or elevated concentration levels. These trends have the potential to give rise to heightened credit and liquidity risk.
While interest rates are beginning to rise, asset maturities remain lengthened. A lengthy period of historically low interest rates and tightening net interest margins created incentives for insured depository institutions to reach for yield in their lending and investment portfolios by extending portfolio durations, potentially increasing their vulnerability to interest-rate risk. Banks must continue to be diligent in their efforts to identify, manage, and monitor credit risk, liquidity risk, and interest-rate risk.
Through regular on-site examinations and interim contacts with state nonmember institutions, FDIC staff regularly engages in dialogue with institution management to ensure that their policies to manage credit risk, liquidity risk, and interest-rate risk are effective. Where appropriate, FDIC staff works with institutions that have significant exposure to these risks and encourages them to take appropriate risk-mitigating steps. The FDIC uses off-site monitoring to help identify institutions that may have heightened exposure to these risks, and follows up with them to better understand their risk profiles.
Throughout 2018, the FDIC conducted outreach and offered technical assistance regarding these risk issues, including Supervisory Insights articles on credit risk grading systems and on the risk management practices of insured banks active in oil and gas lending. In addition, FDIC examiners now devote additional attention during the examination process to assessing how well banks are managing the risks associated with concentrations in credit exposures and funding sources. The findings of these assessments are shared with bank management in the Report of Examination.
Industry Guidance
Interagency Statement on Accounting and Reporting Implications of the New Tax Law
In January 2018, the FDIC, jointly with the FRB and OCC, issued an interagency statement containing guidance on the accounting implications of the new tax law, which was enacted on December 22, 2017, and related matters. The statement provided instructions on the application of FASB Accounting Standards Codification (ASC) Topic 740, “Income Taxes,” and did not represent new rules or regulations of the agencies. The changes enacted in the new tax law were relevant to financial statements and regulatory reports, such as the Call Report and the Consolidated Financial Statements for Holding Companies (FR Y-9C Report).
Interagency Statement Clarifying the Role of Supervisory Guidance
In September 2018, the FDIC, jointly with the FRB, OCC, National Credit Union Administration (NCUA), and Consumer Financial Protection Bureau (CFPB), issued an interagency statement explaining the role of supervisory guidance and describing the agencies’ approach to supervisory guidance. The statement reaffirmed the purpose of supervisory guidance to articulate the agencies’ general views regarding appropriate practices for a given subject area. Unlike a statute or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supposed “violations” of supervisory guidance.
Regulatory Relief
During 2018, the FDIC issued 13 FILs to provide guidance to financial institutions in areas affected by hurricanes, tornadoes, flooding, wildfires, and other severe storms, and to facilitate recovery. In these FILs, the FDIC encouraged banks to work constructively with borrowers experiencing financial difficulties as a result of natural disasters, and clarified that prudent extensions or modifications of loan terms in such circumstances can contribute to the health of communities and serve the long-term interests of lending institutions.
Rulemakings to Implement the Economic Growth, Regulatory Relief, and Consumer Protection Act
In May 2018, EGRRCPA was signed into law, and the FDIC immediately began efforts to implement various provisions of the new law.
Community Bank Leverage Ratio
In November 2018, the FDIC, OCC, and FRB issued a notice of proposed rulemaking to implement Section 201 of EGRRCPA to establish a leverage ratio for qualifying community banks. If a qualifying community bank exceeds this leverage ratio, it would be deemed to meet the generally applicable leverage and risk-based capital requirements and the well-capitalized ratio requirements under the prompt corrective action framework. Comments will be accepted for 60 days following publicaIon in the Federal Register.
In December 2018, the FDIC published a notice of proposed rulemaking to amend the deposit insurance assessment system to address the application of the leverage ratio for qualifying community banks. Comments will be accepted for 60 days following publication in the Federal Register.
Appraisal Threshold for Residential Real Estate Loans
In December 2018, the FDIC, OCC, and FRB published a proposed rule to amend the agencies’ regulations requiring appraisals for certain real estate-related transactions. The proposed rule would raise the threshold from $250,000 to $400,000 at which appraisals would be required for residential real estate-related transactions. The proposed rule would also make conforming changes to exempt certain transactions secured by residential property in rural areas from the agencies’ appraisal requirement pursuant to the EGRRCPA. Pursuant to the Dodd-Frank Act, the proposed rule would amend the agencies’ appraisal regulations and require institutions to review appraisals for federally related transactions for compliance with the Uniform Standards of Professional Appraisal Practice. The comment period closed on February 5, 2019.
Reciprocal Deposits
Section 202 of EGRRCPA amended Section 29 of the FDI Act with respect to reciprocal brokered deposits. On September 12, 2018, the FDIC approved an NPR on the treatment of reciprocal deposits to conform Section 337.6 of the FDIC Rules and Regulations to Section 202. The NPR was published in the Federal Register on September 26, 2018. The 30-day comment period closed on October 26, 2018.
After reviewing the 13 comments received, the FDIC Board approved a final rule on December 18, 2018, for publication in the Federal Register. This final rule adopts the NPR as proposed.
The final rule incorporates the Section 202 statutory language into the regulation. In summary, the final rule provides an exception for a capped amount of reciprocal brokered deposits from treatment as brokered deposits for certain IDIs, and confirms that the current statutory and regulatory rate restrictions for less than well-capitalized institutions apply to reciprocal deposits that are excepted from treatment as brokered deposits. The final rule also includes conforming amendments to the insurance assessment regulations, Part 327 of the FDIC Rules and Regulations, to be consistent with the statutory definition of reciprocal deposits.
Volcker Rule
In December 2018, the FDIC, OCC, FRB, and SEC issued an NPR to implement Section 203 of EGRRCPA. Section 203 amends Section 13 of the Bank Holding Company Act to create an exclusion for certain banks and their holding companies from the prohibitions of the Volcker Rule. To qualify, neither the IDI nor any controlling company may have more than $10 billion in total consolidated assets, or total trading assets and trading liabilities of more than 5 percent of total consolidated assets, as reported on the most recent regulatory filing. The NPR would also implement Section 204 of EGRRCPA to amend the restrictions applicable to the naming of a hedge fund or private equity fund to permit certain banking entities that are not banks or bank holding companies to share a name with the fund under certain circumstances. Comments will be accepted for 30 days following publication in the Federal Register.
Short-Form Call Reports
In November 2018, the FDIC, together with the FRB and OCC, published in the Federal Register an NPR to implement Section 205 of EGRRCPA that would increase the existing asset-size limit from less than $1 billion to less than $5 billion for eligibility to file the streamlined FFIEC 051 Call Report, provided other criteria are met, and establish reduced reporting for all IDIs that file this version of the Call Report.
To further reduce reporting requirements in the FFIEC 051 Call Report, the agencies also proposed exempting approximately 37 percent of data items from being reported in the FFIEC 051 Call Report in the first and third quarters. The principal areas proposed for reduced reporting include data items related to categories of risk-weighting of various types of assets and other exposures under the agencies' regulatory capital rules, fiduciary and related services assets and income, and troubled debt restructurings by loan category. As of June 30, 2018, almost 90 percent of IDIs reported less than $1 billion in total assets and were already eligible to file the FFIEC 051 Call Report based on asset size. By raising the threshold for filing the FFIEC 051 to less than $5 billion in total assets, approximately 95 percent of all IDIs would be eligible to file this streamlined Call Report. The 60-day comment period closed on January 18, 2019.
Expanded Examination Cycle
In December 2018, the FDIC, FRB, and OCC jointly published final rules to expand the examination cycle for certain small IDIs and U.S. branches and agencies of foreign banks. The final rules did not differ from the interim rules that were published in the Federal Register on August 29, 2018.
Section 210 of the EGRRCPA raised the asset-size threshold for the 18-month examination cycle from less than $1 billion in assets to less than $3 billion in assets for certain well-capitalized and well-managed IDIs with an “outstanding” composite condition, and gave the agencies discretion to similarly raise this threshold for certain IDIs with an “outstanding” or “good” composite condition. The agencies exercised this discretion and issued final rules that, in general, make qualifying IDIs with less than $3 billion in total assets eligible for an 18-month (rather than a 12-month) examination cycle.
To qualify, IDIs must have a CAMELS composite rating of “1” or “2,” and be well-capitalized, well-managed, not subject to a formal enforcement proceeding, and must not have undergone any change in control during the previous 12-month period. The rule also applies to qualifying U.S. branches or agencies of a foreign bank.
Since BSA compliance programs are required to be reviewed during safety and soundness examinations, institutions with assets up to $3 billion that are now eligible for the 18-month safety-and-soundness examination cycle will also generally be subject to less frequent BSA reviews.
High-Volatility Commercial Real Estate
The FDIC worked with the FRB and OCC to issue an NPR, published in the Federal Register on September 28, 2018, to incorporate the new definition of high-volatility commercial real estate acquisition, development, or construction loan included in Section 214 of EGRRCPA. The 60-day comment period ended on November 27, 2018.
Liquidity Coverage Ratio Rule: Treatment of Certain Municipal Obligations as High-Quality Liquid Assets
Section 403 of EGRRCPA amended Section 18 of the FDI Act, requiring the FDIC, OCC, and FRB (collectively, the agencies) to amend their liquidity coverage ratio (LCR) rules, and any other regulation that incorporates a definition of the term “high-quality liquid asset” (HQLA), to treat a municipal obligation as HQLA that is a level 2B liquid asset if the obligation, as of the calculation date, is liquid and readily-marketable and investment grade. On August 31, 2018, the agencies published an interim final rule in the Federal Register in compliance with Section 403. The comment period for the interim final rule closed October 1, 2018. The agencies are reviewing the comments received.
Other Rulemakings
Removal of Credit Ratings from International Banking Regulations
In March 2018, the FDIC published a final rule amending its international banking regulations related to permissible investment activities and the pledging of assets. The final rule removes references to “external credit ratings” and replaces them with “appropriate standards of creditworthiness.” The changes in the FDIC Rules and Regulations Part 347, Subparts A and B, are consistent with Section 939A of the Dodd-Frank Act.
Securities Transaction Settlement Cycle
In June 2018, the FDIC and OCC published a final rule to amend the rules to generally require supervised institutions to settle securities transactions within the number of business days in the standard settlement cycle followed by registered broker dealers in the United States. The final rule, which became effective on October 1, 2018, responds to an industry-wide shift in the standard settlement cycle from three days after the trade date (“T+3”) to two days (“T+2”), as mandated by the SEC’s recent amendments to SEC Rule 15c6-1(a). By requiring FDIC-supervised institutions to settle securities transactions within the standard settlement cycle as provided in SEC Rule 15c6-1(a), the final rule effectively conforms the FDIC’s rules to the current T+2 and accommodates future shifts in the standard settlement cycle.
Proposed Changes to Applicability Thresholds for Regulatory Capital Requirements and Liquidity Requirements
In December 2018, the FDIC, FRB, and OCC published an NPR that would establish a revised framework for applying the regulatory capital rule, liquidity coverage ratio rule, and proposed net stable funding ratio rule. Under the proposal, application of the rules would depend on the risk profile of each large U.S. banking organization and its subsidiary institutions. The proposal would establish four categories of standards for banking organizations with total assets of $100 billion or more, and would apply capital and liquidity requirements tailored for banking organizations subject to each category. The 30-day comment period ended on January 22, 2019.
Modifications to the Statement of Policy for Section 19
On July 19, 2018, after considering public comments, the FDIC Board of Directors approved modifications to the Statement of Policy for Section 19 of the Federal Deposit Insurance Act to revise the criteria that define de minimis offenses, clarify existing statements, and remove outdated references to the Office of Thrift Supervision. The modifications are intended to reduce regulatory burden, promote public awareness of the law, and decrease the number of covered offenses that will require an application. In addition, the FDIC revised the Section 19 application form and published an informational brochure: “Your Complete Guide to Section 19.” The modifications to the statement of policy, revised application form, and informational brochure were announced in FIL-68-2018.
Brokered Deposits
The FDIC continues to receive questions about the application of the brokered deposit regulation (Section 337.6 of the FDIC Rules and Regulations). Except for the December 2018 update for reciprocal deposits, FDIC last amended its brokered deposit regulation – specifically the interest rate restrictions– in 2009. Since that time, technology, law, business models, and product ranges have evolved. In order to determine what additional changes to Section 337.6 may be warranted, the FDIC approved an Advance NPR on December 18, 2018, to seek comment on the brokered deposit regulation more generally. The comment period will end 90 days after publication in the Federal Register.