What Should the OCC Consider in Proposed Recovery Planning Changes?
As the OCC considers changes to banks’ recovery planning requirements, they should tailor such requirements to banks’ distinctive business models and risk profiles, the Bank Policy Institute and the American Bankers Association said in a letter filed late last week.
What we’re saying: “When the OCC first adopted its recovery planning Guidelines in 2016, the OCC stated that ‘a covered bank may tailor its recovery plan to its unique size, risk profile, activities, and complexity,’” the trades said in the letter. “As the OCC now proposes to expand the Guidelines by reducing the asset threshold to $100 billion and introducing a testing standard, we urge the OCC to reiterate that all aspects of the Guidelines are designed to, and will be, implemented in a tailored manner.”
The background: National banks with more than $250 billion in assets are required to maintain “recovery plans” for how they will stabilize their business during a crisis. These plans act as a map of emergency exits to avoid the bank entering into resolution. The OCC recently proposed to extend these recovery plan requirements to national banks with assets between $100 billion and $250 billion, which they frame largely as a response to the banking turmoil of 2023. The agency also proposed a new testing standard that would apply to all banks subject to the requirements. Additionally, the new proposal would treat financial risks and non-financial risks – reputational damage, operational failures – as equal factors in triggering recovery plans, when these risk areas are not equivalent; they should be clearly distinguished from one another. Non-financial risk alone should not automatically activate a recovery plan.
Key point: As the OCC expands the substantive requirements and also extends them to a bigger universe of banks, it should draw clear lines between financial risk and non-financial risk and ensure that the requirements are tailored to banks’ risk profiles and business models.
To learn more, see the letter here.
Five Key Things
1. Fed Unveils Living Will Guidance for Larger Banks
Following the FDIC’s approval last week, the Federal Reserve this week released new guidance for how certain large U.S. banks should develop living wills – plans for how they can be safely wound down. The final guidance is similar to a proposed version from last August with a few adjustments in response to commenters. The guidance generally applies to banks over $250 billion in assets that are not Global Systemically Important Banks.
- Key points: The Fed noted that, “distinct from the guidance to the largest and most complex banks, this guidance provides agency expectations for both single point of entry and multiple point of entry resolution strategies”. The guidance also acknowledges that the preferred resolution option for foreign banks is “often a successful home country-led resolution” and guides foreign banks on how they can address their global resolution plan in their U.S. living will.
- Timing: The Fed and FDIC also announced that they are extending the resolution plan submission deadline to Oct. 1, 2025 instead of March 31, 2025, “to provide reasonable time for banks to consider the final guidance as they develop their plan submissions.”
2. Bank of England Assessment Shows ‘Significant Progress’ in Large UK Banks’ Resolvability
The Bank of England this week released its latest Resolvability Assessment of 8 major UK banks (under the Resolvability Assessment Framework), where it evaluates the ability of large UK banks to be resolved safely. The report highlights “significant progress” in resolution preparedness among the eight major UK banks that were assessed. The report identifies some areas for improvement, such as “substantial variation” in quality and accuracy of firms’ data and documentation, but none of the flagged issues would likely impede the Bank’s ability to execute a resolution.
- What’s new: This second assessment brings more detailed scrutiny to large UK banks’ resolvability than previous versions.
- Next steps: The report flags issues that will be in focus in the next assessment under the RAF: variation in banks’ data and documentation quality and accuracy; restructuring planning; and valuations.
- Global cooperation: The report emphasizes the importance of international cooperation in large-bank resolutions. The Bank specifically flags the failure of Credit Suisse and subsequent merger with UBS, which “demonstrated the importance of international authorities’ commitment to ensuring the resolution framework and plans for G-SIBs remain credible.”
- SVB: The failure and resolution of Silicon Valley Bank brought new urgency to resolution preparedness as a priority. The Bank of England said that its resolution of SVB UK last year “demonstrates that we remain ready and able to use the resolution regime to protect financial stability,” but said there “will always be lessons to learn from putting the resolution regime into practice.” This section referred to the Bank Resolution (Recapitalisation) Bill recently introduced in Parliament that aims to give the Bank more flexibility to manage small-bank failures.
- Bottom line: Major UK banks have demonstrated they are prepared for resolution, and resolution planning is robust.
3. The Fed’s Preferred Bank Run Solution Will Force the Fed to Stop Shrinking. It Doesn’t Have to be This Way.
Bank examiners prefer that banks address deposit runs by drawing on massive stockpiles of cash maintained at the Fed, rather than borrowing from the discount window against pre-positioned collateral. That preference will lead to a premature end to the Fed’s quantitative tightening efforts – its effort to shrink its massive portfolio of securities. This consequence will prevent the Fed from retreating from its vast involvement in the financial system, BPI’s Bill Nelson wrote in a new Risk op-ed.
What is happening: The Fed is shrinking its massive bond portfolio by allowing some securities to mature without replacing them. This process is known as quantitative tightening, or QT. As the Fed’s assets shrink, its liabilities do, too – especially the deposits of commercial banks at Federal Reserve banks, known as reserve balances. QT will end when reserve balances approach the minimum amount necessary for banks to meet their payment-clearing needs, prepare for liquidity contingencies and satisfy liquidity requirements or examiner mandates. Reserve balances must stay above that minimum amount for the Fed to continue implementing monetary policy using its current framework. Otherwise, interest rates will rise above the rate the Fed pays on reserve balances as banks compete for the available reserves.
What drives that minimum amount? This minimum level depends critically on bank regulations and bank examiners’ preferences, namely their disparagement of the discount window as a source of bank liquidity.
Bottom line: The Fed’s necessary path to shrinking hinges on the success of current efforts to persuade bank examiners that banks should be allowed to meet immediate cash needs in a contingency with discount window borrowing.
4. BPI Supports Lankford-Peters Bill to Harmonize Federal Cyber Rules
The Senate Homeland Security and Governmental Affairs Committee voted recently to advance a bill introduced by Senators James Lankford (R-OK) and Gary Peters(D-MI) to establish a comprehensive framework for streamlining cybersecurity regulations across the federal government. The bill would mitigate challenges associated with conflicting, contradictory cybersecurity compliance requirements by establishing an interagency Harmonization Committee at the Office of the National Cyber Director (ONCD).
BPI expressed support for this legislation: “The Streamlining Federal Cybersecurity Regulations Act would mark an important first step toward aligning unnecessarily duplicative or divergent cyber regulatory requirements. The Office of the National Cyber Director (ONCD) is ideally suited to lead a Harmonization Committee and the development of a framework for achieving harmonization between regulatory agencies given its government-wide remit and previous work on this topic. We appreciate the legislation’s requirement that all agencies—including independent regulators—consult with the Harmonization Committee before prescribing any cybersecurity regulation, which will help minimize duplicative or unhelpful requirements in the future,” said Greg Baer, BPI President and CEO.
5. 5 Essential Reads to Better Understand the Current State of Bank M&A Review Standards
The FDIC and OCC have recently requested and received comments on whether the agencies should update their existing bank merger and acquisition review standards. Rather than increasing regulatory clarity, the two agencies’ proposed changes to the merger guidelines would intensify uncertainty by rejecting longstanding legal standards.
A sound merger policy promotes a diverse, competitive banking system that allows banks of all sizes to flourish, rather than assuming all growth through M&A over an arbitrary size threshold is inherently bad. Banks considering mergers — and their customers and employees — need a clear, transparent and predictable review process.
To better understand the current state of bank M&A review standards, access five research notes and blog posts here.
In Case You Missed It
The Latest Look at the Fed’s ON RRP Facility
Overnight investments, primarily by money market mutual funds, at the Federal Reserve’s ON RRP facility have declined to $287 billion as of Wednesday, down from $1.8 trillion a year ago. “As the overall supply of liquid Fed balances has declined, money funds have been able to replace Fed RRP holdings with Treasury bills and private market repo investments, which have soared,” according to Lou Crandall, of Wrightson ICAP.
A look back: To learn more about the ON RRP facility, take a look at our work below.
- A BPI symposium explaining the state of the facility, among other topics.
- A BPI note outlining why ON RRP takeup was getting much larger in 2021.
The Crypto Ledger
Here’s the latest in crypto.
- Mango fraudster seeks acquittal: A crypto trader convicted of defrauding trading platform Mango Markets is seeking an acquittal on the grounds that federal prosecutors failed to prove at trial that he violated the law. The trader, Avraham Eisenberg, said in a motion for acquittal that prosecutors failed to link his “highly successful strategy” to New York’s Southern District and failed to prove violations of the Commodities Exchange Act. Eisenberg was found guilty of commodities fraud, commodity manipulation and wire fraud.
- Coinbase adds board members: U.S. crypto exchange Coinbase recently added three new members to its board of directors. The new additions are OpenAI executive Chris Lehane, former U.S. Solicitor General Paul Clement and Aon Chief Financial Officer Christa Davies.
Member News
Regions Named as a ‘Best Place to Work’ for Disability Inclusion
Regions Bank recently announced that it has been named in the 2024 Disability Equality Index as a “Best Place to Work” for disability inclusion. The bank has been featured in this Best Places to Work list for the fourth consecutive year.
JPMorgan’s Dimon on Interest Rates, Inflation and the Bank’s Expanding Reach
JPMorgan Chase CEO Jamie Dimon joined CNBC for an interview this week, where the chief executive discussed topics ranging from the economic outlook to how the bank is reaching new customers through its new branch strategy. The interview mentions Dimon’s recent Washington Post op-ed, where he called for the next President to “restore our faith in America.”
Upcoming Events
- 9/17/2024—9/18/2024: FOMC meeting
