Bank Prudential Regulation & Regulatory Capital
US Federal Deposit Insurance Corporation Consults on the Treatment of Reciprocal Deposits On September 13, 2018, the U.S. Federal Deposit Insurance Corporation published a notice of proposed rulemaking and request for comments regarding a limited exception for a capped amount of reciprocal deposits from treatment as brokered deposits. In general, brokered deposits are treated in a restrictive or adverse manner for various regulatory purposes. Most significantly, an FDIC-insured institution that is less than adequately capitalized is prohibited from accepting brokered deposits. Reciprocal deposit
arrangements generally permit a bank to accept a large deposit in excess of FDIC insurance limits and place the excess amount with other banks in a reciprocal network, thereby affording full FDIC insurance coverage to the bank's customers. The proposed rule would implement Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amends Section 29 of Federal Deposit Insurance Act.
Under the proposed rule, a well-capitalized and well-rated (composite condition of outstanding or good) depository institution would be permitted to except non-brokered reciprocal deposits (defined in Section 202 of the EGRRCPA as "deposits received by an agent institution through a deposit placement network with the same maturity (if any) and in the same aggregate amount as covered deposits placed by the agent institution in other network member banks") up to the lesser of 20 percent of its total liabilities or $5 billion from treatment as brokered deposits (referred to as the general cap).
For institutions that are not both well-capitalized and well-rated, the proposed rule provides for the exclusion of reciprocal deposits up to the lesser of the general cap or a special cap amount calculated as the average amount of reciprocal deposits held at quarter-end during the last four quarters preceding the quarter that the institution ceased to qualify as well-capitalized or well-rated, subject to certain conditions. One potential impact of the rule is an increase in the use of reciprocal deposits given that undercapitalized banks would be permitted to accept such deposits to a limited extent.
The FDIC also proposes to make corresponding amendments to its insurance assessment regulations to ensure conformity with the statutory definition of reciprocal deposits. The FDIC estimates that the changes could cause deposit insurance assessments to increase for certain banks that have brokered deposits greater than 10% of total assets. The FDIC noted that this proposal will be followed by a proposed rulemaking that would address comprehensively the FDIC's overall framework for regulating brokered deposits in light of changes in technology, business models and product types since the rules were put in place. Comments to the proposed rule regarding reciprocal deposits are due no later than October 26, 2018.
The full text of the FDIC proposal is available at: https://www.gpo.gov/fdsys/pkg/FR-2018-09-26/pdf/2018-20303.pdf.
US Federal Deposit Insurance Corporation Seeks to Retire Certain Financial Institution Letters
On September 10, 2018, the FDIC published a proposal (FIL-46-2018) seeking comment with respect to the retirement of certain Financial Institution Letters. FILs are letters that typically announce various types of regulations, policies, publications, and other matters of interest to those in the banking community. The retired FILs would be archived and moved to inactive status, but would still be available for reference. The FDIC issued the proposal pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which requires the FDIC (and other agencies) to conduct a review of their rules at least every ten years to identify outdated or unnecessary regulations. In connection with this mandate, the FDIC has identified 374 FILs issued between 1995 and 2017 regarding risk management supervision that have become outdated or redundant. The FDIC is also currently reviewing FILs regarding other subject matters, and is exploring opportunities to update or streamline its remaining FILs generally.
Comments to the proposal are due by October 10, 2018.
The full text of the FDIC proposal, including a list of the letters to be retired, is available at: https://www.fdic.gov/news/news/financial/2018/fil18046.pdf.
US Office of the Comptroller of The Currency Proposes to Permit Certain Federal Savings Associations to Operate With National Bank Powers
On September 10, 2018, the U.S. Office of the Comptroller of the Currency published a notice of proposed rulemaking with respect to permitting federal savings associations with total consolidated assets of $20 billion or less as of December 31, 2017 ("covered savings associations"), to elect to operate with the same rights and privileges as a national bank. The proposed rule seeks to implement Section 206 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amends the Home Owners' Loan Act, and is intended to provide business flexibility for certain federal savings associations to adapt to change without a corresponding requirement to change charters. Under the proposed rule, a covered savings association has the same rights and privileges as a national bank that has its main office situated in the same location as the home office of the covered savings association, and is subject to the same duties, restrictions, penalties, liabilities, conditions and limitations that would apply to such a national bank. The covered savings institution, however, will retain its federal savings association charter, and will be treated as a federal savings association for governance and other purposes, including consolidation, merger, dissolution, conversion, conservatorship and receivership. Treatment as a covered savings association would generally continue even after the institution's total consolidated assets exceed $20 billion.
Comments to the proposed rule are due no later than November 19, 2018.
The full text of the proposal is available at: https://www.gpo.gov/fdsys/pkg/FR-2018-09-18/pdf/2018-19955.pdf.
European Central Bank Guide to On-Site Inspections and Internal Model Investigations
On September 21, 2018, the European Central Bank published its finalized Guide to on-site inspections and internal model investigations under the Single Supervisory Mechanism. The ECB is empowered under the SSM Regulation to conduct, with respect to Eurozone entities within its supervisory remit: (i) on-site inspections, which are in-depth investigations of risk, risk controls and governance; and (ii) internal model investigations, which involve in-depth assessments of internal models used for the calculation of own fund requirements.
The ECB has developed the Guide as a reference document for supervised entities and other legal entities for which the ECB has decided to launch an on-site inspection. It consulted on a draft of the Guide in July 2017 and has published a separate feedback statement on the consultation responses that were received.
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