Rules and reporting requirements for company-run stress testing, resolution plans, the Volcker rule, high-volatility commercial real estate exposures, examination cycles, municipal obligations as high-quality liquid assets, and other provisions contained in regulatory relief legislation enacted last month are addressed in a statement issued Friday by the federal banking agencies.
In a joint statement, the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC) described interim positions that the regulatory agencies will take on changes made through the new law – the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA, S. 2155) – before incorporating the changes into their regulations.
The legislation was signed into law by President Donald Trump May 24.
“The amendments made by EGRRCPA provide for additional tailoring of various provisions of the banking laws while maintaining the authority of the agencies to ensure the safety and soundness of the institutions they supervise and to apply the enhanced prudential standards in the Dodd-Frank Act that address financial stability,” the agencies said, referring to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. That legislation was passed in the wake of the financial crisis of the latter part of the last decade.
More specifically, the joint statement outlines several interim positions regarding existing rules affected by the new law, including:
Company-Run Stress Testing
- Deadlines are extended for all regulatory requirements related to company-run stress testing for depository institutions with average total consolidated assets of less than $100 billion until Nov. 25, 2019 (at which time the two statutory exemptions in the new law will be in effect).
- The Fed and the FDIC will not enforce the final rules establishing resolution planning requirements in a manner inconsistent with the amendments made by EGRRCPA to section 165 of the Dodd-Frank Act.
- The agencies said they will not enforce the final rule implementing section 13 of the Bank Holding Company (BHC) Act “in a manner inconsistent with the amendments made by EGRRCPA to section 13 of the BHC Act.” The agencies also intend to address the statutory amendments through a separate rulemaking process, the statement said.
High-Volatility Commercial Real Estate (HVCRE) Exposures
- The statement notes that new law provides that, effective upon enactment, the banking agencies may only require a depository institution to assign a heightened risk weight to an HVCRE exposure if such exposure is an “HVCRE ADC Loan,” as defined in section 214 of EGRRCPA. “Accordingly, a depository institution is permitted to risk-weight at 150 percent only those commercial real estate exposures it believes meet the statutory definition of HVCRE ADC Loan,” the statement notes.
Extended Exam Cycle
- The agencies intend to engage in rulemaking to implement provisions in the new law increasing the total asset threshold for well-capitalized insured depository institutions to be eligible for an 18-month examination cycle from $1 billion to $3 billion, making an 18-month examination cycle available to a larger number of “1-rated” institutions, and authorizing the agencies to make corresponding changes for “2-rated” institutions.
Municipal Obligations as High-Quality Liquid Assets (HQLA)
- The agencies said they intend to engage in rulemaking to address these provisions. However, in anticipation of implementing the changes through rulemaking, the agencies said they will not take action to require an institution subject to the liquidity regulations to exclude from the definition of HQLA municipal obligations that the institution believes meet the statutory criteria for inclusion in HQLA.
Appraisals for Qualifying Rural Transactions (less than $400,000)
- The agencies note that the provision became effective upon enactment but that they are reviewing the statutory provisions to determine whether further action is necessary
Finally, the statement notes that the actions the agencies are taking are consistent with the new law, but they will continue to supervise and regulate financial institutions to ensure the safety and soundness of individual institutions and the stability of the broader banking system.
“Thus, for example, while the agencies will not take action to require company-run stress testing by depository institutions with assets less than $100 billion, the capital planning and risk management practices of these institutions would continue to be reviewed through the regular supervisory process,” they noted.