Board splits on final rules for NSFR levels, TLAC requirements; OKs interim rule on audit requirement relief

The board of the federal insurer of bank deposits on split votes issued two final rules, and also issued an interim final rule Tuesday, including a regulation on bank liquidity that aims to ensure that large institutions don’t rely too much on short-term funding sources, but can still do so without causing more volatility in U.S. government debt markets.

Meeting in open session, the Federal Deposit Insurance Corp. (FDIC) Board approved the two final rules – both on split votes – on a net stable funding ratio (NSFR) and on the regulatory capital treatment for investments in certain unsecured debt instruments of global systemically important U.S. bank holding companies, and other firms. FDIC Board Member Martin Gruenberg voted against both final rules.

The interim final rule approved by the board focused on applicability of annual independent audits and report requirements for fiscal years ending in 2021. The board also issued a proposed rule on the role of supervisory guidance.

Regarding the NSFR final rule – proposed in 2016 in a notice of proposed rulemaking – the FDIC said it measures the stability of the funding profile of certain large banking organizations and requires these banking organizations to maintain minimum amounts of stable funding to support their assets, commitments, and derivatives exposures over a one-year time horizon. The rule – which applies only to banks with assets of $1 billion or more – is also being adopted by the other federal banking agencies, the Federal Reserve and the Office of the Comptroller of the Currency (OCC).

The FDIC said the final rule makes certain adjustments to that proposed in 2016, in particular by implementing the Basel NSFR standard with “modifications” that address specific characteristics of U.S. markets, practices of U.S. banking organizations, and domestic policy objectives. The final rule takes effect July 1, 2021.

FDIC Board Chairman Jelena McWilliams, in a statement, said the final rule is consistent with the 2016 proposal, but with certain “improvements” in the NSFR framework. “For example, in recognition of the low risk to a bank’s funding profile posed by high-quality liquid assets (HQLA), the final rule would not require stable funding to be held against unencumbered level 1 liquid assets and short-term secured lending transactions backed by level 1 liquid assets (e.g., U.S. Treasury securities),” she said. “These assets serve as reliable sources of liquidity based on their high credit quality, and they serve a critically important role in supporting the smooth functioning of funding markets.

She also asserted that the final rule would apply based on a bank’s size, risk profile, and systemic footprint.

Gruenberg, in voting against finalizing the rule, said it would “severely reduce” the number of large banking organizations subject to the NSFR compared to that envisioned in the proposal. He also asserted that the final rule “would significantly weaken the substantive requirements of the NSFR in ways that would not be compliant with the Basel Agreement, and it would provide for less timely public disclosure of the NSFR.” He indicated those were his key reasons for voting against the final rule.

McWilliams and Gruenberg also went opposite ways in considering the final rule on investments in U.S. GSIB unsecured debt instruments with regard to total-loss absorbing capacity (TLAC) requirements. McWilliams said the final rule – also adopted by the Fed and the OCC – is “substantially consistent with the proposal, with certain changes intended to reduce compliance burden and to support deep and liquid markets for TLAC and LTD (long-term debt) issued by GSIBs while reducing interconnectedness.”

Gruenberg saw the final rule differently, asserting that it reduced the total number of banks affected by it from 19 to nine – removing 11 large banking organizations (including foreign organizations) with large U.S. operations from the scope of the rule. The rule added a U.S. banking organization with what Gruenberg termed “substantial cross-jurisdictional activity.”

“Given the potential systemic risks posed by the 19 banking organizations subject to the NPR, the scope of the Final Rule should not have been narrowed,” Gruenberg said. “For that reason, I will vote against the Final Rule.”

In other action, the board:

  • Approved an interim final rule designed to provide temporary relief form the agency’s audit and reporting requirements in the face of large cash inflows due to government stimulus efforts in response to the financial impact of the coronavirus crisis, and money flowing in from other federal programs meant to stanch the financial impact of the crisis (such as the Paycheck Protection Program Liquidity Facility [PPPLF] and the Money Market Mutual Fund Liquidity Facility [MMLF].) According to the agency, the IFR will allow banks that have experienced growth to determine whether they are subject to the requirements of Part 363 of the FDIC’s regulations for fiscal years ending in 2021 based on consolidated total assets as of Dec. 31, 2019. Such banks, the agency said, whose asset growth may be temporary but significant, “would be otherwise required to develop processes and systems to comply with the annual independent audits and reporting requirements of Part 363 on a potentially short-term basis.” The IFR takes effective immediately; comments will be taken for 30 days.
  • Issued a proposed rule (in conjunction with other federal banking and credit union regulators, as well as the Consumer Financial Protection Bureau) aimed at clarifying the role of supervisory guidance issued by the agencies in 2018, which essentially stated that – unlike a law or regulation – supervisory guidance does not have the force of law. “As such, supervisory guidance does not create binding legal obligations for the public,” the proposal states. “The proposal would also clarify that the 2018 Statement, as amended, is binding on the agencies.” Comments will be taken for 60 days.

Final Rule on Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements:

Final Rule on Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain Intermediate Holding Companies, and Global Systemically Important Foreign Banking Organizations; Total-Loss Absorbing Capacity Requirements (TLAC):

Interim Final Rule on Applicability of Annual Independent Audits and Reporting Requirements for Fiscal Years Ending in 2021:

Proposed Rule on The Role of Supervisory Guidance:

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