(March 26, 2021) The Federal Reserve’s top supervisor this week made it clear that the future of LIBOR as a reference rate for such products as adjustable-rate mortgages will be sealed after June 2023.
In remarks this week to a symposium on reference rates sponsored by the Federal Reserve Bank of New York’s Alternative Reference Rates Committee (ARRC), Federal Reserve Board Vice Chair for Supervision Randal Quarles said recent statements about the discontinuation of the London Interbank Offer Rate (LIBOR) are definitive. “There is no scenario” in which LIBOR (London Interbank Offer Rate) will continue past mid-year 2023, when U.S. dollar (USD) LIBOR will no longer be published, Quarles said.
The group that publishes LIBOR has already announced that it can no longer guarantee the rate after the end of this year. (The June 2023 date refers to outstanding contracts that use the rate; after that date, the administrator of LIBOR – the ICW Benchmark Administration (IBA) has said it will no longer publish overnight, one-month, three-month, six-month, or one-year USD LIBOR).
Additionally, the federal banking regulators in November issued guidance to their supervised entities that, after the end of this year, “continued use of LIBOR in new contracts would create safety and soundness risks, and we will examine bank practices accordingly.” NCUA has not issued similar guidance, although it did join an FFIEC statement last summer urging financial institutions to continue their efforts to transition to alternative reference rates. In addition, the agency’s 2021 “supervisory priorities” note the agency continues to encourage credit unions to prepare for LIBOR’s demise by year’s end.
Also this week, the New York state legislature passed legislation that is aimed at minimizing legal uncertainty and adverse economic effects for LIBOR contracts, a side effect of the discontinuation of the reference rate. According to the ARRC, the legislation affects LIBOR contracts that mature after June 2023, including those that have no effective means to replace LIBOR upon its cessation. The legislation is significant to the phase-out of LIBOR since New York law governs many of the financial products and agreements referencing LIBOR, according to the ARRC.
(Feb. 12, 2021) A reprieve for financial institutions from reserve requirements on transactions accounts, implemented last March to keep money flowing amid the coronavirus pandemic, will be permanent under a final rule approved this week by the Federal Reserve Board.
Last year, the Fed Board issued an interim rule setting the transaction account reserve requirement to zero and sought comments on making this permanent; none were submitted. The Fed’s final rule takes effect March 12.
The Fed’s Reg D implements the Fed’s authority under Section 19 of the Federal Reserve Act to require reserves. Section 19(b)(2) of the act requires each depository institution to maintain reserves against its transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities, as prescribed by Board regulations, for the purpose of implementing monetary policy.
Reserve requirements for nonpersonal time deposits and Eurocurrency liabilities have been set at 0% since 1990, so the only reserving required since then was on transaction accounts.
The Fed announced the interim rule and request for comments on zero reserving March 15, 2020. At the time, it said that more than 2,500 depository institutions maintained, in aggregate, $150 billion in account balances to satisfy their Reg D reserve balance requirements.
LINK:
Regulation D: Reserve Requirements of Depository Institutions
(Jan. 8, 2021) The election of two Democrats from Georgia to the U.S. Senate this week – giving the Democrats a slim majority and therefore control — means some changes ahead in policy and, likely, to at least two regulatory agencies.
Once newly elected Sens. Raphael Warnock and Jon Ossof are seated (following certification of their elections, likely late this month), the Democrats will take control of the Senate. That will open the door to Democrats capturing the chairs of Senate committees – including the Senate Banking Committee, which writes the laws affecting credit unions and other financial institutions. Sen. Sherrod Brown (Ohio) is now the ranking Democrat on the committee and will likely be elected chair.
Brown, over the last several years as ranking minority party member of the committee, has been sharply critical of financial institution regulatory relief efforts. This week, for example, he vilified in a press release the recommendations of the CFPB’s task force on consumer law. “From the outset, it was clear that the CFPB’s Taskforce on Federal Consumer Law was just a pretext to gut regulations and protections for consumers,” he stated. “The Taskforce members have a history of undermining the CFPB and work at law firms representing payday lenders, banks, and other corporations with a direct, financial interest in rolling back consumer protections.”
The Democrats’ control of the chamber likely also dooms the nominations for a Federal Reserve governor and a permanent comptroller of the currency. On Jan. 3, President Donald Trump (with 17 days left in office) re-nominated Judy Shelton as a Fed governor, and Brian Brooks as comptroller (Brooks now serves as acting comptroller). Those nominations are unlikely to be considered between now and Jan. 20, when President-elect Joe Biden will be inaugurated, as the Senate is in recess through Jan. 19. Biden will likely withdraw the nominations after taking office – and, even if he didn’t, the Democrat-led Senate is unlikely to ever take them up.
(Dec. 23, 2020) The Federal Reserve Board now has six (out of a total seven) members, as newest Gov. Christopher Waller joined the board after taking his oath of office last Friday. Waller was confirmed by the Senate Dec. 3; he is the former research director for the St. Louis Fed, and a former professor. Meanwhile, there is still no word on confirming the nominee to the seventh and final seat on the board. A vote on controversial nominee Judy Shelton has been stalled in the Senate since at least November; Senate leadership has yet to announce plans to take up the nomination again … Big banks saw their losses rise to more than $600 billion under conditions simulated in a second stress test conducted by the Federal Reserve – but the banks’ capital ratios, despite the losses, would continue to be well above the minimum required (falling from 12.2% to 9.6%, but still above the 4.5% minimum), the central bank said late last week. Nevertheless, the Fed plans to keep restrictions on the banks’ distributions to investors and share repurchases, and won’t make changes to capital requirements … How to spot warning signs of human trafficking is in the spotlight for a webinar next month sponsored by NCUA, set for Jan. 7. The agency said the event will provide an overview of human trafficking and its impact on communities, law enforcement’s efforts to combat it, and potential red flags in credit unions. Attendees will also learn how to report concerns about human trafficking to the proper authorities, the agency said. There is no charge for attending, although advance registration is required … This is the final issue of NASCUS Report for 2020; we’ll see you again on Jan. 8. In the meantime: Happy Holidays – and have a terrific New Year!
LINKS:
Federal Reserve Board releases second round of bank stress test results
Register Now for NCUA’s Human Trafficking Webinar on Jan. 7
(Dec. 4, 2020) NASCUS supports making some changes to recordkeeping and travel rule regulations under rules implementing the Bank Secrecy Act (BSA) to promote calibrating the value of anti-money laundering measures with operational, compliance and expense considerations of credit unions and other institutions, NASCUS wrote in a comment letter filed Nov. 27.
In a letter to the Federal Reserve Board, NASCUS responded to a joint request for comments from the Fed and the Financial Crimes Enforcement Network (FinCEN). When the comment request was issued Oct. 23, the two agencies said they were issuing the portion of the rule concerning recordkeeping jointly because of their shared authority; the portion on travel was issued singly by FinCEN as it has sole authority over that area.
Under current rules, financial institutions must collect, retain, and transmit certain information related to funds transfers and transmittals of funds greater than $3,000, the agencies stated. Under the proposal, the applicable threshold for international transactions would drop to $250; the threshold for domestic transactions would remain the same ($3,000).
NASCUS, in its letter, wrote that lowering the threshold for fund transmittals beginning or ending outside of the U.S. will come with a cost for credit unions and other financial institutions. “For some institutions, the increased data storage requirements of capturing and preserving required information could be a significant burden, particularly as credit unions manage the economic dislocation resulting from the ongoing pandemic,” NASCUS wrote.
The association stated that the agencies should also consider that while the lower threshold applies only to transactions beginning or ending outside of the United States, for many institutions the best practice is to set data collection policies to the “lowest requirement” to ensure consistent compliance. The agencies’s proposal, NASCUS wrote, “would result in the capture and retention of significant amounts of data even for those credit unions doing only infrequent international funds transmittals,” NASCUS wrote.
In other comments, NASCUS also:
- Wrote that it supports including a specific standard for “reason to know” in the rule to mitigate the potential for confusion and uncertainty as to the standard to be met. “We would also recommend clear guidance on the obligations of all financial institutions in the chain of a funds transmission with respect to identifying cross-border transactions and compliance with the final rules,” NASCUS wrote. Under the proposal, funds transfer or transmittal of funds would be considered to begin or end outside the U.S. if a financial institution knows or has reason to know that the transmittor, transmittor’s financial institution, recipient, or recipient’s financial institution is located in, is ordinarily resident in, or is organized under the laws of a jurisdiction other than the United States or a jurisdiction within the United States.
- Urged FinCEN to continue to evaluate the BSA framework to eliminate redundant monitoring, reporting or recordkeeping requirements. “Reducing compliance burden in ‘other’ areas of the BSA would allow credit unions to reallocate resources to those areas where enhanced diligence, or more granular reporting might be needed by law enforcement,” NASCUS wrote.
(Dec. 4, 2020) Following the Senate’s action to fill out the membership of the NCUA Board, on Thursday the Senate filled one of two empty seats on the Federal Reserve Board, confirming Christopher Waller. But it wasn’t a cakewalk: by many accounts, it was one of the closest confirmation votes ever for a central bank board member.
Waller, now executive vice president/director of research for the Federal Reserve Bank of St. Louis (and a former professor of economics at the University of Notre Dame), was confirmed on a vote of 48-47, with all Democrats and Republican Sen. Rand Paul (Ky.) voting against.
Thursday’s vote marked the first time the Senate had confirmed a Fed governor in a lame-duck period that follows the November election before the president’s term ends in January. Further, Fed governors are more typically confirmed on much more lop-sided votes, with 60 votes or more in favor.
The close vote for Waller (considered a “non-controversial” nominee) may signal bad news for the future on the Fed Board for the nominee to the other open seat: Judy Shelton. She has received a cool reception in the Senate, particularly among Democrats, for her past comments about bringing back the gold standard, questioning the effectiveness of federal deposit insurance, and the Fed’s independence from political influence.
Last month, Shelton’s nomination came before the Senate and failed to earn enough votes to cut off debate – action that would have paved the way for a final vote on her nomination. The close vote on Waller likely indicates the controversial Shelton will have a tough time being considered again in the Senate. In fact, Senate Majority Whip John Thune (R-S.D.) said Thursday that another vote on Shelton’s nomination was “unlikely” at this point.
(Nov. 20, 2020) Two federal banking agencies saw action for their leadership futures this week, as a nominee for one barely failed to be confirmed to the position and another was nominated for a permanent position.
However, further progress for the two candidates – at the Federal Reserve and OCC, respectively — seems doubtful at this stage.
Meanwhile, the Senate could consider the nomination of Kyle S. Hauptman for the NCUA Board as early as the week following Thanksgiving.
On the Federal Reserve nomination: The Senate failed to confirm nominee Judy Shelton on a vote of 47-50, which was marked by bipartisan opposition to her confirmation. Shelton has proved to be a controversial candidate to sit on the central bank board: in the past, she has drawn controversy and some criticism for her expressed views about reinstituting the gold standard, questioning the effectiveness of federal deposit insurance, and the Fed’s independence from political influence.
Republican senators had vowed to consider her confirmation again (which was hobbled the first time by three senators outright expressing or voting in opposition to her, and others not available to vote after quarantining for Covid-19 exposure or infection). However, the Senate recessed Wednesday evening for the Thanksgiving holiday and won’t return until the afternoon of Nov. 30 (the Monday after Thanksgiving). That timing places Shelton’s confirmation in further doubt – on that day, the Democrats gain an additional member, Senator-elect Mark Kelly (Ariz.), who won a special election over incumbent Martha McSally (R ) Nov. 3. All Democrats have vowed to oppose Shelton’s confirmation.
On top of that, time is running short for the Senate to consider her nomination again in the coming weeks, as the current Congress winds down (and the Christmas and New Year holiday breaks loom). The new Congress will take its seats Jan. 3.
Also this week, President Donald Trump nominated Acting Comptroller of the Currency Brian P. Brooks to take the job (that is, remove the “acting” from his title) for a five-year term. Brooks was appointed to his current position by Treasury Secretary Stephen Mnuchin; he was not been confirmed by the Senate.
But the outlook for Brooks’ confirmation is similar to Shelton’s, with an added twist: In addition to growing Democratic opposition, and a dwindling calendar, Brooks will be subject to a Senate Banking Committee hearing on his nomination before he can be considered by the full Senate. Ranking Member Sherrod Brown (Ohio) has already questioned Brooks’ qualifications for the comptroller’s job; Brooks has held the acting title only since late May, and joined the OCC in April.
Nevertheless, press reports indicated late this week that Senate Banking Committee Chairman Mike Crapo (R-Idaho) intends to hold a hearing on the Brooks nomination. Further, reports also indicated that the Senate is also preparing to take up the confirmation of another (less controversial) Federal Reserve Board nominee, Christopher Waller, before Congress ends.
Meanwhile, late this week (after the Senate had already recessed for the holiday), the Senate leader published his Executive Calendar for Monday, Nov. 30 – which includes consideration of cutting off debate on the nomination of Kyle S. Hauptman to take a seat on the NCUA Board. President Trump tapped Hauptman in June to take the seat now held by Board Member Mark McWatters. He has been serving in a holdover capacity since his term expired in August, 2019.
LINK:
Senate Executive Calendar, Nov. 20, 2020
(Nov. 13, 2020) The NCUA Board has scheduled a 2020 budget update and reprogramming, as well as an item on the agency’s rules and regulations, “Capitalization of Interest” as agenda items for its Nov. 19 regular monthly meeting. Other items on the agenda for the meeting, set to begin at 10 a.m. ET and to be streamed live via the Internet, are board briefings on the quarterly performance of the National Credit Union Share Insurance Fund (NCUSIF) and on the state of credit union diversity, including the 2019 Credit Union Diversity Self-Assessment … The FL Office of Financial Regulation recently approved Nov. 1 the conversion of Panhandle FCU of Panama City to a state charter; the institution holds more than $263 million in assets … Controversial Federal Reserve Board NomineeJudy Shelton – criticized by some for her past views on reinstituting the gold standard, questioning the effectiveness of federal deposit insurance, and the Fed’s independence from political influence – will receive a confirmation vote as early as next week. Sen. Lisa Murkowski (R-Alaska) said Thursday she would vote for Shelton, meaning there are now enough votes among Republicans to approve her confirmation; all Democrats have vowed to reject her nomination. A vote for fellow Fed Board Nominee Chris Waller has not been scheduled, although his nomination has received little if any opposition. There is no word, yet, on a vote for NCUA Board Nominee Kyle Hauptman … Actual payment “furnishing” (or information on payments sent to consumer credit reporting agencies from financial institutions) grew steadily for mortgage, auto and student loans between 2012 and 2020, according to a report issued Thursday by the CFPB, reaching more than 90% of credit accounts. On the other hand, over the same period, the bureau said payment furnishing for credit card and retail revolving loan accounts fell to 40% of accounts. The bureau said the information in its report is used to determine whether consumers are approved for credit and the interest rates and terms consumers receive. “Financial institutions’ decisions regarding which data elements within a consumer’s credit account to furnish to consumer reporting agencies have important implications for which factors lenders can use to evaluate potential and existing borrowers,” the report states. It added that “describing trends in furnishing practices can help deepen policymakers’ and market participants’ understanding of the consumer reporting system’s key role in consumer access to credit, especially in the wake of the COVID-19 pandemic when credit standards have tightened and there has been increased strain on consumer finances.”
LINK:
New report explores the prevalence of actual payment information in consumer credit reporting