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COVID-19 Financial Regulatory Roundup

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In response to regulatory responses and guidance by a variety of government entities….. [text to be drafted shortly]

The Fed Repurposes the Financial Crisis Playbook for Pandemic Response 

In the face of the coronavirus (COVID-19) pandemic, the U.S. Federal Reserve Board (the Fed) and the U.S. federal banking agencies have announced several market and supervisory actions to address the sudden market stress and strain.

The Fed is the central bank of the United States and a banking regulator, and it is taking a series of actions similar to some of those taken during the 2007 – 2008 financial crisis. The Office of the Comptroller of the Currency (the OCC) and the Federal Deposit Insurance Corporation (the FDIC) are the other U.S. federal banking regulators. The actions described below are aimed to assist banks, businesses and consumers, all of whom face unique challenges because of the sudden closure of businesses and market volatility. In doing so, the Fed is drawing upon its authority under Section 13(3) of the Federal Reserve Act. As distinct from the last financial crisis, however, these actions appear to be in reaction to shut downs in the real economy and the need for credit to be extended to a range of borrowers, rather than a perceived seizing up of the liquidity and credit of the financial institutions themselves.

Stay Tuned

We will continue to monitor legislative, supervisory and market actions taken by bank regulatory agencies as events unfold. Given the market developments since the impact of the pandemic has been absorbed, we anticipate regular developments in this space, and will regularly update this note.

Fed Adjusts Supervisory Approach

The Fed announced on March 24 adjustments to its supervisory approach in response to the COVID-19 pandemic by reducing its focus on examinations and inspections and placing its focus on monitoring efforts. The statement applies to state member banks, bank holding companies, Edge Act Corporations, and U.S. operations of foreign banks, among others.

Examinations and inspections. Specifically, the Fed announced that, for supervised institutions with less than $100 billion in total consolidated assets, the Fed intends to cease all regular examination activity, except where such examination is critical to safety and soundness or consumer protection, or is required to address an urgent or immediate need. For supervised institutions with assets greater than $100 billion, the Fed intends to defer a significant portion of planned examination activity based on its assessment of the burden on the institution and the importance of the exam activity to the supervisory understanding of the firm, consumer protection, or financial stability.

In the Fed’s assessment, “critical” could include exams of less-than satisfactorily rated state member banks or institutions where a Reserve Bank is aware of liquidity, asset quality, consumer protection, or other issues that are an immediate threat to an institution’s ability to operate or to consumers, or Reserve Bank monitoring identifies an unusual circumstance.

Any examination activities would be conducted off-site until normal operations are resumed at the bank and Reserve Banks.

In addition, the Fed extended the time periods for remediating existing supervisory findings by ninety days, unless the Fed notifies the firm that a more timely remediation is required because it would aid the firm in addressing a heightened risk or to help consumers. This includes MRAs, MRIAs, as well as provisions in formal and informal enforcement actions.

The Fed intends to reassess its approach to examinations in the last week of April 2020.

CCAR Submissions. The Fed stated that financial institutions should submit their capital plans for the purposes of the Comprehensive Capital Analysis and Review by April 6, 2020.

Monitoring. The Fed noted it would focus on monitoring efforts during this time. In particular, the Fed will focus on understanding the challenges, risks and potential impacts that the COVID-19 pandemic presents for customers; staff; firm operations; and financial condition. Supervisors will continue to monitor and analyze operations; liquidity; capital; asset quality; and impact on consumers. In addition, for large financial institutions, the Fed will focus on operational resiliency and potential impacts on broader financial stability.

Interagency Action on Current Expected Credit Loss Accounting Standard

The Fed, the OCC and the FDIC issued an interim final rule on March 27 allowing banking organizations to mitigate the effects of the current expected credit loss (CECL) accounting standard on regulatory capital. On the same day, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law, which also provides banking organizations optional, temporary relief from complying with CECL.

The interim final rule provides banking organizations that implement CECL before the end of 2020 the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. Under the interim final rule, a banking organization may use the five-year transition if it was required to adopt CECL for purposes of U.S. GAAP (as in effect January 1, 2020) for a fiscal year that begins during the 2020 calendar year, and elects to use the transition option in a Call Report or FR Y-9C.

In addition, the CARES Act, signed into law on March 27, provides banking organizations optional temporary relief from complying with CECL (statutory relief) ending on the earlier of the termination date of the current national emergency, declared by the President on March 13, 2020 under the National Emergencies Act, or December 31, 2020 (statutory relief period). The federal banking regulators issued a joint statement on March 31 to clarify the interaction between the CECL interim final rule and these provisions of the CARES Act.

According to the federal banking regulators, banking organizations, including those that otherwise would be required to adopt CECL in 2020 under U.S. GAAP, are not required to comply with CECL during the statutory relief period under the CARES Act. Such banking organizations may delay compliance with CECL until the statutory relief period expires. Banking organizations that elect to use the statutory relief may also elect the regulatory capital relief provided under the CECL interim final rule after the statutory relief period. Regardless of whether a banking organization utilizes the statutory relief, the five-year transition period under the CECL interim final rule begins on the date the banking organization would have been required to adopt CECL under U.S. GAAP. If a banking organization utilizes the statutory relief and then chooses to use the relief provided in the CECL interim final rule, the initial two-year transition period would be reduced by the number of quarters during which the banking organization uses the statutory relief.

Interagency Action on Counterparty Credit Risk Derivatives Contracts

The Fed, FDIC and the OCC issued a notice on March 27 permitting early adoption of the standardized approach for measuring counterparty credit risk (SA-CCR) for calculating the exposure amount of derivative contracts under the agencies’ regulatory capital rule.

The SA-CCR was finalized by the federal banking regulators in November 2019, with an effective date of April 1. In the notice, the federal banking regulators announced they will permit banking organizations to adopt SA-CCR one quarter early for the reporting period ending March 31. The early adoption is allowed to be on a best efforts basis, however upon adoption, institutions must adopt the methodology for all derivative contracts; they cannot implement the methodology for a subset of contracts. The mandatory compliance date remains January 1, 2022.

In addition, the SA-CCR rule included several other amendments to the capital rule that are effective as of April 1, 2020:

  • a 2 percent or a 4 percent risk-weight for cash collateral posted to a qualifying central counterparty subject to certain requirements;
  • the ability of a clearing member banking organization to recognize client collateral posted to a central counterparty (CCP) under certain circumstances;
  • a zero percent risk-weight for the CCP-facing portion of a transaction where a clearing member banking organization does not guarantee the performance of the CCP to the clearing member’s client; and
  • the ability of a clearing member banking organization to apply a 5-day holding period for collateral associated with client-facing derivatives for purposes of the collateral haircut approach.

Federal Regulators Encourage Small-Dollar Loans

The Fed, the Consumer Financial Protection Bureau (CFPB), the FDIC, the National Credit Union Administration (NCUA) and the OCC (the Agencies) issued a joint statement on March 26, followed by guidance by the Fed on March 30, to encourage financial institutions to make small-dollar loans to customers who experience adverse effects as a result of the COVID-19 pandemic or to otherwise work with borrowers to re-work outstanding loans. The Agencies stated that such small-dollar loans may be offered through open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans. For borrowers facing difficulties repaying a loan, the Agencies further urged financial institutions to consider workout strategies that enable a borrower to repay principal without the need to re-borrow.

The U.S. federal banking regulators, as members of the Federal Financial Institutions Examination Council (FFIEC), have announced that institutions have an additional 30 days to file their first quarter (March 31) Consolidated Reports of Condition and Income (Call Reports). Call Reports must be submitted within thirty (30) days after the original filing deadline. The grace period applies to all three versions of the Call Report (FFIEC 031, FFIEC 041, and FFIEC 051). The OCC noted that Call Reports may be amended for unintentional and incidental reporting errors within 30 days of the original filing deadline without penalty. The FDIC noted that institutions should contact their FDIC regional office if they anticipate a delayed submission.

The Fed announced a similar extension to financial institutions with $5 billion or less in total assets for submitting their March 31 Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) or Financial Statements of U.S. Nonbank Subsidiaries of U.S. Bank Holding Companies (FR Y-11). Such reports must also be submitted within thirty (30) days after the original filing due date. In addition, the Fed noted in an FAQ that directors may generally attest to the Call Report after a reasonably short period of time. Banks should, however, contact their Reserve Bank to request a reasonable extension for obtaining director attestations if needed.

Federal Regulators Grant Grace Period for Filing First Quarter Call Report

The U.S. federal banking regulators, as members of the Federal Financial Institutions Examination Council (FFIEC), have announced that institutions have an additional 30 days to file their first quarter (March 31) Consolidated Reports of Condition and Income (Call Reports). Call Reports must be submitted within thirty (30) days after the original filing deadline. The grace period applies to all three versions of the Call Report (FFIEC 031, FFIEC 041, and FFIEC 051). The OCC noted that Call Reports may be amended for unintentional and incidental reporting errors within 30 days of the original filing deadline without penalty. The FDIC noted that institutions should contact their FDIC regional office if they anticipate a delayed submission.

The Fed announced a similar extension to financial institutions with $5 billion or less in total assets for submitting their March 31 Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) or Financial Statements of U.S. Nonbank Subsidiaries of U.S. Bank Holding Companies (FR Y-11). Such reports must also be submitted within thirty (30) days after the original filing due date. In addition, the Fed noted in an FAQ that directors may generally attest to the Call Report after a reasonably short period of time. Banks should, however, contact their Reserve Bank to request a reasonable extension for obtaining director attestations if needed.

International Bodies Announce Deferral of Margin Requirements

The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) announced on April 3 an extension of the deadline for completing the final two implementation phases of the margin requirements for non-centrally cleared derivatives by one year. The final implementation phase will therefore take place on September 1, 2022. On that date, covered entities with an aggregate average notional amount (AANA) of non-centrally cleared derivatives greater than €8 billion will be subject to the margin requirements. In addition, beginning September 1, 2021, covered entities with an AANA of non-centrally cleared derivatives greater than €50 billion will be subject to the requirements.

Easing of Capital Requirements

The Fed announced on April 1 the issuance of an interim final rule to temporarily change the supplemental leverage ratio (SLR) rule, which will exclude U.S. Treasury securities and deposits at Fed banks from the calculation of the rule. Specifically, the interim final rule revises the calculation of total leverage exposure, which is the denominator of the SLR, to exclude the on-balance sheet amounts of U.S. Treasury securities and deposits at Fed banks. The interim final rule applies to bank holding companies, savings and loan holding companies, and U.S. intermediate holding companies of foreign banking organizations.

The SLR generally applies to financial institutions with more than $250 billion in total consolidated assets and requires financial institutions to hold a minimum ratio of 3 percent, measured against their total leverage exposure. The SLR applies more stringent requirements for the largest and most systemic financial institutions. The interim final rule would temporarily decrease tier 1 capital requirements of holding companies by approximately 2 percent in aggregate. The interim final rule is effective immediately and will be in effect until March 31, 2021. The Fed noted in its interim final rule that the tier 1 leverage ratio is not affected by the rulemaking.

In addition, the Fed announced on March 23 the issuance of an interim final rule to phase in gradually the automatic restrictions associated with a firm’s total loss absorbing capacity, or TLAC, buffer requirements. Similar to the March 17 interim final rule described below, the purpose of this interim final rule is to revise the definition of “eligible retained income” so that, if there are reductions in capital ratios, the limitations on capital distributions apply in a more gradual manner rather than in a sudden and severe manner.

The Fed, OCC and FDIC also announced on March 17 a technical change to their capital regulations to phase in gradually the restrictions on capital distributions and discretionary bonus payments that automatically apply if a bank’s capital levels decline. The change was made by the issuance of an interim final rule that will be effective upon its publication in the Federal Register (expected in a few days after the announcement).

The interim rule revises the definition of “eligible retained income” for all depository institutions, bank holding companies and savings and loan holding companies subject to the agencies’ capital rule. The revised definition will make limitations on capital distributions that would have been automatic instead apply more gradually.

This interim final rule was released in tandem with a statement by the agencies urging banking organizations to use their capital and liquidity buffers as they respond to the challenges presented by the effects of the coronavirus. In addition, the banking agencies issued Q&As about the statement. In the Q&A, the agencies emphasized the flexibility of banking organizations to dip into their capital and liquidity buffers in a safe and sound manner without suffering undue adverse consequences by the banking regulators.

The agencies noted that the changes made by the interim final rule do not impact other rules that may limit capital distributions or discretionary bonus payments.

FOMC Operations

The Federal Open Market Committee (FOMC) announced on March 23 an expansion of its program to purchase Treasury securities and agency mortgage-backed securities (MBS), stating it would continue to purchase such assets “as necessary.” The Open Market Trading Desk indicated that it plans to conduct operations totaling approximately $75 billion of Treasury securities and approximately $50 billion of agency MBS each business day during the week of March 23. The Fed had previously announced it would purchase at least $500 billion of Treasury securities and at least $200 billion of MBS. In addition, the Fed announced it would include agency commercial MBS in its agency MBS purchases.

The Open Market Desk will also conduct overnight reverse repurchase operations, along with reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday or similar trading conventions, at an interest rate of 0 percent. Such reverse repurchase transaction amounts will be limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.

In addition, the Open Market Desk will continue rolling over at auction all principal payments from the Fed’s holdings of Treasury securities and to reinvest all principal payments from its holdings of agency debt and agency MBS received during each calendar month in agency MBS. Lastly, the Open Market Desk will engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Fed’s agency MBS transactions.

Fed Discount Window and Reserve Requirements

The Fed announced on March 15 (a Sunday) that it would cut its benchmark federal funds rate by a full percentage point to zero. As of the date of this publication, the Fed Funds target rate was in a range of 0 to 0.25 percent, down from a range of 1 to 1.25 percent.

Aiming to instill confidence in the market, a group of major banks announced they had accessed the Fed Discount Window (which in normal circumstances might be seen as a sign of financial weakness) shortly after the Fed and other banking agencies urged banks to do so on March 16. On March 15, the Fed had lowered the primary credit rate by 150 basis points to 0.25 percent.

The Fed also announced that depository institutions could borrow from the discount window for periods as long as 90 days, prepayable and renewable by the borrower on a daily basis.

The Fed also reduced the reserve requirement ratios to zero percent on March 15, 2020. This reduction will be effective on March 26, 2020, which marks the beginning of the next reserve maintenance period. The Fed has not indicated whether weekly reporting of deposits will continue.

Also on March 15, the Fed, together with the European Central Bank, Bank of England, Bank of Japan and the Swiss National Bank, announced coordinated action to enhance liquidity through standing U.S. dollar liquidity swap line arrangements. The pricing on such arrangements will be the U.S. dollar overnight index swap rate plus 25 basis points, which represents a reduction in the rate by 25 basis points.

Federal Reserve Special Lending Programs 
Guidance for Banking Entities 
  • NYDFS Requires COVID-19 Preparedness Plans from Regulated Entities | March 17, 2020

    In light of the circumstances surrounding COVID-19, the NYDFS released a set of industry letters that: (i) require regulated institutions to have preparedness plans in place to address operational and financial risks posed by the outbreak of COVID-19 and to submit a description of those plans to the NYDFS, and (ii) encourage New York regulated banks, credit unions and licensed lenders to consider all reasonable and prudent steps to assist businesses that have been adversely impacted by COVID-19.

  • NYDFS Requires COVID-19 Preparedness Plans from Virtual Currency Businesses | March 17, 2020

    In light of the circumstances surrounding COVID-19, the NYDFS released an industry letter to entities engaged in “Virtual Currency Business Activities,” requiring each such regulated institution submit a plan describing the institution’s preparedness to manage the risk of disruptions—financial, services and operations—stemming from the recent outbreak of COVID-19.

Trading and Markets Releases 
  • SEC Issues New COVID-19 Disclosure Guidance | March 27, 2020

    As part of its response to the effects and economic disruption that the novel coronavirus disease 2019 (“COVID-19”) is causing to the worldwide economy, on March 25, 2020, the Division of Corporation Finance of the U.S. Securities and Exchange Commission (“SEC”) issued additional guidance regarding public company disclosure requirements with respect to COVID-19.

  • SEC Emergency Order Bolsters Fund Liquidity by Expanding Ability to Borrow From Affiliates, Enter Into Interfund Lending Facilities (Even Without an Order) | March 26, 2020

    In response to the outbreak of the COVID-19 coronavirus disease, the Securities and Exchange Commission took extraordinary action to bolster liquidity for registered investment companies through at least June 30, 2020. In an Order dated March 23, 2020, the Commission exempts most open-end funds from restrictions that limit their ability to borrow money from affiliates or engage in interfund lending (IFL) arrangements. The order applies to open-end funds, other than money market funds, and insurance company separate accounts registered as unit investment trusts (collectively “funds” or “open-end funds”) that seek short-term financing.