STATE GOVERNMENT RELATIONS
Holcomb Signs 159 Bills
Gov. Eric J. Holcomb has signed 159 bills into law since Monday, bringing this session’s total of signed bills to 252. Among the bills signed by Holcomb is SEA 1, also referred to as the Behavioral Health Matters bill, which establishes a statewide crisis response system to support Hoosiers going through a mental health or substance abuse crisis. Also signed was the state Biennial Budget, HEA 1001, which Holcomb said he would "gladly sign." "[It's] not just your average, ordinary, typical, two-year budget," he told reporters at a press conference after sine die. "It's a generational impact budget."
See which bills are signed and which are awaiting signature
FEDERAL GOVERNMENT RELATIONS
Powell: Fed Seeking to Learn from SVB Closure
The Federal Reserve is committed to learning the right lessons from the recent bank failures, "and we will work to prevent events like these from happening again," Fed Chairman Jerome Powell said Wednesday. Following the announcement of the Federal Open Market Committee’s decision to raise the federal funds rate, Powell referenced a recent agency report that found missteps in its supervision of Silicon Valley Bank in the months before the bank's closure.
"The review's findings underscore the need to address our rules and supervisory practices to make for a stronger and more resilient banking system, and I'm confident that we will do so," Powell said.
Among its findings, the report by Fed Vice Chairman of Supervision Michael Barr pointed to previously adopted regulatory tailoring standards that he said impeded effective supervision, though it acknowledged that in the case of SVB, "higher supervisory and regulatory requirements may not have prevented the firm's failure." Powell said he found persuasive the argument that stronger supervisory oversight would be needed in the future. Still, the chairman said his focus remains on learning what went wrong with SVB.
"It may just have been technology evolving – we have to keep up with all that – but some of it may be our policies, supervisory and regulatory," he said. "Our job now is to identify those things and implement them…I feel like I am accountable for doing everything I can to make sure that that happens."
Watch the FOMC's press conference
FOMC Raises Rates by 25 Basis Points
The Federal Open Market Committee Wednesday announced it would raise the target range for the federal funds rate by 25 basis points to 5-5.25%. The decision marked the tenth consecutive increase. However, the FOMC did not indicate whether members believe further increases would be necessary, unlike in previous meetings where they suggested future rate hikes were possible.
"The U.S. banking system is sound and resilient," the FOMC wrote in a statement. "Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation. The extent of these effects remains uncertain."
The committee noted in Wednesday's statement that economic activity expanded at a modest pace in the first quarter of 2023. It also said that job gains have been robust in recent months, the unemployment rate has remained low and inflation remains elevated. The FOMC last voted to raise rates in March, less than two weeks after the failures of Silicon Valley Bank and Signature Bank.
FDIC Suggests 'Targeted' Coverage Best Option for Deposit Insurance Reform
In a long-awaited review of the deposit insurance system, the Federal Deposit Insurance Corp. indicated Monday that a "targeted" deposit insurance system, in which additional coverage would be extended to business payment accounts, would be the best option for balancing financial stability and depositor protection relative to its costs. The review, prompted by recent bank failures, considered three options for reforming the Deposit Insurance Fund (DIF): The limited coverage option that exists now, an unlimited option that would cover all deposits and a targeted system with additional coverage for business payment accounts. The FDIC indicated the latter was the most promising option, but acknowledged "significant, unresolved practical challenges" to implementing it. Congress must approve any modification to the coverage level.
The FDIC report did not weigh in on a possible special assessment fee to make up for the hit to the DIF resulting from the agency's systemic risk exemption declaration for Silicon Valley Bank and Signature Bank. Instead, the report offered a history of the fund along with possible changes lawmakers could pursue. The agency plans to issue that decision at a later date.
The FDIC's report presented options that all come with tradeoffs, including potentially increased regulation. An unlimited system in which all deposits are covered would mostly eliminate bank runs but would also eliminate depositor discipline while generating possible broader market disruptions and increased insurance assessments, the FDIC indicated. The targeted option could achieve financial stability with only a limited decrease in depositor discipline, but it would be challenging to define business accounts and would also require additional DIF funding.
"The extent to which the DIF would need to expand would be a function of both how business payment accounts are defined and the extent to which the demand for business payment accounts results in inflows from other asset markets," the agency said. "Although assessments would likely need to increase, it is difficult to estimate to what extent."
Read the FDIC chairman's statement
CFPB Proposes Rule to Apply TILA Requirements to PACE Loans
The Consumer Financial Protection Bureau Monday released a proposal for applying ability-to-repay requirements to residential property-assessed clean energy, or PACE, loans. The proposal, required by the S. 2155 regulatory reform law, would also apply civil liability provisions of the Truth in Lending Act for violations. Comments on the proposal are due July 26.
Along with the proposed rule, the CFPB also released a report on PACE financing, which found that the loans cause an increase in borrowers falling behind on their mortgage payments, along with other negative credit outcomes. "It is likely that a contributing factor behind these results is that the PACE companies did not evaluate whether the consumer had the ability to repay before making most of the loans in our data," the report noted. "We find that PACE outcomes improved significantly in California after that state began requiring PACE companies to consider the ability to pay before making a loan." PACE loans are financed through tax assessments and often take super-priority over existing and subsequent first mortgage liens.
Read the CFPB's rulemaking report
Post-Mortem Reports on Bank Failures Highlight Supervisory Missteps
Federal Reserve supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity, and the bank experienced "a textbook case of mismanagement," Federal Reserve Vice Chairman for Supervision Michael Barr said last Friday in his long-awaited report on the institution's failure. He also pointed to previously adopted regulatory tailoring standards that he said impeded effective supervision, though the report itself acknowledged that in the case of SVB, "higher supervisory and regulatory requirements may not have prevented the firm's failure."
As the Fed looks to make changes to its current framework for bank supervision and regulation, one focus should be to improve "the speed, force and agility of supervision," Barr said. He also suggested higher capital or liquidity requirements for banks that "can serve as an important safeguard until risk controls improve, and they can focus management's attention on the most critical issues." As for regulation, the Fed plans to revisit its tailoring framework, particularly for banks with more than $100 billion in assets, Barr said, which will include revisiting the current approach to stress testing. Barr said that the Fed will also reevaluate how it supervises and regulates liquidity risk; assess how to improve its capital requirements; and consider tougher minimum standards for executive incentive compensation programs.
The Federal Deposit Insurance Corp. also issued a report last Friday citing management failures and excessive exposure to the volatile crypto sector as reasons for the collapse of Signature Bank, which failed shortly after SVB. The FDIC report identified matters for further study, including the need for more examiner guidance on supervising banks that are overly reliant on uninsured deposits.
While the Fed and FDIC reports placed much of the blame on mismanagement by the bank and the current regulatory framework, a report by the Government Accountability Office – also issued last Friday – took a more pointed stance on the supervisory failures that led to the collapse of both SVB and Signature Bank in March, noting that supervisors failed to escalate their concerns about the banks' management of risk related to deposits in the months preceding the failures.
CFPB Issues Interim Final Rule for Libor Transition
The Consumer Financial Protection Bureau issued an interim final rule last Friday, updating its Libor transition rule from 2021. The new rule makes changes consistent with the Adjustable Interest Rate Act, or Libor Act, enacted in March of last year. The changes include conforming the terminology used to identify the replacement indices and adding an example of a 12-month Libor tenor replacement index that meets standards in the Truth in Lending Act.
Last Friday's interim final rule does not modify the CFPB's 2021 Libor transition rule related to the prime rate as a replacement index. According to the CFPB, the updated rule will "further facilitate the orderly transition of those consumer loans that currently use the LIBOR index to other indices" prior to the planned sunset of Libor on June 30. The interim final rule is effective May 15, and comments are due on or before 30 days after publication in the Federal Register.
Read more about the LIBOR Index Transition
Bills to Overhaul CFPB Make Progress in House
A legislative package that would overhaul the Consumer Financial Protection Bureau has gained the House Financial Services Committee's approval. A key proposal would replace the CFPB director position with a Senate-confirmed five-member commission, while others would subject the CFPB to the congressional appropriations process and establish a dedicated inspector general for the CFPB.