FEDERAL GOVERNMENT RELATIONS
OCC Outlines Supervision Priorities for 2021
The Office of the Comptroller of the Currency yesterday released its bank supervision operating plan for fiscal year 2021, identifying what each of the agency’s supervisory operating units will focus on for the new federal fiscal year that started Oct. 1. The OCC indicated that supervision efforts will focus on the pandemic, including commercial and residential real estate concentration risk management, especially in sectors hard hit by COVID-19; compliance risk management associated with pandemic-related bank activities, such as CARES Act loan forbearance requirements; and credit risk management, given projected weaker economic conditions.
The OCC also will focus on cybersecurity and operational resilience and on governance over new technology innovation, as well as new payment systems products, focusing on new or novel products. The agency added that “[f]or FY 2021, supervision efforts will be flexible to recognize the broad and bank-specific impacts of the pandemic and resulting economic, financial, operational, and compliance implications.”
Other risk areas include Bank Secrecy Act and anti-money laundering compliance management; appropriateness of allowance for loan and lease losses and allowance for credit losses; Community Reinvestment Act performance; the effects of a low-rate environment on banks’ business models; bank preparation for the phaseout of the London Interbank Offered Rate after 2021; and proper oversight of third-party relationships.
Current Expected Credit Losses Final Rule Published
The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corp. collectively published a rule finalizing the interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of Accounting Standards Update No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (CECL) by banks. This bulletin replaces and rescinds OCC Bulletin 2020-27, “Current Expected Credit Losses: Interim Final Rule,” and OCC Bulletin 2020-42, “Current Expected Credit Losses: Final Rule With Technical Changes to Interim Final Rule.”
In March 2020, the agencies issued an interim final rule (2020 CECL IFR) that provides banking organizations that were required under U.S. GAAP (as of January 2020) to 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 (five-year transition option). The final rule adopts all provisions of the 2020 CECL IFR, permits all banking organizations that adopt CECL in 2020 the option to use the new transition in the 2020 CECL IFR, even if not required to adopt CECL under U.S. GAAP in 2020, and clarifies that a banking organization is not required to use the transition in quarters in which it would not generate a regulatory capital benefit.
National Trade Groups Push for More PPP Funding, Streamlined Forgiveness
With time running out before Congress adjourns ahead of the November elections, 10 financial trade associations – including the ABA and ICBA – in a letter on Tuesday urged congressional leaders to immediately pass standalone legislation that would allow for additional funding for the Paycheck Protection Program and streamline the forgiveness process for PPP borrowers.
“The PPP provided over five million small businesses the financial lifeline they desperately needed to weather the start of the pandemic and the economic shutdown that followed,” the groups wrote. “As these businesses continue to recover, they will need additional resources to maintain business operations, and the PPP remains the most efficient and effective means to assist them through this challenging period.”
With regard to forgiveness, the groups wrote in support of two bipartisan bills: S. 4117, sponsored by Sens. Kevin Cramer (R-N.D.), Bob Menendez (D-N.J.), Thom Tillis (R-N.C.) and Kyrsten Sinema (D-Ariz.); and H.R. 7777, a House companion bill sponsored by Reps. Chrissy Houlahan (D-Pa.) and Fred Upton (R-Mich.). Both bills would forgive PPP loans of less than $150,000 upon the borrower’s completion of a one-page document.
“Throughout the pandemic, helping small businesses has consistently been bipartisan,” the groups wrote. “As lenders that support our nation’s small businesses and stepped up to help deliver the critical relief the Paycheck Protection Program provided, we strongly urge members of the Senate and House to continue these bipartisan efforts by quickly supporting an extension of PPP funding and a simpler forgiveness process that will make converting loans into grants easier and less technical for millions of small business borrowers that have PPP loans.”
For Community Banks, COVID-19 Brings Existential Concerns
Amid the COVID-19 recession, business conditions were most often called the single biggest challenge facing community banks, according to an annual survey released Wednesday by the Conference of State Bank Supervisors. More than a third of banks cited business conditions, followed at some distance by regulations (16%), competition (11%) and core deposit growth (9%). By comparison, core deposit growth was the most-cited challenge in the more halcyon economic times of 2019.
In response to those challenging business conditions amid COVID-19, 79% of community banks increased lending to small businesses and farms. This was visible in the swollen community bank balance sheets reported during the survey’s administration in June, with small business loans up 40% year-on-year. After joining the Small Business Administration’s 7(a) program for PPP loans, 77% of community banks reported they would remain in the program.
The commercial loan growth was accompanied by a 33% surge in transaction deposits, blunting prior years’ concerns over core deposit growth. Just over 45% of banks considered liquidity risk important or very important, down more than 12 points from last year, and banks were less likely to prioritize deposit growth over loan growth. Long-term demographic trends continued to worry banks, with 28% saying in-market depopulation was an important or very important impediment to attracting and retaining core deposits. While just 2% said they had an online-only division to gather deposits or loans, an additional 19% said they were considering it or planning to launch one.
CSBS Survey: COVID-19 Accelerates Tech, Operational Changes
Beyond lending, community banks took other actions in response to COVID-19, the CSBS survey found. Seven in 10 implemented a work-from-home policy for staff whose jobs permitted it, and 47% increased their paid and unpaid sick and family leave offerings. Only 5% of community banks reduced headcount, and 3% added staff. Nearly every community bank (98%) restricted lobby access, and 23% closed at least one branch for a time. About a third of banks reduced or eliminated late-payment penalties on loans and fees on deposit accounts.
The need to enhance remote work and banking capability drove greater tech implementation at community banks. Online loan closing availability surged in 2020; the share that offered them rose from 6% to 20%, while the share planning to offer them in the next 12 months jumped from 21% to 29%. Despite the surge, the numbers still trailed online loan applications, with about 40% of banks currently offering them, and an additional 29% planning to do so in the next 12 months.
The share of banks offering remote deposit capture rose 8 points to 87%. Other technologies with widespread adoption among community banks were mobile banking (95%) and electronic bill payment (81%). Among transactional and advisory services, most community banks offered cash management (69%). Smaller shares of community banks offered personal financial management (39%), prepaid cards (28%), remittances (22%) or payroll cards (8%) – although 13% reported they planned to add PFM tools in the next year. About 36% of community banks offer wealth management.
Banks Dissatisfied With Core Costs, Flexibility, Innovation, CSBS Survey Shows
With community banks reliant upon core processors to offer new technologies, the CSBS survey for the first time asked about satisfaction with core processing. More than four in 10 community banks indicated they were dissatisfied or very dissatisfied with the cost of their core processing, compared to just 27% who reported they were satisfied. Likewise, nearly half were dissatisfied or highly dissatisfied with their cores’ flexibility, compared to just 20% who were satisfied. Cores were slightly more highly rated on speed of innovation (35% satisfied/very satisfied vs. 39% dissatisfied/very dissatisfied) and the ability to roll out new products and services (33% satisfied/very satisfied vs. 37% dissatisfied/very dissatisfied).
While 57% of banks relied solely on their core provider for digital banking products, 30% rely on third parties in addition to the core, and 12% are seeking other non-core providers. About as many community banks said they were dissatisfied with their cores’ third-party compatibility as said they were satisfied – but banks were three times likelier to be very dissatisfied than very satisfied. Four in 10 banks indicated that their core contracts were impediments to fintech partnerships, either because of a lack of API access, contract exclusivity provisions or both. Nearly 78% reported that getting more information about core providers from the banking agencies that supervise them would be helpful.
Agencies Issue Final Rules on Appraisals, LCR Relief
The federal banking agencies on Tuesday finalized two rules intended to provide relief for financial institutions as a result of actions taken to aid in the coronavirus response. Both rules are substantively similar to interim final rules issued earlier this year.
The agencies issued a final rule, effective upon publication in the Federal Register, allowing financial institutions to temporarily defer appraisals and evaluations for residential or commercial real estate transactions for up to 120 days during the COVID-19 national emergency. This temporary relief will expire on Dec. 31, 2020. The rule does not apply to real estate acquisition, development and construction loan transactions, and the final rule provided more clarity about which loans fall under that category.
The agencies also finalized a rule intended to facilitate banks’ participation in the Paycheck Protection Program Liquidity Facility and the Money Market Mutual Fund Liquidity Facility by allowing them to neutralize the effects of their participation for purposes of the liquidity coverage ratio. Under the existing liquidity coverage ratio (LCR) rule, banks are required to hold a buffer of high-quality liquid assets to meet short-term liquidity needs. This action by the agencies effectively exempts MMMLF or PPPLF funding from the LCR calculation. The rule takes effect 60 days after publication in the Federal Register.
Flood Insurance Extension Passes
The Senate passed a short-term spending package that includes a one-year extension of the National Flood Insurance Program. The vote sent the $1.4 trillion package to President Trump to be signed into law ahead of the midnight deadline.
IBA COVID-19 Updates
The IBA has several COVID-19 resources and updates available at our website.