STATE GOVERNMENT RELATIONS
Governor Issues New Executive Order
On Wednesday, Gov. Eric Holcomb issued a new executive order in response to the growing number of COVID-19 cases in many Indiana counties. The order, effective Nov. 15, creates restrictions on gatherings based on county jurisdiction coupled with new infection metrics. The order is expected to remain in place for a minimum of one month.
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FEDERAL GOVERNMENT RELATIONS
Regulators Exploring Relief for Banks Participating in COVID-19 Programs
Regulators are exploring additional ways to provide temporary relief to banks that may be approaching regulatory asset thresholds that could trigger additional compliance requirements as a result of participation in COVID-19 relief programs like the Paycheck Protection Program.
In testimony before the Senate Banking Committee on Tuesday, Acting Comptroller of the Currency Brian Brooks said that regulators are working on an interagency basis “on a set of rules that would relieve for a period of time certain asset thresholds being tripped that would trigger heightened scrutiny and heightened compliance requirements at different levels.” Brooks signaled that this relief would “cap out at $10 billion, most likely, based on current conversations.”
Chairman Jelena McWilliams of the Federal Deposit Insurance Corp. added that “small banks have done a disproportionate amount of lending to their proportion of the banking industry share” and that “it’s only appropriate that we look at these thresholds … and accommodate them.” The FDIC last month approved an interim final rule providing relief from auditing, internal control and audit committee requirements that would have resulted from the rapid inflow of assets and deposits from the coronavirus pandemic.
Fed to Hold Most Payments Services Fees Steady for 2021
The Federal Reserve announced Tuesday that it will maintain its current fee schedules for priced services for most payments services in 2021, except for check fees, which will rise 2.7% on average. Fees will remain unchanged for FedACH, National Settlement Services, Fedwire Funds, Fedwire Securities and FedLine Solutions.
The Fed projects that it will recover 98.7% of its priced services costs in 2021 and added that the Reserve Banks do not expect to fully recover expenses and profits in the short term that would have been earned if a private-sector firm provided the services, but do expect to recover those expenses in the long run. “This approach recognizes the uncertainties created by the COVID-19 pandemic and offers price stability for customers facing unique challenges in 2021” the Fed reported.
OCC: Pandemic, Low Rates Shape Risk Environment for Banks
The response to the coronavirus pandemic continues to shape the risk environment for banks, according to the Semiannual Risk Perspective released Monday by the Office of the Comptroller of the Currency. Key risks the OCC highlighted were credit risk as the ongoing economic downturn affects debt service capability, strategic risk from a long-term low-rate environment, cyber risk as many banks continue operating in a primary or partial work-from-home environment, and compliance risk as banks implement new programs to support the recovery.
The report highlighted credit risk in both commercial and consumer portfolios. While “banks need to work with borrowers while making timely recognition of risk – emphasis on timely,” said Acting Comptroller Brian Brooks during a press briefing Monday, he added that “we need real-time and accurate information about loans that are going south, loans that are at risk, loans that should be classified. We will not be punishing banks for loans that were prudently underwritten at the front end, but we will look very carefully at banks that fail to recognize the risk in those loans at this present moment in the pandemic response.”
The OCC also flagged the transition away from the London Interbank Offered Rate, noting that in 2021, “the OCC will increase its oversight, particularly for banks with significant Libor exposure or less-developed transition processes.” The agency also noted an increase in ransomware attacks using phishing emails and risks stemming from an increasingly technologically complex operating environment.
The OCC acknowledged that banks were well-positioned at the outset of the pandemic with “historically high capital ratios and amply liquidity.” The number of banks with a CAMELS rating of 3, 4 or 5 did not change materially, nor did the number of outstanding Matters Requiring Attention.
Fed: ‘Great Deal of Uncertainty’ Around Credit Quality Due to COVID-19
Banks “remained well capitalized throughout” the COVID-19 pandemic, even as they absorbed large losses, according to the Federal Reserve’s financial stability report released Monday. The Fed noted that capital ratios have “generally recovered to pre-pandemic levels” since the last report was issued in May 2020, but that the pandemic “highlighted how vulnerabilities related to leverage and funding risk at nonbank financial institutions could amplify shocks in the financial system in times of stress.”
Corporate debt – which was already high at the start of the pandemic – has continued to rise and credit quality for small businesses “has worsened notably” since the COVID-19 outbreak began, the Fed indicated. Additionally, a weakening in household finances could pose “a significant medium-run vulnerability for the financial system,” according to the report. It noted, however, that a deterioration in household credit quality has been mitigated by government support programs, including expanded unemployment and economic impact payments.
“Because of the implementation of loss-mitigation programs, government stimulus payments and PPP loans, the true status of credit quality is not reflected in loan delinquencies,” the Fed cautioned. “As these programs expire, some of these accounts in loss mitigation could roll into and be reflected in higher bank delinquency rates later this year and early next year, followed by higher charge-off rates and losses. All told, a great deal of uncertainty about the future path of these losses remains.”
The Fed also flagged several near-term risks to the financial system, including a prolonged economic slowdown, disruptions in global dollar funding markets and stresses emanating from Europe – including those related to COVID-19 and a potential no-deal Brexit – as well as emerging market economies. It also addressed the implications of climate change for financial stability.
IBA COVID-19 Updates
The IBA has several COVID-19 resources and updates available at our website.