Debit-Card Interchange Fees
As suggested when the Fed last year finalized controversial new debit-card routing requirements, the central bank is now proposing a sharp reduction in the cap mandated on debit-card interchange fees under the Dodd-Frank Act’s Durbin Amendment for debit-card issuers with over $10 billion in assets.
Consumer Data Rights/Open Banking
Following a request for information that was a de facto advance notice of proposed rulemaking,[1] the CFPB has now proposed a preliminary, but binding framework for consumer data rights covering consumer “transaction” accounts offered by banks, credit unions, and – a departure from the initial outline – nonbanks/fintechs. The proposal is sweeping with regard to data-rights and -sharing standards for covered accounts and providers, but still preliminary in that the Bureau has yet to turn as it plans to in in subsequent actions to loan products such as mortgages and student loans.
Transaction-Account FDIC Coverage
Bipartisan senators have introduced legislation to provide FDIC coverage for certain noninterest-bearing transaction accounts, a move designed to prevent the stress and potential systemic risk evident when Silicon Valley and Signature Banks failed in March. However, expanding FDIC coverage could increase FDIC premiums, heightening pressure on IDIs and their holding companies in concert with the pending special assessment unless companies that opt out of added coverage do not bear additional costs for IDIs that choose to offer these insured accounts.
Account-Information Access
Using its advisory process to issue guidance that may lead to enforcement actions, the Bureau has for the first time set standards for the obligations of large banks and credit unions to respond to certain consumer inquiries. Going forward, virtually all requests specific to a consumer’s deposit or loan account within an IDI or credit union over $10 billion in assets will require a prompt, complete response without additional fees or any other obstacles the Bureau could deem a violation. No specific standards are set for criteria such as timeliness, making it a matter of subjective CFPB judgment that could lead to uneven enforcement and/or use of information-related penalties in the context of other Bureau actions, including those designed to penalize “repeat offenders.”
Large-IDI Resolution Plans
Although a pending FDIC/FRB proposal imposes a raft of new requirements for resolution plans from IDIs with over $100 billion in assets, the FDIC has also issued a freestanding proposal doing the same, also setting information-filing standards for IDIs below $100 billion but above $50 billion. Aspects of the resolution-plan filing standards for large covered IDIs (CIDIs) echo and in some cases allow reliance on aspects of the joint rule with the Fed, but the FDIC notes that this rule is, as required by the Dodd-Frank Act, focused on financial stability. Its own IDI resolution rules now and as proposed instead address how the FDIC is to meet its own statutory requirements (e.g., least-cost resolution). The NPR mandates many new planning or filing requirements to achieve its goals, most notably adding new severability standards that may require new inter-affiliate or -branch firewalls that reduce operating efficiencies and, when it comes to broker-dealer or other entities, lead to indirect resolution requirements not mandated by functional regulators. The proposal also tightens enforcement policy, most notably increasing the criteria by which a resolution plan will be judged “credible” and thus the extent to which a CIDI will be subject to monetary penalties or even allowed to operate as is.
Living-Will Requirements
In conjunction with proposing a new long-term debt (LTD) requirement for categories II, III, and IV banks, the Fed and FDIC are pursuing other ways to enhance resolvability. Among these is new guidance for large domestic and foreign banking organizations that requires U.S. banking organizations and foreign banking organization (FBO) intermediate holding companies (IHCs) along with all their insured depositories when any is over $100 billion to file resolution plans. These are also redesigned to make the plans much closer in substance to those mandated for GSIBs. However, in a leading indicator of what the FRB is also likely to demand of GSIBs, smaller companies would be required to ensure severability – that is, the ability to cut off a weak limb to save the rest of the banking organization or ensure ready resolution without undue cost to the FDIC or systemic risk. However, easing one aspect of current planning, banking organizations are expressly allowed to count on use of discount-window or other Fed lending facilities to avert failure if – and this is a significant new if – the plan rests atop sound collateral valuation and data-management systems.
Long-Term Debt Requirements
Building on an advance notice of proposed rulemaking, the banking agencies have issued several proposals to enhance the resolvability of large banking organizations not covered by stringent GSIB standards. Among these is a proposal mandating long-term debt (LTD) to increase regional-bank total loss-absorbing capacity (TLAC) and, the agencies believe, reduce resolution costs and/or increase the FDIC’s options, thus avoiding the systemic designation and costly resolutions that occurred for regional banks earlier this year. The LTD requirements for category II, III, and IV banking organizations do not go as far as those mandated for GSIBs, based instead exclusively on a “capital-refill” construct in which eligible LTD is issued in amounts the agencies believe sufficient to provide enough capital-equivalent funding to achieve the proposal’s expected results.
GSIB Surcharge
As anticipated in the wake of recent bank failures, the FRB has proposed a significant revision to the current rules calculating systemic-risk scores that lead to GSIB designation. These indicators are used not only for GSIB designation or a higher surcharge, but also for categorizing U.S. and foreign banks for other purposes and thus would also bring some banking organizations into categories subject to very strict prudential standards. The Board estimates that the overall impact of the changes to the surcharge and risk-scoring methodology are small and, regardless, warranted to enhance systemic resilience and consistency. It also estimates that the interaction of this new approach with certain liquidity and TLAC standards is generally minimal. However, the Fed has not assessed the relationship of scoring revisions to one way to calculate the GSIB charges, nor does the Board assess the cumulative impact of all of the changes proposed here in concert with its sweeping revisions to U.S. capital rules for all banking organizations with assets over $100 billion. It is also unclear how these changes in concert with all the others interact with the stress capital buffer applicable to large U.S.-domiciled banking organizations. Despite the Fed’s conclusions, it seems likely that the total impact will be considerable in light of methodological problems in this proposal as well as those FedFin identified with the impact analysis for the capital rewrite.
Market-Risk Capital Standards
In this analysis, we turn to one of the costliest aspects of the proposed rewrite of U.S. regulatory-capital standards: the market-risk framework. This aspect of the proposal would significantly rewrite current U.S. market-risk rules to reflect the “fundamental review of the trading book” (FRTB) regime the Basel Committee crafted in 2018.2 However, unlike the global rules, the U.S. approach would largely dispense with reliance on internal models in a manner generally consistent with the overall decision to eschew models;3 even where models are allowed for market risk, they are strictly constrained.
Stablecoin/Tokenization Activities
In conjunction with issuing a new supervisory policy for “novel” activities,[1] the FRB has instituted a new process requiring non-objection letters before state member banks proceed with stablecoin or dollar-tokenization activities. Although the new non-objection process makes it clear that Fed approval will require clear adherence to a raft of policy and legal obligations, the non-objection process clears the way for state member banks to offer products with a growing role in retail and wholesale payment, settlement, and clearing activities.