ICBA Takes a Stand for “Grandfathered” New England Mutuals in its Volcker Letter
Last week, ICBA filed its comment letter on the banking agencies’ proposed rule that would implement Section 619 of the Dodd-Frank Act, known as the Volcker Rule. The proposed rule contains certain prohibitions and restrictions on the ability of a banking entity or nonbank financial company supervised by the Federal Reserve Board to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund.
With regard to the definition of proprietary trading, ICBA commended the banking agencies for excluding repurchase and reverse repurchase arrangements from the proposed rule’s definitions of “proprietary trading” and “trading account.” However, in defining the term “trading account,” ICBA emphasized that the final rules should ensure that the authority of insured state banks to make certain investments under Section 24(f) of the Federal Deposit Insurance Act is preserved. ICBA said that Subsection (f) was adopted to preserve the authority of some state banks, primarily mutual savings banks in New England, to make equity investments. These powers date back to the 19th century, and the institutions exercising them do so under well-established state and federal guidelines. For many years, qualifying banks have used their subsection (f) investment powers prudently, and no one has suggested that these powers contributed to the recent financial crisis.
ICBA also said in its letter that the final regulations should make clear that community banks that engage from time to time in interest rate swaps to hedge their interest rate risk should be able to do so without complying with subpart D of the proposal and without having to comply with any of the proposed criteria to prove that their risk-mitigation activities are not proprietary trading. ICBA recommended that the proposed rule be amended so that banks with consolidated assets of $10 billion or less would be able to participate in interest rate swaps without having to comply with any of the proposed criteria under the risk-mitigating hedging activity exemption as long as aggregate exposures for such swaps do not exceed 10% of a community bank’s tier one capital.
ICBA also said that requiring every bank to amend its compliance policies and procedures and set up a monitoring program, even if it does not engage in covered trading activities or covered fund investments, to ensure compliance with the Volcker Rule is expensive and unnecessary. A community bank that is not engaged in covered trading activities or covered fund activities and investments should not have to amend all its compliance policies and procedures just to prove that it is aware of the Volcker Rule prohibitions and the requirement for a compliance program.
View ICBA’s letter.
Regulators Propose Rules and Guidance to Remove Credit Ratings References
The federal banking regulators have been issuing a series of proposed regulatory amendments to implement Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act that directs federal agencies to remove all references to credit ratings in their regulations and guidance. Since the first of the year, ICBA has commented on five proposed rules or guidance that directly apply to savings associations or that may indirectly impact them. All the comment letters raised the same concern: as the regulators develop new standards for determining creditworthiness to replace credit ratings, new, more complex analytical requirements are likely to place a heavy burden on smaller financial institutions.
The OCC proposed a rule, Alternatives to the Use of External Credit Ratings in the Regulations of the OCC and guidance, Guidance on Due Diligence Requirements in Determining Whether Investment Securities Are Eligible for Investment, to aid federal savings associations in meeting due diligence requirements in assessing credit risk for portfolio investments. In a January 12 comment letter on the proposals, ICBA said that having a strong and robust risk management framework that is appropriate for the level of risk in an institution’s investment portfolio is very important for managing portfolio credit risk. ICBA recognized the challenges and constraints that the OCC faced in implementing the requirements of Section 939A, but expressed concerns that bankers will find the rule and guidance confusing as to the type and depth of analysis needed to determine if an investment is “investment grade.” While the guidance provides a list of factors for consideration, institutions may find it difficult to determine how far examiners will expect them to go in conducting due diligence for each investment security. ICBA said it was particularly concerned about the ability of small banks and thrifts to meet expanded analysis as compared to larger institutions. Recognition of the need to balance an adequate process with the size and complexity of the institution and its investments should be communicated to examiners.
A rule proposed by the OCC, Federal Reserve and FDIC, Risk-Based Capital Guidelines: Market Risk; Alternatives to Credit Ratings for Debt and Securitization Positions only directly applies to a handful of the largest banks. ICBA commented on it because decisions made for the final rule could impact rules that do apply to community banks. In a February 3 letter, ICBA told the regulators that it is concerned about the ability of community banks to meet expanded analytic requirements which places a greater burden on them, due to limited resources, than on larger institutions. Banks may find it difficult to determine how far examiners will expect them to go in conducting due diligence for each investment security. Community banks should be permitted to consider external data and credit analyses provided by third parties. Any new rules or guidance should not hurt the ability of community banks to continue to buy and hold municipal securities. Institutions should be permitted to retain long-term investments if credit hasn’t deteriorated but changes in the analytic process suggest a different level of creditworthiness for the issuer than in the past. These could be illiquid securities and sales of securities that were purchased with the intent that they be held until maturity could have serious accounting implications.
In a February 13 comment letter on Permissible Investments for Federal and State Savings Associations: Corporate Debt Securities and the proposed guidance, Guidance on Due Diligence Requirements for Savings Associations in Determining Whether a Corporate Debt Security is Eligible for Investment proposed by the FDIC, ICBA expressed concerns about the ability of small savings associations to meet expanded internal analytical requirements. ICBA said that the agency should communicate in guidance and to examiners the need to balance an adequate regulatory process with the size and complexity of financial institutions and their investments. Federal and state savings associations should be permitted to consider external credit ratings and other external data and credit analyses provided by third parties to help make creditworthiness determinations to help manage the analytic burden. The ability to use credit ratings and other third-party resources is particularly important for small savings associations with limited resources.
ICBA National Convention Offers Workshops for Mutuals
ICBA’s National Convention and Techworld held this year in Nashville, Tennessee, is right around the corner. Over a thousand community bankers from across the nation are coming together for the world’s largest industry gathering. Bankers will have opportunities to network, earn continuing professional education credits and get the latest insights from Washington’s regulators and policy makers.
This year’s convention will provide a showcase for the latest products and services available and offer a wider range of expert-lead workshops and events including several workshops that may be of interest to mutual bankers. We’ve highlighted a few workshops in which mutual bankers may be interested.
At the Mutual and Thrift Roundtable, bankers will be able to discuss the important issues surrounding mutual and thrift institutions today. Stanley Ragalevsky, Esq., KL Gates, will discuss strategies for preserving your mutual status and good governance practices that include enhancing accountability. Discussion will also cover recent regulatory developments that include the recent OTS/OCC integration.
A workshop on Improving the Quality of Loan Analysis, Approval Process and Credit Review may also be of interest to mutual bankers. In this workshop, bankers will learn how to maintain their lending discipline and continue to enhance their controls and practices. They will also hear a Troubled Debt Restructuring Update.
In addition, mutual bankers may be interested in the workshop on the benefits to banks of investing in Small Business Investment Companies (SBICs). SBICs are licensed by the SBA, are privately owned and managed investment firms and provide venture capital to small independent businesses. Investing in an SBIC can prove to be very compelling for mutual banks. The benefits discussed in this workshop include: Community Reinvestment Act investment test credit, an attractive return and client retention and development opportunities. Banking has become increasingly competitive and investments in SBICs may provide a distinct advantage.
If you’d like to register for ICBA’s National Convention and Techworld, click here.