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About Michael Shumaker

Contact at 404.572.5908 or mike.shumaker@bryancave.com.

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Dodd-Frank Reform Bill Broadens Affiliate and Insider Transaction Rules to Include Additional Financial Products

On June 28, 2010, conferees from the U.S. House and the U.S. Senate approved the financial regulatory reform conference report　(known as the “Dodd-Frank Wall Street Reform and Consumer Protection Act”), and on June 30, 2010, the U.S. House approved a bill that is almost identical to the conference report, except for a change in the so-called “pay-for” amendment (as discussed here). The U.S. Senate will continue its consideration of the legislation following its July District Work Period. Included among its many provisions are amendments to current law governing affiliate transactions between a financial institution and a related party and changes to the legal lending limit for national and state banks. In general, the amendments found in Title VI (see Title VI, starting on page 1 of this PDF version of Title VI) only broaden the existing restrictions on affiliate and insider transactions to include financial products such as derivatives, repurchase agreements (“repos”) and securities purchase or sale transactions that involve a credit exposure, rather than re-writing the general standards governing affiliate and insider transactions.   

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Email This Content Email This Content Posted in Dodd-Frank Act. Tagged with .By Michael Shumaker - Thursday, July 8, 2010

New Regulatory Framework for the Supervision of Bank Holding Companies and their Subsidiaries

The conference report of the Dodd-Frank Wall Street Reform and Consumer Protection Act creates a new regulatory framework for the supervision of financial holding companies and their non-bank subsidiaries, and provides new standards for interstate bank mergers, interstate bank acquisitions by bank holding companies, de novo branching for national and state banks, and charter selection and conversion (see Title VI).

Increasing Supervision of Holding Companies and Their Subsidiaries

Sections 604 and 605 of the conference report broaden the supervisory powers afforded to the Federal Reserve Board to supervise the activities of holding companies and their non-bank subsidiaries.  The conference report permits the Federal Reserve to review other supervisory materials – “reports and supervisory information” – provided to regulators by the holding company or any of its subsidiaries to get a better sense of the risk profile of non-depository subsidiaries of the holding company.  In addition, the Federal Reserve is permitted to commence examinations of the holding company and its subsidiaries, with a particular focus on prudential concerns such as the safety and soundness of the institution, the overall stability of the U.S. financial system, as well as a review of the compliance of the holding company and its subsidiaries with relevant provisions of federal law.

The conference report attempts to reduce the burden of additional regulatory examinations on financial institutions and regulators, with the Federal Reserve instructed to rely on reports from prior examinations by other federal or state regulators in order to get a preliminary picture of the condition of the holding company and its subsidiary.  The conference report further requires the Federal Reserve to coordinate its activities with the functional regulator of a subsidiary; for example, should the conference report be enacted, the Federal Reserve is required to consult with the OCC for its review of a national bank and to consult with the Securities Exchange Commission for its review of a securities or brokerage subsidiary.

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Email This Content Email This Content Posted in BHC Regulations, Dodd-Frank Act. Tagged with .By Michael Shumaker - Monday, July 5, 2010

Federal Bank Regulators Release New Guidance for Management of Interest Rate Risk

On January 7, 2010, the Federal Financial Institutions Examination Council (FFIEC), a collection of federal regulators of financial institutions, issued an advisory on interest rate risk management. This advisory, which was issued as part of an effort to supplement and clarify existing interest rate risk (IRR) guidance provided by individual federal regulators, indicates that federal regulators will have increased expectations during future examinations of a financial institution’s management, modeling, stress testing and documentation of IRR.

In light of the current economic environment in which financial institutions are experiencing downward pressure on capital and earnings, FFIEC has grown concerned with the potential IRR associated with institutions funding longer-term assets with shorter-term liabilities in order to generate earnings. As a result, as part of future federal examinations, IRR assumed by a financial institution will be evaluated relative to the institution’s capital and earnings levels, and management will be evaluated on its efforts to identify, measure, control and document the institution’s IRR.

In particular, FFIEC reiterates its previous position that the ultimate responsibility for the financial institution’s IRR rests with its board of directors; as a result, the board of directors or a specially designated asset/liability committee “should oversee the establishment, approval, implementation, and annual review of IRR management strategies, policies, procedures, and limits.” The board of directors is expected to receive and review regular reports that allow them to accurately assess the IRR sensitivity of the institution to an increasing rate environment and to the important assumptions that underlie management-proposed IRR and liquidity projections. Further, the board of directors is directed to approve comprehensive written policies and procedures in place to monitor and manage IRR continuously. Although the advisory indicates that these processes and systems “should be commensurate with the size and complexity of the institution,” FFIEC indicates that “well-managed institutions” possess IRR management policies that include specific targets under a variety of short and long term scenarios.

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Email This Content Email This Content Posted in Bank Regulations. Tagged with , .By Michael Shumaker - Monday, January 25, 2010

FDIC Issues New Guidance Relating to the Brokered Deposit/Interest Rate Restrictions

As we have discussed earlier, the FDIC has revised the brokered deposit/interest rate restrictions to create a presumption in favor of a “national deposit rate” starting January 1, 2010. Under this new rule, financial institutions that are less than well capitalized will be barred from paying in excess of 75 basis points above the national rate unless the institution is able to persuade the FDIC that the institution’s local market rate is above the national rate. As noted earlier, we anticipate that the presumption in favor of the national rate will be difficult to overcome.

On November 3, 2009, the FDIC issued Financial Institution Letter 62-2009 and Frequently Asked Questions that provide new guidance for financial institutions that would prefer to use a prevailing rate for their local market area instead of the new national rate. As described in its publication, the FDIC envisions a two-step process for financial institutions seeking to use a local rate basis. A financial institution that believes it is operating in a market area with deposit rates that are, on average, higher than the national rates must first request and receive a determination from the FDIC that it is operating in a high-rate area; the FDIC anticipates providing additional guidance explaining how banks can seek this threshold determination later this year. However, regardless of whether a financial institution receives such a determination from the FDIC, the new national rates will apply to all deposits outside the market area.

Should the FDIC provide a “high-rate area” determination to the financial institution, the bank or thrift must then calculate the effective rates for its local market. As today’s guidance makes clear, the prevailing rate in the applicable market area is the average of rates offered by other FDIC-insured depository institutions and branches in the geographic market area in which the deposits are being solicited. This prevailing rate includes not only other competing financial institutions, but also individual branches; in other words, a financial institution must determine the effective yield paid by each branch in its market area in order to correctly calculate the prevailing rate for its local market. This average must exclude the rate offered by the subject financial institution. The FDIC noted in its guidance that when an institution is calculating its prevailing market rate, before or after January 1, 2010, it must calculate this rate using the rates of all branches within its local market area. The FAQ provide several sample calculations.

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Email This Content Email This Content Posted in Bank Regulations. Tagged with .By Michael Shumaker - Wednesday, November 4, 2009

FDIC Issues Final Brokered Deposit and Interest Rate Restriction Regulations

On May 29, 2009, the FDIC adopted a final rule amending the interest rate restrictions applicable to institutions that are less than well capitalized.  The new regulation, which will take effect on January 1, 2010, will effectively tie interest rate caps to an average of interest rates charged nationally, significantly diminishing the importance of calculating prevailing interest rates within local deposit market areas.  Less than well-capitalized institutions will generally be subject to national rate caps as published by the FDIC.

Existing Rules

Section 29 of the Federal Deposit Insurance Act places statutory limits on the ability of any insured depository institution that is not well capitalized to accept brokered deposits.  As we have noted earlier, these brokered deposit rules also limit the interest rates that may be paid by insured depository institutions that are not well capitalized.  In order to be considered well capitalized, an insured depository institution must exceed certain uniform regulatory capital measures, as well as not be subject to any written agreement or order issued by its primary federal regulator that requires the institution to meet and maintain a specific capital level for any capital measure.

Under the current rules, any institution that is not well capitalized (including those subject to a regulatory capital order) may not pay interest in excess of 75 basis points over the average interest paid for comparable deposits in the institution’s “normal market area,” although institutions operating under a brokered deposit waiver may not pay interest rates in excess of 75 basis points over a “national rate” for deposits that are accepted outside the institution’s “normal market area.”

The current rule has proved increasingly problematic in recent years; with the Internet blurring local deposit market boundaries, regulators and institutions have had difficulty determining what constitutes an institution’s “normal market area.” In addition, the “national rate” applicable to institutions with a brokered deposit waiver has proved to be largely obsolete in recent years, as it ties permissible interest rates paid on deposits solicited nationally to the comparable maturity Treasury yield, resulting in an excessively low “national rate.”

The New Rule

The new rule moves to solve these two problems by redefining the “national rate” as “a simple average of rates paid by all insured depository institutions and branches for which data are available” and creating a presumption that this national rate is the prevailing rate in any market.  Effective immediately, the FDIC will regularly (weekly) publish national rates and caps, and permit institutions that are less than well capitalized to avail themselves of these rates as a safe harbor for complying with the statutory interest rate restrictions.

As of June 1, 2009, the highest rate that could be paid by a less than well-capitalized institution for a savings account would be 97 basis points, for a money-market account would be 1.21%, for a six-month CD would be 1.70%, for a one-year CD would be 2.00%, and for a 5-year CD would be 2.94%.  The FDIC Weekly National Rates and Rate Caps provides the rates and caps for various deposit maturities and sizes.

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Email This Content Email This Content Posted in Bank Regulations. Tagged with .By Michael Shumaker - Tuesday, June 2, 2009

Federal Reserve Clarification of Tier 1 Treatment for TARP Capital

Recognizing that the cumulative nature of the preferred stock to be issued under the TARP Capital program by bank holding companies could limit the preferred stock’s inclusion in Tier 1 regulatory capital, the Federal Reserve issued an interim final rule to amend its capital regulations, effective October 17, 2008. Under the revised rule, the Senior Perpetual Preferred Stock purchased under TARP “may be included without limit in the Tier 1 capital of bank holding companies.”

The rule’s broadening of the definition of Tier 1 regulatory capital is limited to the preferred stock purchased by the Treasury under the TARP Capital program and does not otherwise modify the regulatory capital rules for bank holding companies. No regulatory modifications were required for banks without holding companies, as the Treasury intends to purchase noncumulative perpetual preferred from stand-alone banks, which would be treated as Tier 1 capital under existing standards.

Email This Content Email This Content Posted in TARP Capital. Tagged with , .By Michael Shumaker - Wednesday, October 29, 2008