The FDIC Refinery
Wayne A. Abernathy
It was a busy day at the Federal Deposit Insurance Corporation (FDIC). The agency took several actions to refine proposed and existing banking regulations, each with a focus on better achieving their purpose by making them easier to administer and less of a weight on economic activity. Three among the several stand out.
In some order of significance, the FDIC fulfilled a provision from last year’s regulatory reform act, approving a final regulation creating a Community Bank Leverage Ratio (CBLR). The CBLR rule offers to community banks the option to avoid complex Basel III capital calculations. To qualify, the bank (defined as one with less than $10 billion in assets) must have capital equal to 9% of its total assets (not risk weighted), and minimal off-balance-sheet exposures or trading liabilities. The assumption—tested by actual data—is that a bank with that much capital would meet Basel III capital requirements without the fuss of more paperwork to prove it. Some 80% or more of community banks are expected to qualify for exercising the option.
Adopted with objection by former Chairman Marty Gruenberg, the FDIC proposed to repeal the requirement that a bank collect initial swap margin from its own affiliates. Supporters of the repeal argue that margin—effectively, collateral against default—makes little sense when applied to swaps among different divisions of the same firm. Supporters also note that repeal frees up funds that are otherwise sequestered within the firm for no economic purpose. Estimates are that industry wide the amounts could total as much as $40 billion. Opponents argue that the requirement discourages excessive growth of swap transactions, and that these funds could be available to address bank safety and soundness risks. The proposal will be open for public comment for 30 days following publication in the Federal Register.
Capital simplification also got simpler. The banking regulators in June finalized an October 2017 proposal to simplify—and reduce—the capital charge on banks for holding mortgage servicing assets, deferred tax assets, and investments in trust preferred securities (TruPS). That June rule withheld effectiveness of the reform until April 1, 2020. On its busy day the FDIC approved a further refinement, allowing banks to adopt the reform as soon as January 1, 2020, a full quarter earlier.
While the FDIC initiated the work, each measure will require Federal Reserve affirmation as well (in perhaps an even busier day at the Fed, expected late September). Approval by the Comptroller of the Currency was functionally coterminous with the FDIC, since Comptroller Otting, as a member of the FDIC board, voted in favor of each.
Executive VP for Financial Institutions Policy and Regulatory Affairs
American Bankers Association
Federalist Society’s Financial Services & E-Commerce Practice Group