Financial Institutions and Banking

Bank Wire

CECL: Banking agencies offer regulatory capital relief

The federal bank regulatory agencies recently finalized a rule that offers banks relief from the regulatory capital impact of the new Current Expected Credit Loss (CECL) standard. CECL discards the traditional incurred-loss model for recognizing credit losses in favor of a forward-looking approach. That is, banks will recognize an immediate allowance for all expected losses over the life of loans and other financial assets covered by the standard.

For some banks, adoption of CECL will negatively affect regulatory capital. Although the actual impact depends on a bank’s particular circumstances, many banks will experience an increase in allowance levels and a reduction in the retained earnings component of equity. This combination will lower their common equity tier 1 capital.

The final rule gives banks the option to phase in the day-one adverse regulatory capital effects of implementing CECL over a three-year period.

A BYOD policy protects banks

These days, the vast majority of your employees have smartphones. Use of these devices to send and receive work-related emails and other communications, and to access the bank’s files and other network resources, can boost productivity. But the ensuing security concerns have led some banks to prohibit employees from using their own devices for bank business. Although an outright ban can be hard to enforce, setting a bring-your-own-device (BYOD) policy enabling the bank to control these devices and manage the risk may be a better approach.

A BYOD policy should, among other things:

  • Provide for management approval and registration of all mobile devices that will access the bank’s servers,
  • Require employees to maintain up-to-date virus protection, authentication and encryption software on mobile devices,
  • Require employees to use strong passwords and other security controls to access mobile devices and the bank’s servers,
  • Specify what type of information can be stored on or transmitted by mobile devices,
  • Allow the bank to remotely wipe a device clean if it’s lost or stolen, and
  • Require employees to provide written consent to comply with the written security procedures before using the device for bank business.

Consider using mobile device management (MDM) software to manage employees’ devices and implement controls to protect the bank’s information.

Regulators approve lengthened examination cycle

On January 17, the federal bank regulatory agencies finalized a rule expanding the availability of an 18-month, on-site examination cycle for qualifying banks with less than $3 billion in total assets (up from $1 billion). The agencies reserved the right to impose more frequent examinations if deemed “necessary or appropriate.”

© 2019

Financial Institutions and Banking News

Federal Reserve focuses on emerging risks

Late last year, the Federal Reserve released its inaugural Supervision and Regulation Report. The report is designed to summarize banking conditions and the Fed’s supervisory and regulatory activities.

Worth Noting

Here are some highlights from the report:

Banking system conditions. The Fed reports that the U.S. banking system is generally strong, that loan growth remains robust, that the volume of nonperforming loans has declined over the last five years, and that overall profitability is stable. Banks continue to maintain high levels of quality capital and have significantly improved their liquidity since the financial crisis.

Large financial institution (LFI) soundness. According to the report, the safety and soundness of LFIs continues to improve. Capital levels are strong and significantly higher than before the financial crisis. Recent stress test results demonstrate that LFIs’ capital levels would remain above regulatory minimums even after a hypothetical severe global recession.

Regional and community banking organization liquidity risk. The Fed reports that most regional banking organizations (RBOs) and community banking organizations (CBOs) are in satisfactory condition, and that 99% are “well capitalized.” Although liquidity risk is generally low or moderate for RBOs, examiners have observed some deterioration of liquidity positions.

The Fed also has identified opportunities for improving RBO risk management. In 2019, the Fed’s RBO supervisory priorities include:

  • Credit risk (concentrations of credit, commercial real estate [CRE] and construction and land development, and underwriting practices),
  • Operational risk (merger and acquisition risks, IT, and cybersecurity), and
  • Other risks (sales practices and incentive compensation and BSA/AML).

CBOs, the Fed observes, are in “robust financial condition,” with high capital levels and low-to-moderate liquidity risks. But like RBOs, CBOs have experienced “a slight uptick” in liquidity risks. Supervisors continue to focus on three areas of emerging risk: 1) management of concentrations of credit — specifically, CRE, agriculture, and oil and gas, 2) the impact of rising interest rates, and 3) increased liquidity risk.

CBO supervisory priorities for 2019 include:

  • Credit risk (concentrations of credit, CRE and construction and land development, and agriculture),
  • Operational risk (IT and cybersecurity), and
  • Other risks (BSA/AML and liquidity risk).

According to the report, the Fed also has made it a priority to modernize and increase the efficiency of the examination process to reduce the burden on community banks. A key part of this effort is the Bank Exams Tailored to Risk program. Under that program, each bank is classified into a low-, moderate- or high-risk tier. The classification provides examiners with a starting point for determining the scope of work, including the extent of transaction testing and other examination procedures. Examiners have the discretion to consider qualitative factors and apply their own judgment in confirming or adjusting the risk tiers.

A valuable tool

The Fed’s inaugural Supervision and Regulation Report examines trends going back to the financial crisis. Future reports will focus on developments since the previous report. Taken together, these reports provide banks with a valuable tool for keeping their fingers on the pulse of the banking industry and identifying emerging risks.

© 2019

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Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019

Top Republicans on the U.S. House Ways and Means Committee introduced legislation on 3/29/19 that is designed to help strengthen Americans’ long-term financial security.

If it passes, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 would expand opportunities for Americans to increase their retirement savings. It would also repeal the maximum age for making traditional IRA contributions and improve the portability of lifetime income options from one plan to another. To read the text of the bill: