A busy day for bank regulators on Tuesday led to proposed rules dealing with new liquidity requirements, incentive-based compensation, and the way small banks are assessed for deposit insurance.
A “Net Stable Funding rule,” proposed by the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation, would require the largest banks to hold sufficient liquid assets to endure a year-long funding crisis. Described by Comptroller of the Currency Thomas Curry as “one piece of a broader effort to increase the resiliency of the banking system,” the rule will work in concert with the Liquidity Coverage Ratio (LCR) rule issued in September 2014.
The LCR rule required covered institutions to hold “high-quality liquid assets equal to their net cash outflows” over a 30-day period. The new rule would go further, requiring covered institutions to have sources of funding that are stable over a one-year period. Like the liquidity rule, the proposed rule would cover depository institutions with more than $250 billion in total consolidated assets or $10 billion in foreign exposure. It would also cover depository institutions with more than $10 billion in total consolidated assets that are subsidiaries of large holding companies, large depository institutions, and non-banks designated as systemically important by the Financial Stability Oversight Council.
The rule proposal follows a decision by the Federal Reserve earlier this month to include general obligation state and municipal securities in the range of assets large banks may use to satisfy liquidity requirements. While the LCR rule did not initially include investment grade U.S. municipal securities as “high quality liquid assets,” a subsequent analysis by the Federal Reserve, codified in an April 1 rule, determined that they “have liquidity characteristics similar to other HQLA classes, such as corporate debt securities.” The rule, which applies only to institutions supervised by the Federal Reserve and subject to the LCR requirement, is effective on July 1, 2016.
Also on Tuesday, the OCC and FDIC signed onto a proposed rule intended to align employee incentives with the long-term interests and safety and soundness of covered financial institutions.
Last week, moving forward with a Dodd-Frank Act mandate, the National Credit Union Administration re-proposed a stalled 2011 rule proposal targeting incentive-based executive pay that encourages inappropriate risks at banks and credit unions. The proposed rules—which also apply to investment advisers, broker-dealers, and mortgage-finance companies Fannie Mae and Freddie Mac—would impose new clawback provisions, enhance compensation-related disclosures, and require executives and “significant risk takers” to defer as much as 60 percent of their incentive-based pay for up to four years.
The proposed rule takes a tiered approach, based on institutional assets, to scale its requirements. “Level 1” institutions, facing the highest standards, are defined as having $250 billion or more in assets; “Level 2” institutions hold between $50 billion and $250 billion in assets; “Level 3” entities maintain between $1 billion and $50 billion in assets. The rule proposal exempts institutions with less than $1 billion of assets and does not require the disclosure of compensation that is not incentive-based.
Significant risk takers are defined as individuals receiving at least one-third of their pay in incentive-based compensation, are among the top 5 percent compensated individuals at a Level 1 firm, or among the top 2 percent at Level 2 firms. Any individual who may commit or expose at least 0.5 percent of an institution's assets or who is specifically designated by regulators would also be designated.
Level 1 and Level 2 covered institutions would be required to have a risk management framework in place for their incentive-based compensation programs that is independent of any lines of business; includes an independent compliance program that provides for internal controls, testing, monitoring, and training with written policies and procedures; and is commensurate with the size and complexity of the its operations.
The rulemaking is a multi-agency effort and will also include the Federal Housing Finance Agency, the Board of Governors of the Federal Reserve System, and the Securities and Exchange Commission. NCUA is the first of the federal financial industry regulators to reissue the 2011 proposal, but it will not be published in the Federal Register until after all of the agencies have acted. The FDIC and OCC were the latest to sign onto the rule proposal.
Also on Tuesday, the FDIC’s board of directors approved a final rule that amends the way small banks are assessed for deposit insurance.
The rule affects banks with less than $10 billion in assets that have been FDIC insured for at least five years. It updates the data and revises the methodology the FDIC uses to determine risk-based assessments for these institutions to better reflect risks and to help ensure that banks that take on greater risks pay more for deposit insurance than their less risky counterparts. An online calculator for current and future assessments can be found here.
“This rule will allow future assessments to better differentiate riskier banks from safer banks,” FDIC Chairman Martin J. Gruenberg said in a statement. “Using the FDIC's experience during the recent financial crisis, this rule will better allocate the costs of maintaining a strong Deposit Insurance Fund. Taken together with the overall decline in rates approved by the Board in 2011 that will occur once the reserve ratio reaches 1.15 percent, more than 93 percent of small banks will pay lower assessment rates.”