Financial Law Blog

Updates on Banking Law, Investment Management Law, Securities Law, Commodities/Derivatives Law

Tag: Financial Institutions

FRB approves application by First Citizens BancShares to increase non-controlling interest in Carter Bank & Trust

The Federal Reserve Board yesterday approved an application by First Citizens BancShares to increase its ownership interest in Carter Bank & Trust from 4.9 percent to 9.0 percent of voting shares.

The BHC Act requires BHCs to request approval in order to directly or indirectly acquire more than 5% of a bank’s voting shares. In connection with the application, First Citizens made enforceable commitments (“passivity commitments”) to the Fed in order to show that it would not exercise a controlling influence over Carter Bank & Trust.

Furthermore, non-controlling interests in directly competing depository institutions may raise competitive issues under the BHC Act. Because of substantial overlap in some markets, First Citizens has also made enforceable commitments to not acquire any confidential or nonpublic financial information about Carter Bank & Trust.

Governor Tarullo discusses regulatory agenda regarding community banks, enhanced prudential standards, and U.S. branches of FBOs

Governor Tarullo delivered a speech on Friday outlining his views on a number of items on the Board’s upcoming regulatory agenda including U.S. branches of FBOs, Enhanced Prudential Standards, and regulation of community banks.

U.S. branches of FBOs — capital and liquidity

The Board will “take another look at” the capital and liquidity positions of large U.S. branches of some foreign banks:

“The actual consolidated capital positions of some such banks can be difficult for us to discern when the bank uses internal models to compute its required regulatory capital. It is critical to ensure that large U.S. branches of foreign banks do not create financial instability in the United States if their parents’ global positions come under stress.”

$50 billion Enhanced Prudential Standards cutoff — potential increase

Gov. Tarullo “would raise the threshold for enhanced prudential standards from its current $50 billion level, perhaps to $100 billion.”

Regulation of banks under $10 billion — exemption from certain rules, reduction in number of compliance exams and exercises

  • Gov. Tarullo “would entirely exempt” banks under $10 billion “from some regulations, such as the Volcker rule and the incentive compensation rule.”
  • “[T]he burden of these rules for small banks is often less in the substantive constraints they impose on bank activities than in the compliance costs they impose. Even with efforts by banking agencies to streamline implementing regulations for smaller banks, the relatively scarce compliance resources of those banks must still be directed towards assuring that no changes in substantive activities are needed and possibly documenting their compliance.”

  • Although efforts to simplify capital rules for small banks are “worthwhile,” banks may get more benefit from regulatory efforts to reduce the number of rules that apply to them and “the number of separate compliance exams and exercises.”
  • “[T]he smaller the bank, the greater the likelihood that a potential disconnect between costs and benefits of regulation is rooted in the disproportionate costs of exams, audits, and reporting.”

Wells Fargo to pay $185 million in penalties to CFPB, OCC and Los Angeles for sales practices and risk management failures

Yesterday the OCC assessed a $35 million civil money penalty against Wells Fargo Bank, N.A. for risk management failures and retail sales practices. The CFPB assessed a $100 million penalty. The City Attorney of Los Angeles, Mike Feuer, whose 2015 lawsuit appears to have triggered the federal investigations, assessed a $50 million penalty in settlement in state court. The OCC found that Wells Fargo’s employee “incentive compensation program and plans … fostered … unsafe or unsound sales practices.” Specifically, thousands of Wells Fargo employees opened roughly 1.5 million deposit accounts and applied for roughly 565,000 credit card accounts for consumers, all of which may not have been authorized by the consumers. While the CFPB’s action focused on the underlying sales practices, the OCC’s action, as would be expected, focused on Wells Fargo’s risk management system.

What went wrong at Wells Fargo through the lens of the OCC’s Risk Management System (3 Lines of Defense) requirements

Frontline Units
  • “The Bank’s Community Bank Group failed to adequately oversee sales practices and failed to adequately test and monitor branch employee sales practices.”
Independent Risk Management
  • “The Bank lacked an Enterprise-Wide Sales Practices Oversight Program and thus failed to provide sufficient oversight to prevent and detect the unsafe or unsound sales practices”
  • “The Bank lacked a comprehensive customer complaint monitoring process that impeded the Bank’s ability to … assess customer complaint activity across the Bank … [and] analyze and understand the potential sales practices risk.”
Internal Audit
  • “audit coverage was inadequate because it failed to include in its scope an enterprise-wide view of the Bank’s sales practices.”

FRB approves bank merger that takes institutions beyond $10 billion and into enhanced prudential standards

The Federal Reserve Board approved the merger of Chemical Financial Corporation with Talmer Bancorp this week. The merger will push these institutions beyond the $10 billion asset mark, thus subjecting the resulting financial holding company to the Federal Reserve’s enhanced prudential standards. In that regard, the FRB notes that “Chemical has the financial and managerial resources to comply with the Board’s [enhanced prudential standards], and the Board will monitor Chemical’s compliance with these regulations through the supervisory process.”

In the financial stability analysis, the FRB highlighted that it “generally presumes that a proposal that results in a firm with less than $25 billion in consolidated assets will not pose significant risks to … financial stability” so long as the resulting institution would not be overly complex. The merger was approved within 7 months of announcement.

FRB orders Goldman Sachs to pay $36.3 million relating to violations of confidential supervisory information rules

The FRB today ordered Goldman Sachs to pay a $36.3 million civil money penalty arising from violations of rules regarding confidential supervisory information. The release states that the “Board expects all firms, including Goldman Sachs, to comply with all U.S. laws, rules, and regulations.” (emphasis supplied)

The majority of supervisory information received by banks from their regulators is considered confidential. That is, confidential supervisory information is not only internal materials that regulators don’t share with banks. Each of the FRB, OCC, and FDIC has its own rules on what specifically constitutes “confidential” supervisory information, and under what circumstances banks can share it — even with their attorneys, financial advisers, and potential transaction partners. Under the rules, not only the sender but also the recipient of supervisory information could be in violation if the information is “confidential.”

The FRB’s release may be a reminder to practitioners to take their obligations under the rules regarding confidential supervisory information seriously, lest the regulators do that for them.

Large banks predominantly engaged in retail commercial banking receiving M&A approval from FRB

The Federal Reserve Board yesterday approved Huntington Bancshares’ acquisition of FirstMerit. Both are large institutions — Huntington Bancshares has assets of $71.1 billion and FirstMerit $25.5 billion. On closing Huntington would become the 34th largest depository in the United States.

This merger was approved by the FRB within 6 months of announcement and the approval mirrors the recent Federal Reserve Board approval of KeyCorp’s acquisition of First Niagara Financial Group Inc. In the financial stability analysis, the FRB highlighted that both companies are “predominantly engaged in retail commercial banking activities” and the resulting institution would not be overly complex.

Risk management guidance for banks with direct or indirect exposure to oil & gas borrowers released by FDIC

The FDIC released supervisory guidance this week to FDIC-supervised financial institutions with direct or indirect oil & gas exposure.

“When O&G related borrowers experience financial difficulties, the FDIC encourages financial institutions to work constructively with borrowers to strengthen the credits and to mitigate losses where possible.” The release of this guidance suggests that this is an area of supervisory concern, particularly for institutions with concentrated exposures. The FIL warns that if a bank’s exposure to O&G remains concentrated notwithstanding efforts at diversification, that “may indicate the need for capital levels higher than the regulatory minimums.”

The FIL, which applies to large institutions as well as those with assets under $1 billion, makes a number of recommendations regarding institutional risk management policies. For example:

  • When working with troubled borrowers, a “well-conceived workout plan and effective internal controls” are required.
  • Management should closely monitor all credit concentrations and report the results of concentration monitoring programs regularly to the board of directors.

Large bank M&A a possibility for some institutions, regulators say

The Federal Reserve Board recently approved KeyCorp’s acquisition of First Niagara Financial Group Inc. Both are large institutions — KeyCorp has assets of $98.6 billion and First Niagara $40.1 billion. On closing KeyCorp would become the 26th largest depository in the United States.

The FRB noted that both companies are “considered to be well managed” and that the acquirer’s “risk-management program appears consistent with approval.” In approving the large deal, the FRB highlighted that both companies are “predominantly engaged in retail commercial banking activities” and the resulting institution would not be overly complex.

Large banks looking to expand may see this as a welcome development, especially considering the widely held belief that regulators have been lukewarm about any proposed combinations among the large institutions.  F.N.B. Corp. and Yadkin Financial also announced merger plans on Thursday.

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