By W. Bernard Mason
On June 24, 2009 the House Financial Services Committee held a hearing to consider the merits of both the Administration's proposal to establish the Consumer Financial Protection Agency and H.R. 1705, the "Financial Product Safety Commission Act of 2009". The Committee heard from three witness panels: the first panel consisted solely of Rep. William Delahunt (D - MA), the co-author of the House bill. Appearing on the second panel were Harvard Professor Elizabeth Warren; William F. Galvin, Secretary of the Commonwealth of Massachusetts; Ellen Seidman, representing the New America Foundation; Edmund Mierzwinski, Consumer Program Director for the U.S. Public Interest Research Group; Edward Yingling, President of the American Bankers Association; and, Alex Pollock, representing the American Enterprise Institute. The third panel contained further consumer advocates along with witnesses specifically concerned about federal oversight of insurance industry products and services.
Committee Chairman Barney Frank (D - RI) commenced the hearing by noting his past frustration in getting adequate responses to consumer complaints. In his view, consumer concerns "get crowded out", due to the other safety and soundness responsibilities shouldered by prudential regulators. He observed that when a bank regulator's role is the health of the banks, consumer protection becomes secondary. In his view, the Federal Reserve "has been literally ignoring" its consumer responsibilities. So Chairman Frank believes the proposal to create a separate entity, charged with protecting consumers from abuse, is a very good one.
Ranking Member Spencer Bachus (R - AL) stated that the Administration's proposal outlines fundamental changes to the current regulatory regime. He said the Congress has to consider whether these changes have the potential to reduce consumer choice, limit innovation, and exacerbate the credit crisis. He further stated that the House Republicans have offered a consumer plan that closes gaps in some of the present consumer protection laws by consolidating regulatory and consumer enforcement protection in a single agency and streamlining the complaint process for consumers and investors. He said the Republican plan would also give regulators more investigative and enforcement tools. He further noted that the Republican plan is based on the premise that the best way to protect consumers is not through creation of another bureaucracy accountable to no one, but by consolidating the regulatory system in place today and holding regulators accountable for both consumer protection and safety and soundness regulation. Rep. Bachus said his primary question is the wisdom of bifurcating consumer protection and safety and soundness regulation, as is suggested in the Administration's proposal.
Chairman Frank followed up with comments noting that, in ABA President Yingling's written statement, he says that CRA has not led to material safety and soundness concerns and that such lending is prudent and safe for consumers. Chairman Frank said Mr. Yingling's comments, representing the ABA, were "a very impressive refutation of those who say CRA was a major part of the crisis". (The Republican plan referred to by Rep. Bachus cites CRA as one of the factors contributing to the crisis.) Chairman Frank is concerned about resolving the issue of whether enforcement of CRA should be included within the authority of a new consumer protection agency, or left with the safety and soundness regulators.
Rep. Luis Gutierrez (D - IL) said he wants to be certain that the new agency serves as the primary federal regulator for payday lenders, money remitters, and other money services businesses and that the White House commits to establishing that the agency will aggressively use its supervisory and enforcement powers to regulate these industries.
Most of the minority Committee membership voiced concern over the potential reduction in consumer choice, the increase in regulatory burden for service providers, and the cost of operating yet another federal financial regulatory agency. Most Republican members also shared Rep. Bachus' concerns regarding the separation of consumer protection from prudential supervision. Rep. Jeb Hensarling (R - TX) pointed out that there was not a lack of regulatory authority over consumer protection, but he said an argument could be made that regulatory authority was not properly exercised.
In response to questioning, Elizabeth Warren stated that she did not want to mandate specific products, she merely wants meaningful disclosure of those products that are offered. She wants disclosure to be more effective. She cited the many pages of material required at mortgage loan closings and the fact that borrowers are not given time to review the documents before signing as an example of non-meaningful disclosure. She said separating consumer protection from bank regulation was logical, stating that agencies "are conflicted internally". She pointed to the Federal Reserve's important role in overseeing monetary policy, and indicated that consumer protection had been given a secondary role within that agency.
Rep Mel Watt (D - NC) asked Mr. Yingling how Congress could be assured that the regulators would do an adequate job in the area of consumer protection, given the Federal Reserve's recent record on failure to address issues related to the current crisis. Mr. Yingling responded by saying Congress needed to ensure better agency appointees, better coordination, better laws, and more reporting and accountability to Congress. Mr. Yingling added that it would be unfair to put banks in the middle of two regulators who might be pulling them in two different directions.
Rep. Judy Biggert (R - IL) asked about the concept of consumer responsibility and whether financial literacy might be a key factor in ensuring adequate disclosure. Ms. Warren responded that she was in favor of making products transparent enough so consumers can make informed decisions. "Literacy will not solve the problem of reading a 30-page credit card contract", she said. Mr. Pollack added that "good disclosure enables personal responsibility".Ms. Warren stated her view that the Administration's proposal will help smaller banks - those that were not the cause of the problem. She said the current cost of the compliance burden can be crippling for smaller institutions, so the idea is to "slim-down" the requirements to reduce burden and make them less costly. She further said smaller banks often offer cleaner products, better products; however, markets don't enforce the use of these. Instead, those institutions that can afford multi-million dollar advertising campaigns can force consumers into more complicated, expensive and high-risk products that not only injure consumers, they injure smaller banks. A new regulatory regime would level the playing field not only between bank and consumer but between large and small bank.
Ellen Seidman added that a combination of consolidation and consistency in regulation in one agency will create a preference for quality products that most community banks provide. Mr. Yingling countered that, to his knowledge, there is not a community bank in the country that believes such a statement. In his discussions with banks, Mr. Yingling said that community banks believe creation of a new consumer regulatory agency will mean additional regulation and more examiners. In response to another question, Mr. Yingling stated his view that the Federal Reserve already has the authority necessary for consumer protection; further legislation is unnecessary. Rep. Guttierrez later responded to this point by stating that legislation was passed in 1994 mandating Federal Reserve action in the consumer area, but it took that agency until 2009 to issue regulations.
Mr. Yingling stated a major concern for the ABA is how a new consumer protection agency would interact with state-regulated (and in some cases - unregulated) entities. He pointed out that most of the subprime problems were outside the regulated industry. He is concerned that any new federal regulation "stops at the state line" and places trust in the state regulatory authority. This could subject banks to tough regulation while allowing laxity regarding the unregulated. Professor Warren responded that regulation must shift from "who issued the product" to "what the product is", so there is level regulation.
Responding to a different question, Professor Warren again emphasized that she was not advocating banning products. She pointed out that complicated disclosures don't work, and part of the problem has been caused by a bad regulatory structure. Under the Administration's proposal, the new agency would combine all existing regulatory requirements and create a slimmer, more effective set of regulations that apply across the board to all products. She said this new proposal sets a federal regulatory floor "in response to the fact that the OCC in particular has used its federal power to protect the financial institutions from any effective regulation, including preventing the states from enforcing their own laws on fraud".
Rep. Paul Kanjorski (D - PA) argued that, particularly with respect to the offering of insurance products, a separate consumer protection regulator was a bad idea. He said that "anything that has the title 'consumer' seems to get an express ticket", but he feels this proposal could be very expensive and, regarding the insurance industry, could perhaps impede what some are attempting to achieve - creation of a federal insurance charter.Chairman Frank stated that it is his intention to move for a July mark-up of this proposal. He stated that, ultimately, financial regulatory reform will be consolidated into one final House bill.
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W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
Friday, June 26, 2009
Review and Analysis of Administration Proposal to Create a Consumer Financial Protection Agency
By W. Bernard Mason
Proposal
A major piece of President Obama's financial regulatory reform plan is the proposed creation of a new, separate federal agency to "protect consumers of credit, savings, payment, and other consumer financial products and services, and to regulate providers of such products and services". The Administration proposes that this entity should be independent "with stable, robust funding". This agency would have sole rule-making authority for consumer financial protection statutes. It would have supervisory and enforcement authority and jurisdiction over "insured depositories and the range of other firms not previously subject to comprehensive federal supervision". Under this proposal, the agency's rules would serve as a "floor, not a ceiling", permitting the states to adopt and enforce stricter laws, and it would require the agency to coordinate enforcement efforts with the states.
As envisioned in the Administration's proposal, the Consumer Financial Protection Agency (CFPA) would be overseen by a board representing "a diverse set of viewpoints and experiences", with at least one member being the "head of a prudential regulator". Funding is proposed to come "in part from fees assessed on entities and transactions across the financial sector, including bank and non-bank institutions and other providers of covered products and services".
The proposal would authorize this agency to require that all disclosures and communications with consumers be reasonable, balanced, and clear and conspicuous in their identification of costs, penalties, and risks. The agency would be authorized to define standards for "plain vanilla" products that are simpler and have straightforward pricing, and would be further authorized to require all providers of these services to offer these services prominently, alongside the other products they choose to offer. Where efforts to improve transparency and simplicity prove inadequate to prevent unfair treatment and abuse, the agency would be authorized to place restrictions on product terms and provider practices. The agency would be authorized to impose appropriate "duties of care" on financial intermediaries. The agency would be responsible for enforcing fair lending laws and the Community Reinvestment Act.
The Administration's proposal would require the CFPA to consider the costs to consumers of existing or new regulations, including any reduction in consumers' access to financial services, as well as the benefits. It would also require the CFPA to review regulations periodically to assess whether they should be strengthened, adjusted, or scaled back. The CFPA would also be required to consult with other federal regulators to promote consistency with prudential, market, and systemic objectives.The CFPA would assume from the federal prudential regulators all responsibilities for supervision of compliance with consumer regulations. The CFPA's jurisdiction would extend to bank affiliates that are not currently supervised by a federal regulator. The CFPA would also have supervisory and enforcement authority over nonbanking institutions, although the states would be viewed as the first line of defense. The CFPA would have the full range of supervisory authorities over nonbanking institutions, including supervision, information collection and on-site examination.The Administration proposes that federally chartered institutions be subject to nondiscriminatory state consumer protection and civil rights laws to the same extent as other financial institutions. The states would be able to enforce its laws with respect to federally chartered institutions, in coordination with prudential supervisors.
Issues and Obstacles
The first issue to be addressed and settled is whether separation of consumer protection and safety and soundness supervision is a more desirable and effective structure. Many argue that the supervision of bank operations cannot be separated from regulation of the products and services they provide. Federal Reserve Chairman Bernanke, FDIC Chairman Bair, and Comptroller of the Currency Dugan have all publicly stated this view. Supervision by two separate agencies, with differing missions, could put institutions in conflicting positions. Further, adverse observations in one discipline often point to problems in the other; separating these functions could make problem resolution more difficult and less timely. Additionally, creation of another government agency will add further financial burden to the consumer, the service provider, and the taxpayer. A further argument presented is the fear that a single agency focused on consumer protection will stifle innovation in the provision of financial services. Additionally, opponents of the proposal argue that the CFPA would place undue burden on small institutions. Two further arguments have been presented, neither possessing adequate support: (1) the safety and soundness regulators already possess the authority proposed for the CFPA; and, (2) the CFPA would be a redundant layer of bureaucracy. The Administration proposal addresses both of these objections by citing the failure of the current regulatory regime to fully utilize existing authority and by explaining that this action would consolidate and streamline existing consumer protection authority, not duplicate it.
This cost of operation represents a separate issue. If a separate agency were to be created, how would its operations be funded? The Administration calls for a "stable" funding source. Appropriation (the method put forth in H.R. 1705 proposing creation of a Financial Products Safety Commission) could be subject to political manipulation, and would be a further burden on all taxpayers. Some have proposed a fee-based revenue system. This could be either a simple assessment based upon the number of covered accounts or products currently maintained by the service provider, or it could be a transaction-based fee assessed each time a covered product is "sold" or used. Filing fees have been suggested, as well as priced services such as charges for compliance examinations. These fees would be less subject to manipulation, but would present other weaknesses. Assessments or user fees provide regulated entities with leverage over the agency budget. Transaction-based fees can be volatile.
If a new consumer agency were created, remaining issues would be the scope of its jurisdiction; i.e., the entities and products to be covered. One controversial area is the provision of insurance products. A suggestion has been made to include within the CFPA's authority those insurance products that are central or ancillary to credit transactions, such as credit, title, and mortgage insurance. This would provide the agency with jurisdiction over the entire credit transaction. Others argue that the states have effectively regulated the insurance industry and it should be completely excluded from consideration in this proposal, just as investment products under SEC regulation have been. A further argument is one of basic fairness if some products, such as insurance, investments and money market funds, are excluded while banking products are subjected to greater scrutiny.
Another issue will be the scope of the agency's mandate. Disagreement exists as to whether the CFPA should have the authority to restrict or prevent the offering of specific products, or whether it should merely ensure that adequate disclosure of products is achieved. Should the CFPA mandate the offering of "plain vanilla" products, or merely provide a regulatory safe harbor for offering them? Additional resistance exists regarding the concept of setting a federal "floor" on consumer protection, opening the door to increased state supervision and the prospect of a "hodge-podge" of regulations to be addressed by multi-state operators. It also reverses the concept of federal preemption that has particularly consumed the legal staff of the OCC for many years.
A separate concern over CFPA mission and mandate is the issue of CRA review and administration. While the proposal suggests CFPA will have sole authority over CRA, some argue that CRA and safety and soundness are intertwined - having credit and investment being promoted by an entity with no responsibility for safety and soundness could prove to be an unworkable situation. CRA explicitly states that the affirmative obligation to serve is to be exercised "consistent with safe and sound operation". Further, support for community economic development is not a consumer protection issue. Also, the enforcement mechanism for CRA - consideration of the CRA evaluation at the time of a merger, acquisition, etc. - must remain with the prudential supervisor.Clearly, there are issues presented in the Administration's proposal that must be addressed whether a new agency is created or whether consumer protection remains with one or more existing prudential regulators. The concept of regulating products, not providers, would be a departure from past practice. It would introduce the federal regulatory scheme into previously state-regulated or non-regulated entities. Conversely, it would statutorily mandate state regulation and enforcement of consumer protection matters as an "add-on" to federal oversight. It would give a federal imprimatur to certain "plain vanilla" products (perhaps mandate their usage and perhaps require pre-approval of "riskier" products) and potentially introduce a hierarchy of regulatory oversight depending upon the types of products offered by providers. The proposal introduces the possibility of the federal government restricting or banning certain products or dictating their structure. It proposes to oversee the communication occurring between customer and provider.
House Financial Services Committee Chairman Barney Frank has stated that final mark-up of a House bill, addressing the consumer protection aspect of the Administration's proposal, will be completed in July.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
Proposal
A major piece of President Obama's financial regulatory reform plan is the proposed creation of a new, separate federal agency to "protect consumers of credit, savings, payment, and other consumer financial products and services, and to regulate providers of such products and services". The Administration proposes that this entity should be independent "with stable, robust funding". This agency would have sole rule-making authority for consumer financial protection statutes. It would have supervisory and enforcement authority and jurisdiction over "insured depositories and the range of other firms not previously subject to comprehensive federal supervision". Under this proposal, the agency's rules would serve as a "floor, not a ceiling", permitting the states to adopt and enforce stricter laws, and it would require the agency to coordinate enforcement efforts with the states.
As envisioned in the Administration's proposal, the Consumer Financial Protection Agency (CFPA) would be overseen by a board representing "a diverse set of viewpoints and experiences", with at least one member being the "head of a prudential regulator". Funding is proposed to come "in part from fees assessed on entities and transactions across the financial sector, including bank and non-bank institutions and other providers of covered products and services".
The proposal would authorize this agency to require that all disclosures and communications with consumers be reasonable, balanced, and clear and conspicuous in their identification of costs, penalties, and risks. The agency would be authorized to define standards for "plain vanilla" products that are simpler and have straightforward pricing, and would be further authorized to require all providers of these services to offer these services prominently, alongside the other products they choose to offer. Where efforts to improve transparency and simplicity prove inadequate to prevent unfair treatment and abuse, the agency would be authorized to place restrictions on product terms and provider practices. The agency would be authorized to impose appropriate "duties of care" on financial intermediaries. The agency would be responsible for enforcing fair lending laws and the Community Reinvestment Act.
The Administration's proposal would require the CFPA to consider the costs to consumers of existing or new regulations, including any reduction in consumers' access to financial services, as well as the benefits. It would also require the CFPA to review regulations periodically to assess whether they should be strengthened, adjusted, or scaled back. The CFPA would also be required to consult with other federal regulators to promote consistency with prudential, market, and systemic objectives.The CFPA would assume from the federal prudential regulators all responsibilities for supervision of compliance with consumer regulations. The CFPA's jurisdiction would extend to bank affiliates that are not currently supervised by a federal regulator. The CFPA would also have supervisory and enforcement authority over nonbanking institutions, although the states would be viewed as the first line of defense. The CFPA would have the full range of supervisory authorities over nonbanking institutions, including supervision, information collection and on-site examination.The Administration proposes that federally chartered institutions be subject to nondiscriminatory state consumer protection and civil rights laws to the same extent as other financial institutions. The states would be able to enforce its laws with respect to federally chartered institutions, in coordination with prudential supervisors.
Issues and Obstacles
The first issue to be addressed and settled is whether separation of consumer protection and safety and soundness supervision is a more desirable and effective structure. Many argue that the supervision of bank operations cannot be separated from regulation of the products and services they provide. Federal Reserve Chairman Bernanke, FDIC Chairman Bair, and Comptroller of the Currency Dugan have all publicly stated this view. Supervision by two separate agencies, with differing missions, could put institutions in conflicting positions. Further, adverse observations in one discipline often point to problems in the other; separating these functions could make problem resolution more difficult and less timely. Additionally, creation of another government agency will add further financial burden to the consumer, the service provider, and the taxpayer. A further argument presented is the fear that a single agency focused on consumer protection will stifle innovation in the provision of financial services. Additionally, opponents of the proposal argue that the CFPA would place undue burden on small institutions. Two further arguments have been presented, neither possessing adequate support: (1) the safety and soundness regulators already possess the authority proposed for the CFPA; and, (2) the CFPA would be a redundant layer of bureaucracy. The Administration proposal addresses both of these objections by citing the failure of the current regulatory regime to fully utilize existing authority and by explaining that this action would consolidate and streamline existing consumer protection authority, not duplicate it.
This cost of operation represents a separate issue. If a separate agency were to be created, how would its operations be funded? The Administration calls for a "stable" funding source. Appropriation (the method put forth in H.R. 1705 proposing creation of a Financial Products Safety Commission) could be subject to political manipulation, and would be a further burden on all taxpayers. Some have proposed a fee-based revenue system. This could be either a simple assessment based upon the number of covered accounts or products currently maintained by the service provider, or it could be a transaction-based fee assessed each time a covered product is "sold" or used. Filing fees have been suggested, as well as priced services such as charges for compliance examinations. These fees would be less subject to manipulation, but would present other weaknesses. Assessments or user fees provide regulated entities with leverage over the agency budget. Transaction-based fees can be volatile.
If a new consumer agency were created, remaining issues would be the scope of its jurisdiction; i.e., the entities and products to be covered. One controversial area is the provision of insurance products. A suggestion has been made to include within the CFPA's authority those insurance products that are central or ancillary to credit transactions, such as credit, title, and mortgage insurance. This would provide the agency with jurisdiction over the entire credit transaction. Others argue that the states have effectively regulated the insurance industry and it should be completely excluded from consideration in this proposal, just as investment products under SEC regulation have been. A further argument is one of basic fairness if some products, such as insurance, investments and money market funds, are excluded while banking products are subjected to greater scrutiny.
Another issue will be the scope of the agency's mandate. Disagreement exists as to whether the CFPA should have the authority to restrict or prevent the offering of specific products, or whether it should merely ensure that adequate disclosure of products is achieved. Should the CFPA mandate the offering of "plain vanilla" products, or merely provide a regulatory safe harbor for offering them? Additional resistance exists regarding the concept of setting a federal "floor" on consumer protection, opening the door to increased state supervision and the prospect of a "hodge-podge" of regulations to be addressed by multi-state operators. It also reverses the concept of federal preemption that has particularly consumed the legal staff of the OCC for many years.
A separate concern over CFPA mission and mandate is the issue of CRA review and administration. While the proposal suggests CFPA will have sole authority over CRA, some argue that CRA and safety and soundness are intertwined - having credit and investment being promoted by an entity with no responsibility for safety and soundness could prove to be an unworkable situation. CRA explicitly states that the affirmative obligation to serve is to be exercised "consistent with safe and sound operation". Further, support for community economic development is not a consumer protection issue. Also, the enforcement mechanism for CRA - consideration of the CRA evaluation at the time of a merger, acquisition, etc. - must remain with the prudential supervisor.Clearly, there are issues presented in the Administration's proposal that must be addressed whether a new agency is created or whether consumer protection remains with one or more existing prudential regulators. The concept of regulating products, not providers, would be a departure from past practice. It would introduce the federal regulatory scheme into previously state-regulated or non-regulated entities. Conversely, it would statutorily mandate state regulation and enforcement of consumer protection matters as an "add-on" to federal oversight. It would give a federal imprimatur to certain "plain vanilla" products (perhaps mandate their usage and perhaps require pre-approval of "riskier" products) and potentially introduce a hierarchy of regulatory oversight depending upon the types of products offered by providers. The proposal introduces the possibility of the federal government restricting or banning certain products or dictating their structure. It proposes to oversee the communication occurring between customer and provider.
House Financial Services Committee Chairman Barney Frank has stated that final mark-up of a House bill, addressing the consumer protection aspect of the Administration's proposal, will be completed in July.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
Tuesday, June 23, 2009
Recent Interagency Rulemaking
By W. Bernard Mason
The banking agencies have issued the following actions on an interagency basis:
CRA Proposed Rulemaking
The four banking agencies are proposing to amend the Community Reinvestment Act Regulation in two ways. The first amendment would reflect the recent statutory change to the CRA made by the Higher Education Opportunity Act (HEOA) that requires the agencies to consider, as a factor in CRA evaluations, low-cost education loans provided by an institution to low-income borrowers. The second change would be to add a new paragraph to address an existing statutory provision permitting the agencies to consider, as a factor in the CRA evaluation of a non-minority and non-women owned financial institution, activities undertaken by the institution in cooperation with minority-and-women-owned financial institutions and low-income credit unions. This proposal will be published with a 30-day comment period.
Interim Rule on Capital Maintenance: Modified Residential Mortgage Loans
The four banking agencies have approved issuance of this interim rule setting forth that a mortgage loan modified under the Making Home Affordable Program will retain the risk weight assigned to the loan (under the agencies' general risk-based capital rules) prior to the modification, so long as the loan continues to meet other applicable prudential criteria. This interim rule will be effective upon publication and contain a 30-day comment period.
Proposed Interagency Guidance - Funding and Liquidity Risk Management
The agencies have approved publication of this proposed guidance for a 60-day comment period. The guidance summarizes the principles of sound liquidity risk management that the agencies have issued in the past and, where appropriate, brings them into conformance with the "Principles for Sound Liquidity Risk Management and Supervision" issued by the Basel Committee on Banking Supervision in September 2008. While the Basel document primarily focuses on large internationally active financial institutions, this proposed guidance emphasizes supervisory expectations for all domestic financial institutions.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
The banking agencies have issued the following actions on an interagency basis:
CRA Proposed Rulemaking
The four banking agencies are proposing to amend the Community Reinvestment Act Regulation in two ways. The first amendment would reflect the recent statutory change to the CRA made by the Higher Education Opportunity Act (HEOA) that requires the agencies to consider, as a factor in CRA evaluations, low-cost education loans provided by an institution to low-income borrowers. The second change would be to add a new paragraph to address an existing statutory provision permitting the agencies to consider, as a factor in the CRA evaluation of a non-minority and non-women owned financial institution, activities undertaken by the institution in cooperation with minority-and-women-owned financial institutions and low-income credit unions. This proposal will be published with a 30-day comment period.
Interim Rule on Capital Maintenance: Modified Residential Mortgage Loans
The four banking agencies have approved issuance of this interim rule setting forth that a mortgage loan modified under the Making Home Affordable Program will retain the risk weight assigned to the loan (under the agencies' general risk-based capital rules) prior to the modification, so long as the loan continues to meet other applicable prudential criteria. This interim rule will be effective upon publication and contain a 30-day comment period.
Proposed Interagency Guidance - Funding and Liquidity Risk Management
The agencies have approved publication of this proposed guidance for a 60-day comment period. The guidance summarizes the principles of sound liquidity risk management that the agencies have issued in the past and, where appropriate, brings them into conformance with the "Principles for Sound Liquidity Risk Management and Supervision" issued by the Basel Committee on Banking Supervision in September 2008. While the Basel document primarily focuses on large internationally active financial institutions, this proposed guidance emphasizes supervisory expectations for all domestic financial institutions.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
FDIC Adopts Final Rule Changes to Annual Independent Audit Requirements
By W. Bernard Mason
The FDIC has adopted final amendments to its Part 363 (Annual Audit and Reporting Requirements) largely as originally proposed in a notice published on November 2, 2007. The rule will apply to all institutions with consolidated assets of $500 million or more at the beginning of its fiscal year.
Previously, institutions that were holding company subsidiaries could comply with the provisions of Part 363 by relying upon the audit and reporting activities of its parent. The FDIC has determined that, where insured institutions do not comprise a substantial portion of the holding company's consolidated total assets, the holding company's consolidated statements and accompanying notes do not provide sufficient information on the position and operations of the insured entity. Therefore, the FDIC has concluded that, in order for an institution to be eligible to comply with the audit and reporting requirements in Part 363 by looking to the holding company, the consolidated assets of the insured institution(s) must comprise 75 percent or more of the assets of the holding company. Compliance will be required for fiscal years ending on or after June 15, 2010.
The final rule amends the proposal by requiring that, in determining auditor independence, the independent public accountant must look to the AICPA, the SEC, and the PCAOB and comply with whatever standard would be most restrictive. The FDIC has decided not to include in the final rule a proposed requirement that insured institutions file with the FDIC copies of audit engagement letters, but cautions that including "limitations of liability" clauses in such letters could result in supervisory and disciplinary action. The FDIC has also amended some of the proposed guidelines for determining the independence of an outside director.
The final rule will be effective 30 days from the date of publication in the Federal Register. The original proposed rule is available at the here.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
The FDIC has adopted final amendments to its Part 363 (Annual Audit and Reporting Requirements) largely as originally proposed in a notice published on November 2, 2007. The rule will apply to all institutions with consolidated assets of $500 million or more at the beginning of its fiscal year.
Previously, institutions that were holding company subsidiaries could comply with the provisions of Part 363 by relying upon the audit and reporting activities of its parent. The FDIC has determined that, where insured institutions do not comprise a substantial portion of the holding company's consolidated total assets, the holding company's consolidated statements and accompanying notes do not provide sufficient information on the position and operations of the insured entity. Therefore, the FDIC has concluded that, in order for an institution to be eligible to comply with the audit and reporting requirements in Part 363 by looking to the holding company, the consolidated assets of the insured institution(s) must comprise 75 percent or more of the assets of the holding company. Compliance will be required for fiscal years ending on or after June 15, 2010.
The final rule amends the proposal by requiring that, in determining auditor independence, the independent public accountant must look to the AICPA, the SEC, and the PCAOB and comply with whatever standard would be most restrictive. The FDIC has decided not to include in the final rule a proposed requirement that insured institutions file with the FDIC copies of audit engagement letters, but cautions that including "limitations of liability" clauses in such letters could result in supervisory and disciplinary action. The FDIC has also amended some of the proposed guidelines for determining the independence of an outside director.
The final rule will be effective 30 days from the date of publication in the Federal Register. The original proposed rule is available at the here.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
FDIC Seeks Comment on Extension of Transaction Account Guarantee Program
By W. Bernard Mason
Today the FDIC Board authorized staff to seek comment on two alternatives for phasing out the FDIC's Transaction Account Guarantee (TAG) Program. This program, along with the FDIC's Temporary Liquidity Guarantee Program, was initiated on November 21, 2008 under the Agency's systemic risk authority as a means to assist insured institutions during the current financial crisis. The TAG Program provides a full guarantee for certain noninterest-bearing transaction accounts at a cost of 10 basis points for account balances above the current $250,000 deposit insurance limit. The TAG Program currently will terminate on December 31, 2009.
The first alternative is to retain the original termination date, with no modification to the program. The second alternative will be to extend the termination date to June 30, 2010, with an increase in the assessment to 25 basis points for balances beyond the regular deposit coverage. Under this proposal, institutions would have one opportunity to opt out of the extended program.The FDIC will be publishing the proposal for a 30-day comment period.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
Today the FDIC Board authorized staff to seek comment on two alternatives for phasing out the FDIC's Transaction Account Guarantee (TAG) Program. This program, along with the FDIC's Temporary Liquidity Guarantee Program, was initiated on November 21, 2008 under the Agency's systemic risk authority as a means to assist insured institutions during the current financial crisis. The TAG Program provides a full guarantee for certain noninterest-bearing transaction accounts at a cost of 10 basis points for account balances above the current $250,000 deposit insurance limit. The TAG Program currently will terminate on December 31, 2009.
The first alternative is to retain the original termination date, with no modification to the program. The second alternative will be to extend the termination date to June 30, 2010, with an increase in the assessment to 25 basis points for balances beyond the regular deposit coverage. Under this proposal, institutions would have one opportunity to opt out of the extended program.The FDIC will be publishing the proposal for a 30-day comment period.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
FDIC Chairman Addresses Provisions of Obama Regulatory Reform Plan
By W. Bernard Mason
In a CNBC interview yesterday, FDIC Chair Sheila Bair spoke to some of the key issues contained in the Administration's recently released regulatory restricting proposal. Rather than characterize the proposal as "good", she suggested it was "an opening to the process". She said there was a definite need for reform, and the effort must move forward. She stated that ending "too big to fail" is the most important step in reforming the system, and the way to do that is to have a resolution mechanism that works even for very large entities. This mechanism should also impose market discipline on those who invested or extended credit without doing proper due diligence. This is a central focus of the FDIC in analyzing the proposal.
She said the good news is that a regulatory council has been proposed to oversee systemic risk interests; however, the FDIC wants "a seat at the table regarding decision-making on systemic risk", including input on capital standards and leverage constraints. She indicated the FDIC is currently guaranteeing over $6 trillion in deposits, and the agency has tremendous exposure to the financial system. Therefore, it should have a real say in systemic issues.
Ms. Bair stated that the proposed systemic risk responsibility and the Federal Reserve's existing monetary policy responsibility are two unrelated activities, and most of the developed countries have separated these functions, so this is a legitimate policy issue. Congress will need to look at where this authority and responsibility should be placed.
In her view there has been moral hazard and lack of market discipline created by the "too big to fail" doctrine, and this has been furthered by the lack of a resolution mechanism that can be applied to large financial organizations. Regulation plays a large part, but market discipline also must have an influential role. To the extent there is any sort of implied government back-stop, market discipline is diluted. Ms. Bair believes that in dealing with existing large financial entities, Congress must create a fund (separate from the Deposit Insurance Fund) that can institute risk-based assessments so that those entities that pose higher systemic risks will pay higher assessments. This would create economic disincentives to very large growth.
In her view, true regulatory consolidation would mean removing supervisory authority from all current agencies and placing it under a new entity, and also fold in the SEC and the CFTC. She has been perplexed by the Administration's focus on state charters vs. federal charters as something that needs to be addressed as part of regulatory consolidation. Her position is that the ability to choose between state and federal charters was never a contributing factor to the current crisis. "We've had dual banking for a couple of hundred years, now". The integrity of state charters is important to maintain.
As to whether a restructured regulatory system will protect from future crises, Ms. Bair stated that we will always be subject to business cycles, and this is why having a sound resolution mechanism is extremely important. She believes this should be the key focus for Congress.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
In a CNBC interview yesterday, FDIC Chair Sheila Bair spoke to some of the key issues contained in the Administration's recently released regulatory restricting proposal. Rather than characterize the proposal as "good", she suggested it was "an opening to the process". She said there was a definite need for reform, and the effort must move forward. She stated that ending "too big to fail" is the most important step in reforming the system, and the way to do that is to have a resolution mechanism that works even for very large entities. This mechanism should also impose market discipline on those who invested or extended credit without doing proper due diligence. This is a central focus of the FDIC in analyzing the proposal.
She said the good news is that a regulatory council has been proposed to oversee systemic risk interests; however, the FDIC wants "a seat at the table regarding decision-making on systemic risk", including input on capital standards and leverage constraints. She indicated the FDIC is currently guaranteeing over $6 trillion in deposits, and the agency has tremendous exposure to the financial system. Therefore, it should have a real say in systemic issues.
Ms. Bair stated that the proposed systemic risk responsibility and the Federal Reserve's existing monetary policy responsibility are two unrelated activities, and most of the developed countries have separated these functions, so this is a legitimate policy issue. Congress will need to look at where this authority and responsibility should be placed.
In her view there has been moral hazard and lack of market discipline created by the "too big to fail" doctrine, and this has been furthered by the lack of a resolution mechanism that can be applied to large financial organizations. Regulation plays a large part, but market discipline also must have an influential role. To the extent there is any sort of implied government back-stop, market discipline is diluted. Ms. Bair believes that in dealing with existing large financial entities, Congress must create a fund (separate from the Deposit Insurance Fund) that can institute risk-based assessments so that those entities that pose higher systemic risks will pay higher assessments. This would create economic disincentives to very large growth.
In her view, true regulatory consolidation would mean removing supervisory authority from all current agencies and placing it under a new entity, and also fold in the SEC and the CFTC. She has been perplexed by the Administration's focus on state charters vs. federal charters as something that needs to be addressed as part of regulatory consolidation. Her position is that the ability to choose between state and federal charters was never a contributing factor to the current crisis. "We've had dual banking for a couple of hundred years, now". The integrity of state charters is important to maintain.
As to whether a restructured regulatory system will protect from future crises, Ms. Bair stated that we will always be subject to business cycles, and this is why having a sound resolution mechanism is extremely important. She believes this should be the key focus for Congress.
________________
W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.
Friday, June 19, 2009
Issues Raised and Points of Contention Regarding Obama Regulatory Reform Plan
By W. Bernard Mason
The following are issues that have been or are anticipated to be raised and debated in the course of considering enactment of the Administration's regulatory reform proposals:
The following are issues that have been or are anticipated to be raised and debated in the course of considering enactment of the Administration's regulatory reform proposals:
- The primary area of contention is assigning responsibility for systemic risk oversight. The Administration proposes the Federal Reserve assume this role, with oversight from a new Financial Services Oversight Council. Opponents argue the Fed will gain too much responsibility (may diminish Fed attention to other important matters such as monetary policy; also, the perception is the Fed failed in its regulatory responsibilities leading up to the crisis).
- Strong resistance could be offered to the proposal to separate consumer protection regulation from prudential supervision. Both the banking industry and federal banking agencies have raised objections to the proposal, arguing the two responsibilities are interconnected and would be weakened, disjointed, and less efficient if separated.
- Systemic resolution authority infrastructure and funding could be challenged as being an unfair cost and burden to healthy "Tier 1" holding companies.
- Requiring Treasury approval prior to the Federal Reserve pursuing action under its "systemic risk" authority could be viewed as political intervention in the regulatory process.
- Requiring hedge funds to register with the SEC could encounter resistance due to arguments that such entities played no role in the current crisis, and that hedge fund investors are financially sophisticated and need no assistance or oversight from the federal government.
- The plan to establish the Office of National Insurance could encounter criticism from a deeply divided insurance industry - some seeking a single federal insurance regulator and others opposing any federal oversight of the insurance industry.
- Proposal for comprehensive regulation of all derivatives could be viewed as insufficient; the proposal calls for trading of OTC derivatives through clearinghouses, but some argue for more stringent oversight by requiring trading through official exchanges.
- Proposals for credit rating agency reforms could be viewed as insufficient; opponents will argue that ratings agencies should be held more accountable for their decisions, since their actions were a primary factor in the current crisis.
Treasury Secretary Presents Regulatory Restructuring Plan to Senate Committee
By W. Bernard Mason
A day after the Administration announced its blueprint for regulatory reform, Treasury Secretary Geithner appeared before the Senate Banking, Housing and Urban Affairs Committee to answer questions and defend the proposal. In his opening statement, Secretary Geithner emphasized that input had been sought from all sources - Congress, regulators, consumer advocates, business leaders, academics and the broader public. He stated that the proposal does not address every problem and does not propose reforms that, while desirable, would not move toward achieving core objectives. He presented his support for the plan to establish a systemic regulatory authority, a separate consumer protection entity, enhanced capital buffers and transparency, and broader failure resolution authority.
The opening statements of both Committee Chairman Christopher Dodd (D - CT) and Ranking Member Richard Shelby (R - AL) revealed strong skepticism toward the Administration's proposal to grant broader supervisory authority, as systemic risk regulator, to the Federal Reserve Board. This sentiment would be echoed by most of the Committee members during subsequent questioning.
Senator Dodd fully endorsed the concept of consolidating consumer protection authority within a single regulator and somewhat angrily cited morning news headlines suggesting the banking industry was opposed to such a concept, stating that the very ones who created the mess are the ones saying consumers should not be protected. "To attack the very clients and customers you depend upon each day is not the place to begin", he admonished. He stated his view that stronger consumer protection would have stopped this crisis before it started.
Senator Shelby hinted that he was not as confident as some that consensus has been reached on what the guiding principles should be, what the concept of systemic risk was or whether it can even be regulated. He repeated his previously publicized concerns regarding the inherent conflict of interest presented by the Federal Reserve's structure and its supervision of banks. He said events have shown that the Federal Reserve is not structured to be an effective bank regulator. He also pointed out his reservations regarding the Federal Reserve's ability to assume further responsibility while carrying out its primary mission of monetary policy oversight. Mr. Geithner agreed that the Federal Reserve's structure is complicated, and the Administration has requested the Fed to take a close look at its structure and come forward with proposals to modify its governance structure by October 31.
Senator Charles Schumer (D - NY), while also criticizing the Federal Reserve's performance in the consumer protection area, was one of the few Committee members to suggest that giving the Federal Reserve systemic risk authority was probably the best answer. Senator Schumer believes vesting such authority with a regulatory council would be "a formula for disaster - everyone would pass the buck". Senator Schumer faulted the Administration's plan because it does little to reduce the actual number of regulators. With the Federal Reserve gaining additional authority, he wondered why it shouldn't give up supervision of state banks.
Secretary Geithner reminded the Committee that the Administration was not seeking perfection in its proposal; the focus is on those problems that were central causes of the crisis. The Administration does not want to spend time and effort on changes that do not accomplish this.
Senator Robert Bennett (R - UT) focused on a particular provision of the proposal that would eliminate the existence of industrial loan companies (ILC) by treating them as holding companies subject to Federal Reserve supervision and oversight. He was perplexed that ILCs would be singled out for extinction when not one such entity had been a contributor to the current crisis, answering his own question by observing that the Federal Reserve had been attempting to gain regulatory control of these companies for years and found this mechanism to be a convenient means to solve the problem. Secretary Geithner admitted that ILCs were not implicated in the current crisis, but noted they did operate outside the control of formal supervisory oversight and the intent of the restructuring plan was to level the playing field for all entities offering similar financial services. He said he was open to working with Congress on alternatives to this issue.
Senator David Vitter (R - LA) obtained Secretary Geithner's agreement that Fannie Mae and Freddie Mac were significant contributors to the current financial crisis. Senator Vitter then inquired as to why, if the proposal is to address core problems, we "are punting" on these issues. Mr. Geithner stated that Congress had legislated changes last year addressing the GSE oversight regime, and the Administration did not want to rush through further measures at this stage. He stated that the challenge with Fannie Mae and Freddie Mac, and the government more generally, is an effective exit strategy. He said we need to re-think the role of government in the future - "We did not get that right".
Senator Mark Warner (D - VA) echoed previous concerns regarding expansion of Federal Reserve authority and worried that extending the requirement for Treasury approval of Fed actions in "systemic risk" situations could serve to politicize the process. He believes systemic risk supervision should be given to a council whose membership would include the Federal Reserve, Treasury, the prudential regulators, and an independent chair, with a staff solely focused on systemic risk evaluation and independent power to act. He also questioned how the proposed expanded resolution authority would be funded. Secretary Geithner indicated that there would be no up-front funding for potential systemic risk failure resolutions - should a failure occur, any government losses would be recouped over time through assessments against remaining systemically important entities.
Senator Jon Tester (D - MT) inquired as to why the Administration had not proposed combining the Securities and Exchange Commission with the Commodities Futures Trading Commission. While Secretary Geithner argued that the prevailing view was this was unnecessary, he indicated a willingness to work with Congress should such a combination prove effective.
Senator Bob Corker (R - TN) stated his view that a lot of the "heavy lifting" such as dealing with the GSEs and merging the SEC with the CFTC, had not been addressed. He also wondered if it would not be advisable to have the President sign a statement assuring that none of the Administration officials involved in developing the reform plan would subsequently be appointed as Federal Reserve Board Chairman. Secretary Geithner stated he did not believe that to be appropriate; neither did he think such a statement was necessary.
Senator Mike Crapo (R - ID) questioned the benefits of separating consumer protection from prudential supervision. He cited previous testimony from Comptroller of the Currency John Dugan arguing against such a separation. While indicating his support for Comptroller Dugan, Mr. Geithner stated that history had shown the present structure has not worked. During his questioning, Senator Herb Kohl (D - WI) cited testimony from FDIC Chair Sheila Bair stating that separating consumer protection from safety and soundness will weaken each. Secretary Geithner again argued that the present system has not worked.
Other Committee members expressed doubt or outright opposition to the proposal to grant systemic authority to the Federal Reserve. Many members accused the Fed of failing to use its existing powers to avert, or lessen the impact of, the current crisis.
Committee Chairman Dodd predicted that legislation addressing this proposal would be enacted by yearend.
A day after the Administration announced its blueprint for regulatory reform, Treasury Secretary Geithner appeared before the Senate Banking, Housing and Urban Affairs Committee to answer questions and defend the proposal. In his opening statement, Secretary Geithner emphasized that input had been sought from all sources - Congress, regulators, consumer advocates, business leaders, academics and the broader public. He stated that the proposal does not address every problem and does not propose reforms that, while desirable, would not move toward achieving core objectives. He presented his support for the plan to establish a systemic regulatory authority, a separate consumer protection entity, enhanced capital buffers and transparency, and broader failure resolution authority.
The opening statements of both Committee Chairman Christopher Dodd (D - CT) and Ranking Member Richard Shelby (R - AL) revealed strong skepticism toward the Administration's proposal to grant broader supervisory authority, as systemic risk regulator, to the Federal Reserve Board. This sentiment would be echoed by most of the Committee members during subsequent questioning.
Senator Dodd fully endorsed the concept of consolidating consumer protection authority within a single regulator and somewhat angrily cited morning news headlines suggesting the banking industry was opposed to such a concept, stating that the very ones who created the mess are the ones saying consumers should not be protected. "To attack the very clients and customers you depend upon each day is not the place to begin", he admonished. He stated his view that stronger consumer protection would have stopped this crisis before it started.
Senator Shelby hinted that he was not as confident as some that consensus has been reached on what the guiding principles should be, what the concept of systemic risk was or whether it can even be regulated. He repeated his previously publicized concerns regarding the inherent conflict of interest presented by the Federal Reserve's structure and its supervision of banks. He said events have shown that the Federal Reserve is not structured to be an effective bank regulator. He also pointed out his reservations regarding the Federal Reserve's ability to assume further responsibility while carrying out its primary mission of monetary policy oversight. Mr. Geithner agreed that the Federal Reserve's structure is complicated, and the Administration has requested the Fed to take a close look at its structure and come forward with proposals to modify its governance structure by October 31.
Senator Charles Schumer (D - NY), while also criticizing the Federal Reserve's performance in the consumer protection area, was one of the few Committee members to suggest that giving the Federal Reserve systemic risk authority was probably the best answer. Senator Schumer believes vesting such authority with a regulatory council would be "a formula for disaster - everyone would pass the buck". Senator Schumer faulted the Administration's plan because it does little to reduce the actual number of regulators. With the Federal Reserve gaining additional authority, he wondered why it shouldn't give up supervision of state banks.
Secretary Geithner reminded the Committee that the Administration was not seeking perfection in its proposal; the focus is on those problems that were central causes of the crisis. The Administration does not want to spend time and effort on changes that do not accomplish this.
Senator Robert Bennett (R - UT) focused on a particular provision of the proposal that would eliminate the existence of industrial loan companies (ILC) by treating them as holding companies subject to Federal Reserve supervision and oversight. He was perplexed that ILCs would be singled out for extinction when not one such entity had been a contributor to the current crisis, answering his own question by observing that the Federal Reserve had been attempting to gain regulatory control of these companies for years and found this mechanism to be a convenient means to solve the problem. Secretary Geithner admitted that ILCs were not implicated in the current crisis, but noted they did operate outside the control of formal supervisory oversight and the intent of the restructuring plan was to level the playing field for all entities offering similar financial services. He said he was open to working with Congress on alternatives to this issue.
Senator David Vitter (R - LA) obtained Secretary Geithner's agreement that Fannie Mae and Freddie Mac were significant contributors to the current financial crisis. Senator Vitter then inquired as to why, if the proposal is to address core problems, we "are punting" on these issues. Mr. Geithner stated that Congress had legislated changes last year addressing the GSE oversight regime, and the Administration did not want to rush through further measures at this stage. He stated that the challenge with Fannie Mae and Freddie Mac, and the government more generally, is an effective exit strategy. He said we need to re-think the role of government in the future - "We did not get that right".
Senator Mark Warner (D - VA) echoed previous concerns regarding expansion of Federal Reserve authority and worried that extending the requirement for Treasury approval of Fed actions in "systemic risk" situations could serve to politicize the process. He believes systemic risk supervision should be given to a council whose membership would include the Federal Reserve, Treasury, the prudential regulators, and an independent chair, with a staff solely focused on systemic risk evaluation and independent power to act. He also questioned how the proposed expanded resolution authority would be funded. Secretary Geithner indicated that there would be no up-front funding for potential systemic risk failure resolutions - should a failure occur, any government losses would be recouped over time through assessments against remaining systemically important entities.
Senator Jon Tester (D - MT) inquired as to why the Administration had not proposed combining the Securities and Exchange Commission with the Commodities Futures Trading Commission. While Secretary Geithner argued that the prevailing view was this was unnecessary, he indicated a willingness to work with Congress should such a combination prove effective.
Senator Bob Corker (R - TN) stated his view that a lot of the "heavy lifting" such as dealing with the GSEs and merging the SEC with the CFTC, had not been addressed. He also wondered if it would not be advisable to have the President sign a statement assuring that none of the Administration officials involved in developing the reform plan would subsequently be appointed as Federal Reserve Board Chairman. Secretary Geithner stated he did not believe that to be appropriate; neither did he think such a statement was necessary.
Senator Mike Crapo (R - ID) questioned the benefits of separating consumer protection from prudential supervision. He cited previous testimony from Comptroller of the Currency John Dugan arguing against such a separation. While indicating his support for Comptroller Dugan, Mr. Geithner stated that history had shown the present structure has not worked. During his questioning, Senator Herb Kohl (D - WI) cited testimony from FDIC Chair Sheila Bair stating that separating consumer protection from safety and soundness will weaken each. Secretary Geithner again argued that the present system has not worked.
Other Committee members expressed doubt or outright opposition to the proposal to grant systemic authority to the Federal Reserve. Many members accused the Fed of failing to use its existing powers to avert, or lessen the impact of, the current crisis.
Committee Chairman Dodd predicted that legislation addressing this proposal would be enacted by yearend.
Monday, June 15, 2009
Pay Week in Washington
by W. Bernard Mason, Regulatory Relations Liasion, The Risk Management Association
Last week both the Administration and Congress were focused on executive pay and corporate compensation programs. On Wednesday, Treasury Secretary Geithner released an interim final rule on “TARP Standards for Compensation and Corporate Governance”. This rulemaking limits executive compensation for certain executives and highly compensated employees at entities receiving TARP funds. It will limit bonus payments, curtail golden parachute payments, and impose a clawback for bonuses found to be based on “materially inaccurate performance criteria”. It also appoints a Special Master to review compensation plans at firms receiving “exceptional” assistance. Another provision institutes “say on pay” requirements for all TARP recipients. A further provision prohibits tax gross-up practices and mandates disclosure of compensation consultants.
More specifically, the new rule will limit bonuses paid to “senior executive officers” and to a specified number of the most highly compensated employees of TARP recipients to one-third of total compensation, implementing the provisions passed by Congress. It also encourages firms to pay salary in the form of stock that must be held for a long period of time and may not be entirely converted to cash until TARP funds are repaid. The Special Master (Kenneth R. Feinberg has been appointed) will have authority to disapprove compensation arrangements for companies with “exceptional” assistance where salary or other compensation is found to be inappropriate. The rule implements the statutory requirement that TARP recipients provide an annual shareholder vote on a non-binding resolution to approve executive compensation packages (say on pay).
In addition to the new TARP rules, Secretary Geithner issued a more general statement regarding financial system compensation. He indicated that compensation practices were a contributing factor to the financial crisis. In his view, incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage. He announced that he was seeking ways to better align compensation practices with sound risk management and long-term growth. He outlined some broad general principles that would address his concerns:
Mr. Geithner emphasized the importance of efforts underway by the banking agencies to lay out broad standards on compensation that will become part of the normal supervisory process. He stressed that there are no moves to cap pay and no precise prescriptions will be set forth dictating how companies set compensation.
Secretary Geithner announced two pieces of legislation to address compensation issues. One would give the Securities and Exchange Commission authority to require “say on pay” more broadly, giving shareholders a non-binding vote on executive compensation packages. The second piece would give the SEC the power to ensure that compensation committees are more independent, adhering to standards similar to those in place for audit committees under Sarbanes-Oxley. This legislation would also give compensation committees the responsibility and resources to hire their own independent compensation consultants and outside counsel. More details can be found at the following web site under “Recent News”: http://www.ustreas.gov/
On Thursday the House Financial Services Committee held a hearing regarding compensation and systemic risk. The committee delved into the “lessons learned” regarding compensation practices and their perceived contribution to the current financial crisis. The Committee heard from two witness panels: the first panel consisted of representatives from Treasury, the Federal Reserve, and the Securities and Exchange Commission; the second panel was comprised of outside experts. Committee Chairman Barney Frank (D-RI) stated that the focus should not be on the amount of compensation but the structure, and he believes “the structure of compensation has been flawed”. Mr. Frank stated his support for the principle of “say on pay”; the House passed such legislation last year but it failed to become law. Gene Sperling, Counselor to the Secretary of the Treasury, was the first panel witness and he set out in more detail the basis and rationale for the Administration’s two legislative proposals: say on pay and independent compensation committees.
Republican Committee members were less supportive of governmental efforts to set pay standards. Ranking Member Spencer Bachus (R-AL) stated his view that it was not the role of government to mandate compensation policies or to determine who sits on corporate boards of directors. Rep. Jeb Hensarling (R – TX) stated that, while there was no question that government compensation controls should be placed on any firm receiving taxpayer assistance, it was his belief that government intervention in private compensation matters “was the wrong remedy for what is probably a non-existent problem”.
Chairman Frank stated his goal to have some form of compensation legislation enacted before Congress’ summer recess. The prepared testimony of the various witnesses contained many statements of sound principles for compensation programs and related risk management, as well as examples of flawed programs and approaches, and can be accessed at the following link: http://www.house.gov/apps/list/hearing/financialsvcs_dem/hrfc_061109.shtml
Last week both the Administration and Congress were focused on executive pay and corporate compensation programs. On Wednesday, Treasury Secretary Geithner released an interim final rule on “TARP Standards for Compensation and Corporate Governance”. This rulemaking limits executive compensation for certain executives and highly compensated employees at entities receiving TARP funds. It will limit bonus payments, curtail golden parachute payments, and impose a clawback for bonuses found to be based on “materially inaccurate performance criteria”. It also appoints a Special Master to review compensation plans at firms receiving “exceptional” assistance. Another provision institutes “say on pay” requirements for all TARP recipients. A further provision prohibits tax gross-up practices and mandates disclosure of compensation consultants.
More specifically, the new rule will limit bonuses paid to “senior executive officers” and to a specified number of the most highly compensated employees of TARP recipients to one-third of total compensation, implementing the provisions passed by Congress. It also encourages firms to pay salary in the form of stock that must be held for a long period of time and may not be entirely converted to cash until TARP funds are repaid. The Special Master (Kenneth R. Feinberg has been appointed) will have authority to disapprove compensation arrangements for companies with “exceptional” assistance where salary or other compensation is found to be inappropriate. The rule implements the statutory requirement that TARP recipients provide an annual shareholder vote on a non-binding resolution to approve executive compensation packages (say on pay).
In addition to the new TARP rules, Secretary Geithner issued a more general statement regarding financial system compensation. He indicated that compensation practices were a contributing factor to the financial crisis. In his view, incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage. He announced that he was seeking ways to better align compensation practices with sound risk management and long-term growth. He outlined some broad general principles that would address his concerns:
- Compensation plans should properly measure and reward performance.
- Compensation should be structured to account for the time horizon of risks.
- Compensation practices should be aligned with sound risk management.
- Transparency and accountability should exist in setting compensation.
Mr. Geithner emphasized the importance of efforts underway by the banking agencies to lay out broad standards on compensation that will become part of the normal supervisory process. He stressed that there are no moves to cap pay and no precise prescriptions will be set forth dictating how companies set compensation.
Secretary Geithner announced two pieces of legislation to address compensation issues. One would give the Securities and Exchange Commission authority to require “say on pay” more broadly, giving shareholders a non-binding vote on executive compensation packages. The second piece would give the SEC the power to ensure that compensation committees are more independent, adhering to standards similar to those in place for audit committees under Sarbanes-Oxley. This legislation would also give compensation committees the responsibility and resources to hire their own independent compensation consultants and outside counsel. More details can be found at the following web site under “Recent News”: http://www.ustreas.gov/
On Thursday the House Financial Services Committee held a hearing regarding compensation and systemic risk. The committee delved into the “lessons learned” regarding compensation practices and their perceived contribution to the current financial crisis. The Committee heard from two witness panels: the first panel consisted of representatives from Treasury, the Federal Reserve, and the Securities and Exchange Commission; the second panel was comprised of outside experts. Committee Chairman Barney Frank (D-RI) stated that the focus should not be on the amount of compensation but the structure, and he believes “the structure of compensation has been flawed”. Mr. Frank stated his support for the principle of “say on pay”; the House passed such legislation last year but it failed to become law. Gene Sperling, Counselor to the Secretary of the Treasury, was the first panel witness and he set out in more detail the basis and rationale for the Administration’s two legislative proposals: say on pay and independent compensation committees.
Republican Committee members were less supportive of governmental efforts to set pay standards. Ranking Member Spencer Bachus (R-AL) stated his view that it was not the role of government to mandate compensation policies or to determine who sits on corporate boards of directors. Rep. Jeb Hensarling (R – TX) stated that, while there was no question that government compensation controls should be placed on any firm receiving taxpayer assistance, it was his belief that government intervention in private compensation matters “was the wrong remedy for what is probably a non-existent problem”.
Chairman Frank stated his goal to have some form of compensation legislation enacted before Congress’ summer recess. The prepared testimony of the various witnesses contained many statements of sound principles for compensation programs and related risk management, as well as examples of flawed programs and approaches, and can be accessed at the following link: http://www.house.gov/apps/list/hearing/financialsvcs_dem/hrfc_061109.shtml
Thursday, June 11, 2009
Oversight Panel Issues Report on Bank Stress Tests
by W. Bernard Mason, Regulatory Relations Liasion, Risk Management Association
A report issued on June 9, 2009 from the Congressional Oversight Panel for the Troubled Asset Relief Fund concluded that, while the Federal Reserve had used a “conservative and reasonable model” in conducting the recently completed stress tests, serious concerns and unanswered questions remain. The report suggested that, without relevant details, it is impossible for others to replicate the tests and there are key questions surrounding how the calculations were tailored for each institution as well as questions regarding the quality of the self-reported data. It also raised the concern that the testing horizon projected only through 2010 even though some experts fear commercial real estate defaults may rise beyond the testing horizon.
The report offered several recommendations for consideration:
by W. Bernard Mason, Regulatory Relations Liasion, Risk Management Association
A report issued on June 9, 2009 from the Congressional Oversight Panel for the Troubled Asset Relief Fund concluded that, while the Federal Reserve had used a “conservative and reasonable model” in conducting the recently completed stress tests, serious concerns and unanswered questions remain. The report suggested that, without relevant details, it is impossible for others to replicate the tests and there are key questions surrounding how the calculations were tailored for each institution as well as questions regarding the quality of the self-reported data. It also raised the concern that the testing horizon projected only through 2010 even though some experts fear commercial real estate defaults may rise beyond the testing horizon.
The report offered several recommendations for consideration:
- Should the actual average unemployment rate exceed the 8.9% assumed under the more adverse stress testing scenario, the stress tests should be repeated
- Stress testing should be repeated so long as banks continue to hold large amounts of toxic assets on their books
- Between formal tests, banks should be required to run internal stress tests and share results with regulators
- Regulators should have the ability to use stress tests in the future when they believe doing so would help promote a healthy banking system
The report further suggested that the Federal Reserve Board release more information, such as results of the “baseline” scenario, as well as details of the test methodology. The report also cautioned that banks should not be forced into “fire sales” of assets that may ultimately require the investment of even more taxpayer money.The full report may be found at the following link: http://cop.senate.gov/documents/cop-060909-report.pdf
Friday, June 5, 2009
OTS Issues Results of ALLL Sound Practices Review
by W. Bernard Mason, Regulatory Relations Liasion, Risk Management Association
The Office of Thrift Supervision recently issued a memorandum to thrift institution chief executive officers describing the results of an OTS-conducted “horizontal review” of the allowance for loan and lease losses (ALLL) methodologies at a number of larger institutions. The review included 1-4 family residential first mortgages, Option ARMs, second mortgages, and the related qualitative component of the allowance. OTS stated that the purpose of the review was to identify industry practices, including sound practices, in the ALLL estimation process. The results of the review will be used by OTS examiners as a tool in assessing a thrift institution’s ALLL. The memorandum enumerates several observed “sound practices” for estimating an appropriate ALLL; it also lists several types of deficiencies noted by the review. The memorandum cautions against generalizing these sound practices and points out that ALLL practices must be appropriate to each institution. The complete memorandum (CEO Letter 304) can be found at the following link: http://files.ots.gslsolutions.com/25304.pdf
The Office of Thrift Supervision recently issued a memorandum to thrift institution chief executive officers describing the results of an OTS-conducted “horizontal review” of the allowance for loan and lease losses (ALLL) methodologies at a number of larger institutions. The review included 1-4 family residential first mortgages, Option ARMs, second mortgages, and the related qualitative component of the allowance. OTS stated that the purpose of the review was to identify industry practices, including sound practices, in the ALLL estimation process. The results of the review will be used by OTS examiners as a tool in assessing a thrift institution’s ALLL. The memorandum enumerates several observed “sound practices” for estimating an appropriate ALLL; it also lists several types of deficiencies noted by the review. The memorandum cautions against generalizing these sound practices and points out that ALLL practices must be appropriate to each institution. The complete memorandum (CEO Letter 304) can be found at the following link: http://files.ots.gslsolutions.com/25304.pdf
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