Banking Law Prof Blog

Report on SCAP Institutions Needing More Capital

Last Spring, 19 financial holding companies were required to undergo "stress testing" in the Supervisory Capital Assessment Program (SCAP).  Ten were determine to need more capital.  The Federal Reserve now says that nine of those have met increased capital targets.  The one exception is GMAC, which should meet increased capital standards through the TARP Automotive Industry Financing Program.

Link to FRB Press Release:  http://www.federalreserve.gov/newsevents/press/bcreg/20091109a.htm

(ag) Nov. 11, 2009, in Economy/Capital

Bringing Securitized Assets Back Onto Bank Balance Sheets

The comment period is open for a Joint Federal Banking Agency proposed regulatory capital rule.  Beginning in 2010, new accounting rules from the Federal Accounting Standards Board (FASB) will require major changes in the way banks account for currently off-balance sheet items, including securitized assets. 

How shoud the bank capital requirements be adjusted or phased-in to reflect these new items on the balance sheet and the true risk involved?

Link:  http://www.occ.treas.gov/ftp/release/2009-101.htm 

(ag) Sept. 3, 2009, in Capital

Regulatory Disputes Over Restricting the Size of Our Biggest Financial Institutions

Today's Bloomberg news story by Craig Torres and Alison Vekshin, "Bair, Bernanke Want Tougher Curbs on Biggest Banks," highlights the differences of regulatory opinion over future restrictions on the largest financial institutions.  FDIC Chairman Sheila Bair and Federal Reserve Chairman Ben Bernanke want to impose strict measures to curb the size and risk-taking of the nation's biggest financial firms, including more fees on the biggest bank holding companies for activities outside of traditional lending -- for example, proprietary trading. 

Bair says she favors "financial disincentives for size and complexity."  Bernanke says that "restricting size is a 'legitimate' option."  Treasury Secretary Timothy Geithner disagrees.  He would tax financial firms only after they have to be bailed out, expressing concern that pre-funded bailouts would create inappropriate expectations.  The Obama plan would allow financial institutions to expand if they meet higher capital and liquidity requirements.

Link to Story:  http://www.bloomberg.com/apps/news?pid=20601087&sid=aB4OVrCHNQmE

(ag) July 15, 2009, in Capital, Economy, Financial Regulatory Reform

What Happens to Restructured Loans and Bank Capital

One-to-four-family mortgage loans usually have a risk-weighting of 50% for purposes of calculating a bank's capital requirements.  Once they're restructured, they receive a risk-weighting of 100%.  Banks suddenly need a lot more capital to balance these assets that have been recognized as riskier. 

What has really changed?  Well, nothing about the loans.  They carried just as high a risk of default one minute before restructuring as they do one minute after, but the impact on the amount of capital required can be quite significant!  Some of the biggest banks won't be able to do this without a capital infusion from somewhere.  Let's see, where to find more capital . . . .

Oh, I know, we'll change the rules about risk-weighting.  We'll let the restructured loans keep their previous risk-weighting, "so long as the loan continues to meet other prudential criteria."

Link to Interim Final Rule:  http://www.occ.treas.gov/ftp/bulletin/2009-22.html

(ag) July 12, 2009, in Capital, Lending Issues, Federal Banking Agencies, Economy

More Stress (Testing)

Here's a comment from the Conference of State Bank Supervisor's Newsletter:

Closing Comment
"If we want to heal our financial system so it can resume the business of financing the economy, the Treasury and the White House need to get out of the way and return the authority for bank supervision to the professionals at the independent banking agencies." - William M. Isaac, the former chairman of the Federal Deposit Insurance Corp., writing about the stress tests and accompanying press coverage and publicity in the May 6 issue of American Banker.

-- and I say AMEN!

In addition, CSBS summarized the stress testing results by entity, as follows:

"The capital buffer for each BHC is sized to achieve a Tier 1 risk-based ratio of at least 6 percent and a Tier 1 common risk-based ratio of at least 4 percent at the end of 2010. The report found that all the institutions had sufficient Tier 1 capital at the end of 2010 in the worse case scenario, but 10 firms need to augment their Tier 1 common capital. In total, the regulators estimated the firms needed to add $74.6 billion to their capital buffers. The nine firms that do not need to supplement their capital are: American Express, BB&T, The Bank of New York Mellon Corp., Capital One Financial Corp., Goldman Sachs Group Inc., J.P. Morgan Chase & Co., MetLife Inc., State Street Corp. and U.S. Bancorp. Those needing to add capital are Bank of America -- $33.9 billion, Wells Fargo & Company -- $13.7 billion, GMAC LLC -- $11.5 billion, Citigroup -- $5.5 billion, Regions Financial Corp. -- $2.5 billion, SunTrust Banks Inc. -- $2.2 billion, Key Corp – $1.8 billion, Morgan Stanley -- $1.8 billion, Fifth-Third Bancorp -- $1.1 billion, PNC Financial Services Group -- $600 million."

(ag) May 8, 2009, in Capital, Federal Banking Agencies

Official Stress Test Results

The offficial announcement is posted on the Federal Reserve website.  There have been many advance leaks and general misunderstanding about what the stress test results mean, so please refer to the Statement released at 5 p.m. today by Secretary of the Treasury Timothy Geithner, Federal Reserve Board Chairman Ben Bernanke, FDIC Chairman Sheila Bair and Comptroller of the Currency John Dugan.

The nineteen largest U.S. bank holding companies (BHCs) participated in the Supervisory Capital Assesment Program (SCAP).  Each bank's balance sheet was analyzed under various "worst case scenarios" about the economy.  The purpose is to determine a capital buffer sufficient to weather severe economic shocks.  This goes beyond minimum capital requirements which are fairly mechanical to calculate.  BHCs that need more capital buffer according to the stress test results will have until June 8 to develop a capital restoration plan and until November 9 to implement the plan.  To the extent stress testing shows a need for more capital buffer, the Treasury stands ready to provide funds under its Capital Assistance Program "as a bridge to private capital in the future."

Regulators will look carefully at any BHC proposal to redeem preferred stock held by the government pursuant to the Capital Purchase Program (CPP).  In fact, this won't be allowed if it jeopardized the SCAP buffer deemed prudent. 

Bank regulators hope that the generally favorable stress testing results will foster public confidence in the banking system. 

Link to Results for each holding company:  http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf 

Link to Statement by the regulators:  http://www.federalreserve.gov/newsevents/press/bcreg/20090507a.htm

(ag) May 7, 2009, in Capital, Economy

How to Get Out of TARP

It's not just a matter of giving back funds received from the Troubled Asset Relief Program (TARP).  Banks that want to exit the TARP program must also demonstrate ability to raise private funds without a guarantee from the FDIC.  The FDIC guarantee has allowed banks to issue debt securities with a lower interest rate, providing a lower cost of funds.  Without that government backing, a bank's ability to raise funds in the private sector is entirely dependent on the public perception of that institution's financial soundness.

Here's a link to today's Wall Street Journal online article by Deborah Solomon and Damian Paletta, "Condition is Set for Banks' TARP Exit":  http://online.wsj.com/article/SB124156005555589031.html

(ag) May 6, 2009, in Capital, Economy, Federal Banking Regulators

OCC - Compliance with Market Risk Capital Rule

OCC Bulletin 2007-27 (July 27, 2007) explains the interaction between Financial Accounting Standard - FAS 159 and the OCC's market risk capital rule.  OCC's Market Risk Capital Rule requires a national bank with significant trading activity to measure the market risk of the debt and equity positions in its trading account and hold capital to cover that market risk using its internal value-at-risk (VAR) model.

OCC's rule applies to a national bank that meets either of the following two criteria:

The sum of the bank’s trading assets and liabilities is at least 10 percent of total assets, or

The sum of the bank’s trading assets and liabilities exceeds $1 billion.

BUT OCC has flexibility to exempt a bank that meets either of the two criteria as a consequence of accounting, operational, or similar considerations and the OCC determines that such an exemption is consistent with safe and sound banking practices.

SO now, FAS 159 might cause a national bank to meet one of the two criteria above.

OCC cautions its banks to contact the OCC Supervisory office if it appears that this accounting rule might cause the bank to meet one of these two criteria for the first time.  Apparently, OCC will then make a judgment about exemption.

Link:  http://www.occ.gov/ftp/bulletin/2007-27.html

(ag) July 30, 2007, in Capital

Allowance for Loan & Lease Losses - FAQs

FRB, OCC, FDIC and OTS have released a new Policy Statement on the Allowance for Loan and Lease Losses (ALLL) and supplemental Frequently Asked Questions (FAQs).  This Guidance replaces ALLL Guidance last revised in 1993.

Here's what the Agencies have to say about the importance of the ALLL and attendant responsibilities (and potential liability) that fall on directors and officers:

"The ALLL represents one of the most significant estimates in an institution's financial statements and regulatory reports. Because of its significance, each institution has a responsibility for developing, maintaining and documenting a comprehensive, systematic, and consistently applied process appropriate to its size and the nature, scope, and risk of its lending activities for determining the amounts of the ALLL and the provision for loan and lease losses. To fulfill this responsibility, each institution should ensure controls are in place to consistently determine the ALLL in accordance with GAAP, the institution's stated policies and procedures, management's best judgment and relevant supervisory guidance."

Link:  http://www.fdic.gov/news/news/press/2006/pr06115.html

(ag) Dec. 15, 2006, in Capital

Pension Plans & Regulatory Capital

Heads up for a Joint Federal Banking Agency Release: FRB, OCC, FDIC, and OTS, have decided that a Financial Accounting Standard relating to the accounting for the overfunded or underfunded status of certain pension plans will NOT affect regulatory capital -- at least until the agencies can go through the formal rulemaking process.

According to Financial Accounting Standard 158,  Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans (FAS 158), effective as early as Dec. 31, 2006, a banking organization that sponsors a single-employer defined benefit postretirement plan, such as a pension plan or health care plan, would be required to recognize the overfunded or underfunded status of each such plan as an asset or liability on its balance sheet with corresponding adjustments recognized in accumulated other comprehensive income (AOCI), a component of equity capital.

The Federal Banking Agencies will be providing guidance on appropriate regulatory reporting.

Link to Joint Federal Banking Agency Announcement: http://www.fdic.gov/news/news/press/2006/pr06116.html

(ag) Dec. 15, 2006, in Capital