ComplianceFed and OCC: Basel III proposals expected

Fed and OCC: Basel III proposals expected

US Fed and OCC outline regulatory objectives for this year

The US Federal Reserve has underlined the importance of addressing bank capital requirements and stated that rules will be proposed in the months ahead.

“Implementing that package is going to be a top priority for the Fed and US bank agencies this year. We’re expecting to issue a proposed rule for public comment later this year,” said Mark Van der Weide, general counsel of the board of governors for the Federal Reserve, who spoke during the IIF’s Washington policy summit.

He added that given the changes to the financial environment caused by the pandemic, the Fed would also be looking at the Supplementary Leverage Ratio (SLR).

“Fundamentally, we think we need to explore some potential longer-term adaptations to SLR to ensure that it’s still going to be a backstop to risk based capital requirements in the new high reserves environment that we are now entering.”

The Fed has temporarily relaxed its SLR requirements to exclude US Treasury securities and central bank reserves in an effort to encourage lending. This temporary change has been confirmed to end March 31.

Other areas of possible reform Van der Weide highlighted were treasury markets and working with other organisations like the Financial Stability Oversight Council (FSOC) and the Financial Stability Board (FSB) on Non-Banking Financial Institutions (NBFI).

Likewise, The Office of the Comptroller of the Currency (OCC) will be focusing on several areas this year which include, financial inclusion, AML, cybersecurity and the Libor transition, said Grovetta Gardineer, senior deputy comptroller for bank supervision policy at the OCC.

Speaking on AML, she said, “the transparency, efficiency and effectiveness that we have spent in the BSA (Banking Secrecy Act) AML space last year, going into this year, has led us to put out a significant number of guidance documents of policies to make our supervisory expectations clear in this particular area.”

With Congress passing the Anti-Money Laundering Act of 2020 late last year, Gardineer said AML will be a continued focus for the agency.

“There is a laundry list embedded in that legislation focused on things like the suspicious activity reporting, greater transparency and coordination between law enforcement, the financial sector and the supervisory group. We have a lot that we will be focused on there.”

Market participants however, don’t expect new financial regulation to be a priority issue for the Biden administration.

“We don’t expect financial regulation to be at the forefront of the new administration,” said Ana Arsov, managing director of the financial institutions group at Moody’s. “Unlike in contrast, the early days of the Obama administration, which walked into office during the worst days of the financial crisis.”

Fintechs and climate change

The Fed will also be examining the partnerships that are developing between fintechs and traditional bank.

“We are carefully assessing partnerships between banks and technology firms, with an emphasis on ensuring that the bank partners do sufficient due diligence on their fintech partner,” said Van der Weide.

Fintechs have been targeting less developed segments of financial services. They often partner with banks to leverage their large customer base, their knowledge of financial compliance and because of the high requirements of receiving a bank charter. Arsov said she expects this to continue.

“Fintechs, will continue probing the niches, particularly in the payment space or in the targeted lending areas like non prime consumer or corporate private lending.”

Van der Weide added the digitalisation and automation technologies being implemented by banks would also come under scrutiny.

“We’re also focusing on the use of new technology by our supervisory banking firms, including cloud computing and AI machine learning”, he said. “You want to make sure that the potential efficiency velocity, inclusivity benefits of that technology aren’t outweighed by some of the potential increased cyber, consumer protection and other risks.”

The Fed is also starting to address some of the risks associated with climate change. Last week, Governor Lael Brainard announced the formation of a “Financial Stability Climate Committee” which will identify and assess climate related risks to financial stability.

However, unlike other central banks, the Fed’s role in addressing climate change is more limited said Van der Weide.

“Addressing climate change is the job of Congress and for agencies in the government other than the Federal Reserve. Unlike the Bank of England, the ECB and some other central banks, the Fed doesn’t have a separate mandate to achieve climate objectives.”

“That said, we do have a mandate to make sure the US banking system and financial system are protected against all material risks that includes any potential risks from climate change.”

 

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