Federal Regulators Revising ‘Burdensome’ Risk Requirements

The Federal Deposit Insurance Corp. (FDIC), Federal Reserve System Board of Governors, Office of the Comptroller of Currency (OCC) and Office of Thrift Supervision (OTS) is already receiving complex from the financial industry that final guidance on correspondent concentration risks (CCR), issued Friday, could be complex and burdensome to financial firms. In light of the comments received, the agencies are taking steps to revise the guidance to address industry concerns. The CCR guidance outlines the agencies’ expectations for financial institutions to identify, monitor and manage credit and funding concentrations to other institutions on a standalone and organization-wide basis, and to take into account exposures to the correspondents’ affiliates. According to a joint release from the agencies, the guidance establishes that each financial institution should set up appropriate internal parameters commensurate with the nature, size, and risk characteristics of their correspondent concentrations. An institution’s internal parameters should detail the information, ratios, or trends that will be reviewed for each correspondent on an ongoing basis, instruct management to conduct comprehensive assessments of correspondent concentrations that consider its internal parameters, and revise the frequency of correspondent concentration reviews when appropriate. The agencies received 91 comments, primarily from financial institutions and industry trade groups, that “in general” agree with the fundamentals of the guidance, according to a letter to CEOs (download here). Some responses, however, called the guidance “excessive, unnecessarily complex and burdensome.” Additionally, some comments said the the 5% funding threshold within the guidance was vague and lacked consideration of type, term and nature of certain funding sources, the agencies said. “A number of institutions and industry trade groups also voiced concern that the credit and funding thresholds in the CCR guidance would be applied as ‘hard caps’ rather than as indicators of potentially heightened risk,” the letter reads, in part. The agencies launched a number of revisions to the guidance to address the concerns raised. Primarily, the agencies clarified that financial institutions “should consider taking actions” beyond minimum requirements already set on correspondent concentration risks, especially amid rapid market condition changes. “The revised CCR guidance also specifies that the credit and funding thresholds are not ‘hard caps’ or firm limits, but are indicators that a financial institution has concentration risk with a correspondent,” according to the CEO letter. Additionally, the agencies modified the credit concentration threshold calculation to reflect a percentage of total capital rather than tier 1 capital. The agencies also said they continue to address concerns about the application of the CCR guidance across financial firms. “The agencies appreciate the concern of commenters who remarked that failure to apply the CCR guidance uniformly to all financial institutions engaged in correspondent banking services could cause smaller scale correspondents to be placed at a competitive disadvantage to large institutions due to a perception of large institutions being ‘too big to fail’ or having government support,” the agencies wrote in the letter. “The agencies are working together to ensure that the CCR guidance is applied uniformly to all financial institutions engaged in correspondent banking services.” Write to Diana Golobay.

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