A Washington Perspective on Regulatory and Legislative Developments - PowerPoint PPT Presentation

A Washington Perspective on Regulatory and Legislative Developments E ric M. Ma rio n Silve r, F re e dma n, T a ff & T ie rna n L L P PACB 137th Annua l Co nve ntio n | Ame lia I sla nd, F lo rida Se pte mb e r 5-8, 2014

Topics of Discussion  Renewed focus on community banks  Regulations in Perspective Basel III  Effects of QM Rules  BSA/AML  FDIC Guidance on S Corp Dividends  Developments on Capitol Hill Bills likely to Pass this Term  Prospects for GSE reform and the Future Senate  Mutual Capital Certificates  Future of Community Banks Resilience of Community Banks  Economies of Scale  Prospects For De Novos 2

Renewed Focus on Community Banks T he supe rviso ry a nd re g ula to ry e nviro nme nt re ma ins c ha lle ng ing , b ut the re a re ho pe ful sig ns tha t b o th re g ula to rs a nd le g isla to rs a re a tte mpting to a ddre ss issue s impo rta nt to c o mmunity b a nks. Initia tive s ha ve b e e n unde rta ke n b y the F DIC, F RB, F F IE C, CF PB a nd OCC to pro vide g uida nc e a nd a tte mpt to ta ilo r re g ula tio ns.  T he F e de ral De posit Insuranc e Corp . e xpa nde d its q ua rte rly b a nking pro file fo r the first q ua rte r o f 2014 to inc lude a ne w se c tio n o n the pe rfo rma nc e o f c o mmunity b a nks - https:/ / www2.fdic .g o v/ q b p/ 2014ma r/ q b p.pd f. In the first q ua rte r o f 2014, the F DIC pro duc e d a re po rt o n c o mmunity b a nk c o nso lida tio n - https:/ / www.fdic .g o v/ b a nk/ a na lytic a l/ q ua rte rly/ 2014_vo l8_2/ a rtic le .pdf fo llo wing o n its Co mmunity Ba nking Study re le a se d in De c e mb e r 2012 - https:/ / www.fdic .g o v/ re g ula tio ns/ re so urc e s/ c b i/ re po rt/ c b i- full.pdf. In 2009, the F DIC c re a te d the F DIC Adviso ry Co mmitte e o n Co mmunity Ba nking . T he Co mmitte e ha s he ld re g ula r me e ting s thre e time s pe r ye a r.  T he F e de ral Re se rve Bank (“F RB”) of Kansas City re le a se d a b ulle tin in Ma y with de ta ils o n the ne w c a pita l rule fo r c o mmunity b a nks, whic h ta ke s e ffe c t o n Ja nua ry 1, 2015, inc luding ke y c ha ng e s a nd a re a s o f supe rviso ry fo c us. http:/ / www.c o mmunityb a nking c o nne c tio ns.o rg / fe dlinks/ 2014/ Ma y2014.pd f  T he F RB of Minne apolis ha s unde rta ke n to study the e ffe c ts o f inc re a se d b a nking supe rvisio n a nd re g ula tio n o n c o nso lida tio n a mo ng c o mmunity b a nks a nd q ua ntifying the c o sts o f the a dditio na l re g ula tio n. https:/ / www.minne a po lisfe d.o rg / pub lic a tio ns_pa pe rs/ pub _displa y.c fm? id=5102&&  T he Consume r F inanc ial Prote c tion Bure au c re a te d the Co mmunity Ba nk Adviso ry Co unc il (“CBAC”). T he CBAC’ s Cha rte r e stima te s fo ur me e ting s pe r ye a r. T he la st me e ting wa s he ld in Oc to b e r 2013. http:/ / www.c o nsume rfina nc e .g o v/ a d viso ry-g ro ups/ a dviso ry-g ro ups-me e ting -de ta ils/  T he F xamination Counc il (“F F IE C”) he ld a we b ina r in Ma y, whic h is e de ral F inanc ial Institutions E a va ila b le o n the F F IE C’ s we b site , o n c yb e r se c urity pre pa re dne ss fo r c o mmunity fina nc ia l institutio ns. http:/ / www.ffie c .g o v/ pre ss/ PDF / CCIWG_Cyb e rse c urity_Dra ft18fo rIndustry_Ma y7we b ina r.pdf 3

Regulatory Relief  I n the c urre nt e nviro nme nt, it is like ly tha t le g isla tive re lie f ma y still pro ve to b e q uite mo de st.  Pro spe c ts fo r re g ula to ry re lie f re ma in c o nstra ine d b y the re q uire me nts o f the Do dd-F ra nk Ac t a nd the c o nc e rns o f b a nking a g e nc y po lic yma ke rs tha t the y ne e d to b e re a so na b ly vig ila nt in pre ve nting a no the r fina nc ia l c risis. 4

Status of Dodd-Frank Rulemaking Almost one-third of Dodd-Frank rules are incomplete after four years. Complete In Progress Not Started *Includes Dodd-Frank Rulemaking as of May 31, 2014. 14% 19% 67% Sources : Federal Register, BGOV analysis Bloomberg Brief, Financial Regulation Community Banking & Credit Unions, Special Edition June 2014. 5

Basel III Co mme nts fro m c o mmunity b a nks re sulte d in thre e ma jo r c ha ng e s fro m the pro po se d c a pita l rule . T he se c ha ng e s inc lud e :  e : T he pro po se d rule c a lle d fo r hig he r risk we ig hts Re side ntia l Mor tg a g e E xposur a pplie d to c e rta in re sid e ntia l mo rtg a g e e xpo sure s. No ne o f the pro po se d inc re a se s in we ig hts a re fo und in the fina l rule . T hus, re ma ining unc ha ng e d is the 50 pe rc e nt risk we ig ht fo r “prud e ntly und e rwritte n” first-lie n mo rtg a g e lo a ns tha t a re no t pa st d ue , re po rte d a s no na c c rua l o r re struc ture d , a nd a 100 pe rc e nt risk we ig ht fo r a ll o the r re sid e ntia l mo rtg a g e s.  1 Ca pita l : T he initia l pro po sa l wo uld Gr a ndfa the r e d Ca pita l Instr ume nts a nd T ie r ha ve re q uire d trust pre fe rre d se c uritie s a nd c umula tive pe rpe tua l pre fe rre d sto c k to b e pha se d o ut o f tie r 1 c a pita l. T he fina l rule e xe mpts d e po sito ry institutio n ho ld ing c o mpa nie s with le ss tha n $15 b illio n in to ta l c o nso lid a te d a sse ts a s o f De c e mb e r 31, 2009, o r o rg a nize d in mutua l fo rm a s o f Ma y 19, 2010, fro m this re q uire me nt. Gra nd fa the re d c a pita l instrume nts, c o nsiste nt with c urre nt tre a tme nt, a re limite d to 25 pe rc e nt o f a d juste d tie r 1 c a pita l e le me nts.  ilte r : T he initia l pro po sa l Ac c umula te d Othe r Compr e he nsive Inc ome (AOCI) F wo uld ha ve inc lud e d mo st AOCI c o mpo ne nts in re g ula to ry c a pita l. In the fina l rule , c o mmunity b a nking o rg a niza tio ns a re g ive n a o ne -time e le c tio n to filte r c e rta in AOCI c o mpo ne nts, simila r to c urre nt tre a tme nt. T he AOCI o pt-o ut e le c tio n must b e ma d e o n the first re g ula to ry re po rt file d a fte r Ja nua ry 1, 2015. 6

Held to Maturity Portfolios Increase  Unde r the Ba se l I I I rule s, c ha ng e s in the va lue o f AF S po rtfo lio s wo uld flo w thro ug h re g ula to ry c a pita l a t institutio ns with mo re tha n $250 b illio n in a sse ts.  HT M po rtfo lio s g re w to ne a rly 18% o f se c uritie s po rtfo lio s a t the e nd o f the first q ua rte r o f 2014 fro m just unde r 10% two ye a rs a g o .  Prima rily la rg e r b a nks ha ve inc re a se d the ir HT M po rtfo lio s. L a rg e r b a nks a re no t o nly trying to pro te c t tho se liq uid se c uritie s fro m ma rk-to -ma rke t a djustme nts tha t c o uld ne g a tive ly impa c t ta ng ib le c o mmo n e q uity b ut a lso c la ssifying a s HT M ma ny o f the liq uid se c uritie s the y ha ve a c q uire d to pre pa re fo r ne w pro visio ns suc h a s the "liq uidity c o ve ra g e ra tio ," o r L CR.  Still, sma lle r institutio ns ha ve b uilt the ir HT M po rtfo lio s a s we ll, with b a nks unde r $1.0 b illio n in a sse ts b uilding tho se po rtfo lio s to $38.96 b illio n a t the e nd o f the first q ua rte r, up 13.3% fro m o ne ye a r e a rlie r. 7

Held to Maturity Portfolios Increase 8

FDIC Guidance on S Corp. Dividends  On July 21, 2014, the F DI C issue d g uida nc e o n ho w it will e va lua te re q ue sts b y S Co rpo ra tio ns to ma ke divide nd pa yme nts tha t wo uld o the rwise b e pro hib ite d unde r the Ba se l I I I c a pita l c o nse rva tio n b uffe r.  T he c a pita l c o nse rva tio n b uffe r will b e pha se d in during 2016-2018 a nd fully e ffe c tive in 2019.  T he F DI C g uida nc e pe rmits b a nks tha t ha ve ma de a n S Co rp. e le c tio n to a pply to the F DI C fo r a divide nd wa ive r if the y a re no t o the rwise pe rmitte d to pa y divide nds.  T he re is c o nc e rn a b o ut the unc e rta inty o f whe the r a divide nd wa ive r will b e g ra nte d. 9

QM Rules Expected to Cause Higher Operational Costs Ac c o rd ing to F a nnie Ma e ’ s June Mo rtg a g e L e nd e r Se ntime nt Surve y, the QM rule s a re e xpe c te d to re sult in hig he r c o sts. In the q ua rte rly surve y c o nd uc te d b y F a nnie Ma e ’ s E c o no mic a nd Stra te g ic Re se a rc h Gro up a nd with se nio r mo rtg a g e e xe c utive s a s pa rtic ipa nts:  85% o f the le nd e rs re po rte d tha t c o sts fo r q ua lity-c o ntro l-re la te d a c tivitie s ha ve inc re a se d o ve r the pa st 12 mo nths.  74% e xpe c t o pe ra tio na l c o sts to inc re a se a s a re sult o f the QM rule s.  80% o f the le nd e rs ha ve no pla n to pursue no n-QM lo a ns, with la rg e r le nd e rs mo re like ly to re po rt tha t the y pla n to a c tive ly pursue suc h lo a ns.  84% re po rte d tha t the y e xpe c t a t le a st 90% o f the ir sing le -fa mily mo rtg a g e o rig ina tio n d o lla r vo lume to b e c o nsid e re d q ua lifie d mo rtg a g e s und e r the ne w QM rule s.  74% o f a ll le nd e rs surve ye d a g re e tha t “the q ua lity c o ntro l inve stme nts will re d uc e the ir re purc ha se risk,” with sma lle r le nd e rs le ss like ly to a g re e .  An e stima te d 95% o f the mo rtg a g e lo a ns b e ing ma d e in the c urre nt ma rke t fit the QM c rite ria , a c c o rd ing to Ric ha rd Co rd ra y, d ire c to r o f the CF PB. 10