Fed urges Basel III rules reproposal; mulls updates to big bank capital math

The Washington Wrap is a weekly recap of financial regulation, news and chatter from around the capital.

At federal regulators

The Federal Reserve is negotiating a complete reproposal of the Basel III endgame capital rules because of revisions to the current version.

"It is the strongly held view of members of the board that we do need to put a revised proposal out for comment for some period" because that is how the board functions when there are "broad and material changes," Fed Chair Jerome Powell said in a Senate Banking, Housing and Urban Affairs Committee hearing.

The Fed is working through the question with the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency and is prepared to move forward when the parties can reach an agreement, Powell said.

The comments mark a change in posture, since the last time Powell testified before a congressional committee he presented both options for a reproposal and revisions in the final rule. The change comes after data gathering efforts from the agency and strong pushback from banks and other industries.

President Joe Biden's pick to lead the FDIC, Christy Goldsmith Romero, is open to a reproposal of the Basel III capital rules.

"I think reproposal is always on the table when you have a rule that's proposed and you get that many negative comments," Goldsmith Romero told the Senate Banking, Housing and Urban Affairs Committee.

The regulatory agencies are working within a tight time frame if they want to finalize the rule before a potential change in administration.

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The Fed is considering updating inputs it uses in the calculation of additional capital that US global systemically important banks (GSIBs) must hold, Reuters reported, citing four people with knowledge of the matter. The capital requirement, known as the GSIB surcharge, was introduced in 2015.

The central bank plans to update the inputs to adjust for economic growth and reflect the size of the banks relative to the global economy, a move that will bring down banks' systemic scores and resulting capital surcharge, the unnamed sources told the news outlet.

The eight US GSIBs held roughly $230 billion in risk-based capital surcharge in the first quarter, the report said, citing Fed data.

A small change in the calculation could save the GSIBs billions of dollars in capital, according to the report.

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The Biden administration's latest Unified Agenda of Regulatory and Deregulatory Actions gave hints on when banks can expect some much-awaited final rules.

A final long-term debt rule is expected in July on both the FDIC's and Office of the Comptroller of the Currency's agendas. A final rule on resolution plans is anticipated in July and the Basel III endgame in September on the FDIC's agenda. However, the Federal Reserve System's agenda does not list any final rules, even though these are joint, interagency rulemakings.

The Office of the Comptroller of the Currency's agenda also indicates that a final rule related to the Bank Merger Act is expected in September. The Consumer Financial Protection Bureau's final rule on personal financial data is expected in October.

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The California Department of Financial Protection and Innovation revoked the financing law license of Synapse Credit LLC, a subsidiary of Synapse Financial Technologies, Inc., which filed for Chapter 11 bankruptcy in April.

The department commenced a regulatory examination of Synapse Credit following the bankruptcy of its parent company, according to a news release.

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Lawmakers urged regulators to address risks associated with third parties to encourage financial inclusion and innovation, particularly in the wake of increasing bank-fintech partnerships.

While such partnerships have enabled banks to make "significant progress" in enabling financial inclusion, banks need to have efficient controls to manage third-party risks and prevent violations of law, while keeping pace with the growth of new products and services, Fed Vice Chair for Supervision Michael Barr said at a conference.

A specific regulatory framework on third-party risk management is necessary to enable innovation and competition in the financial services sector, FDIC board member Jonathan McKernan said at a fintech conference, American Banker reported.

McKernan seconded a statement by CFPB Director Rohit Chopra calling upon agencies to lower the barriers for companies entering the bank-fintech space, the report said.

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The SEC is planning to repropose amendments to the open-end fund liquidity framework introduced in November 2022, Bloomberg News reported, citing the agency's latest rulemaking agenda.

The proposed rule would include the use of a liquidity management tool called "swing pricing" for open-end funds during periods of high redemptions, which attracted pushback from the industry.

The agency did not say which parts of the proposal might be redrafted or how it would change the swing-pricing plan in its updated rulemaking agenda, Bloomberg News reported.

At the CFPB

The Consumer Financial Protection Bureau proposed new rules that would require mortgage servicers to focus on helping borrowers when they ask for assistance, rather than foreclosing.

The proposed rules would make it easier for servicers to help by reducing paperwork requirements, improving communication with borrowers, and ensuring that critical information is provided in languages borrowers understand.

The rule would apply to banks or nondepository institutions that serve more than 5,000 loans, CFPB officials said.

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The CFPB fined Fifth Third Bancorp unit Fifth Third Bank NA $20 million for allegedly illegally repossessing customers' cars and opening fake accounts, among other things.

The regulator issued a consent order, the first of two actions, that requires the bank to pay a $5 million penalty for forcing vehicle insurance onto borrowers who already had coverage. Fifth Third Bank will also be required to pay a $15 million penalty for allegedly opening fake accounts in the names of its customers. This order resolves the CFPB's March 2020 lawsuit against the bank over the matter.

On Capitol Hill

Democratic lawmakers including Sen. Elizabeth Warren (D-Mass.) criticized JPMorgan Chase & Co. for "backsliding" on nearly two decades of climate and environmental commitments and raising concerns over whether the bank has misled investors and the public.

"Your recent statements and actions indicate a retreat by JPM from the firm's earlier pledges to help mitigate climate change," the senators said in a letter to CEO Jamie Dimon. "This is disappointing, raising questions about the impact of these policy changes moving forward, and about whether JPM misled investors and the public when you made these commitments."

The lawmakers asked the company to provide answers about its climate and environmental commitments by July 24.

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Three House lawmakers expressed concerns to federal regulators with certain state banking laws preventing banks from denying or closing customer accounts, which could impact their compliance with regulations such as the Bank Secrecy Act and Anti-Money Laundering Act.

"Under such state laws, financial institutions could be subject to investigation when they decline to provide services to a customer or close a customer account, including in situations where the decision was related to a financial crime risk," the lawmakers wrote.

Reports in which institutions are required to provide detailed reasons for such denials "could lead to the disclosure of confidential and sensitive information related to America's national security," they added.