Financial Institutions Executive Briefing – July 25, 2014
The Financial Institutions Executive Briefing offers updates on financial reporting, governance, and risk management topics from Crowe Horwath LLP. In each issue of this electronic newsletter, you will find abstracts of recent standard-setting activities and regulatory developments affecting financial institutions.
From the Federal Financial Institution Regulators
Comments Sought by Agencies in Effort to Reduce Regulatory Burden
The Federal Reserve Board (Fed), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp. (FDIC) announced they have begun a review to identify outdated, unnecessary, or unduly burdensome bank regulations. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 requires a review at least every 10 years to give the agencies and the public an opportunity to consider how to reduce the regulatory burden on community banks and other small insured depository institutions or holding companies. Regulations have been divided into 12 subject-matter categories. At regular intervals over the next two years the agencies will request comments on one or more of the categories.
The first request for comments, issued June 4, 2014, seeks comments on regulations in the following three categories: applications and reporting, powers and activities, and international operations. The request for comments lists the rules covered by each of these categories. Comments specifically are requested on the following issues:
- Need for changes to the statutes underlying the regulations
- Changes affecting the need for and purpose of the regulations
- Different regulatory approaches that may impose less regulatory burden while remaining faithful to statutory intent
- Effects on competition of regulations or underlying statutes
- Considerations of unique characteristics of a type of institution
- Clarity of the regulations or underlying statutes
- Burden on community banks and other small insured depository institutions
- Clarifications needed on the scope of rules
Comments on the three subject-matter categories included in the first notice of regulatory review are due Sept. 2, 2014.
Interim Examination Procedures Issued for Volcker Rule
On June 12, 2014, the OCC issued interim examination procedures for examiners to assess banks’ progress in developing a framework to comply with the requirements of the Volcker rule. The Volcker rule, as Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is commonly called, prohibits banks from engaging in short-term proprietary trading of financial instruments and from owning, sponsoring, or having certain relationships with hedge funds or private equity funds.
Banks must achieve compliance with the Volcker rule by July 21, 2015. The interim examination procedures are intended to help examiners understand and focus on the rule’s primary aspects. The procedures emphasize:
- Identification of activities subject to the rule
- Assessment of the bank’s progress toward establishing its compliance programs
- Evaluation of the bank’s plans for conforming covered fund securitizations, asset management, and sponsorship activities
- The bank’s progress in being able to report quantitative metrics
Stress-Test Schedule Changes Proposed
The Fed announced on June 12, 2014, proposed changes to the regulations for capital planning and stress testing. Under the proposal, the start date of the test cycles would shift from Oct. 1 of a calendar year to Jan. 1 of the following calendar year. Capital plans and stress-test results of banks with $10 billion to less than $50 billion in assets would have to be submitted by July 31; banks with $50 billion or more in assets would have until April 5. The proposed rule would make the new schedule effective beginning with the 2015-2016 capital plan and stress-test cycles. For the upcoming 2014-2015 capital plan cycle, the schedule would be unchanged from prior years.
Comments on the proposal are due Aug. 11, 2014.
A similar proposal by the OCC was published in the Federal Register on July 1, 2014. The OCC’s proposed rule also adjusts the timing of the annual stress-test cycle (but with a submission deadline of April 7 for banks with $50 billion or more in assets) and clarifies the method to be used to calculate regulatory capital in the stress test. Under the OCC’s proposal, no bank would be required to use the advanced approaches capital method in its stress-testing projections until the stress-testing cycle beginning Jan. 1, 2016.
Comments on the OCC’s proposal are due Sept. 2, 2014.
Revisions to Call Report Proposed
On June 23, 2014, the Fed, the FDIC, and the OCC requested comments on proposed revisions to the risk-weighted assets portion of schedule RC-R and the reporting of securities borrowed in schedule RC-L of the call report. The proposed call report changes are consistent with the agencies’ revised regulatory capital rules and would take effect as of the March 31, 2015, report date. Drafts of the proposed reporting forms and instructions are available for review.
Comments on the proposal are due Aug. 22, 2014.
Report Examining Risks Facing Banks Issued by OCC
The OCC published its spring 2014 “Semiannual Risk Perspective” on June 25, 2014. Competitive pressures and strategic and operational risks top the semiannual list of supervisory concerns. Data, as of Dec. 31, 2013, is presented in five main areas: the operating environment, the banking system’s condition and performance, primary risk issues, elevated risk metrics, and regulatory actions.
Significant findings of the report include:
- Intensifying competition for limited lending opportunities is resulting in loosening underwriting standards, particularly in indirect auto, commercial, and leveraged lending. Credit risk is building following a period of improving credit quality and problem loan cleanup.
- The prolonged low-interest-rate environment continues to lay the foundation for future vulnerability for banks that extend asset maturities to pick up yield.
- Evolving cyberthreats require heightened awareness and appropriate resources to identify and mitigate the associated risks.
- As money-laundering methods evolve and electronic bank fraud increases in volume and sophistication, Bank Secrecy Act and anti-money-laundering risks remain prevalent.
Cybersecurity Program Launched by FFIEC
On June 24, 2014, the Federal Financial Institutions Examination Council (FFIEC) announced a new Web page on cybersecurity awareness that will serve as a repository for FFIEC-related materials on cybersecurity. The Web page includes links to FFIEC statements and resources along with links to other resources addressing cybersecurity.
The announcement also described a pilot program to be conducted by state and federal regulators at more than 500 banks and credit unions having $1 billion or less in assets. Information from the pilot effort will assist regulators in assessing how community financial institutions manage cybersecurity and how prepared they are to mitigate increasing cyberrisks. Regulators also will use the obtained information to help make risk-informed decisions to enhance the effectiveness of supervisory programs, guidance, and examiner training.
New Guidance Issued on Home Equity Lines of Credit
The Fed, the OCC, the FDIC, the National Credit Union Administration (NCUA), and the Conference of State Bank Supervisors on July 1, 2014, issued new guidance on home equity lines of credit (HELOCs) nearing their end-of-draw periods, which occur when the principal amount of a HELOC must begin to be repaid. The guidance encourages financial institutions to communicate effectively with borrowers about the pending reset and provides five broad principles for managing risk as HELOCs reach their end-of-draw periods.
The guidance also describes how financial institutions effectively can manage their potential exposures when borrowers find it difficult to make higher payments or to refinance existing loans due to changes in the borrowers’ financial circumstances or declines in property values. Ten prudent risk management expectations are described that promote a clear understanding of potential exposures and help guide consistent, effective responses to HELOC borrowers who might be unable to meet contractual obligations.
July Issue of NCUA Report Published
The NCUA posted the July 2014 issue of “The NCUA Report” on its website on July 22, 2014. The issue includes columns from NCUA board members as well as articles from several NCUA offices on the agency’s initiatives and information on supervisory, regulatory, and compliance issues that are relevant to all federally insured credit unions. Specifically, this month’s report includes an article on understanding the basics of an information security policy and one on new resources for interest rate risk and consumer compliance.
From the Financial Accounting Standards Board (FASB)
Additional Guidance on Certain Share-Based Payments Issued
On June 19, 2014, the FASB issued Accounting Standards Update (ASU) 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period.” The new guidance addresses situations in which an employee would be eligible to vest in a share-based payment award regardless of whether the employee is still rendering service on the date the performance target is achieved.
The ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The amount to be recognized should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If it becomes probable that the performance target will be achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period.
The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after Dec. 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in the ASU either retrospectively or prospectively only to awards granted or modified after the effective date.
New Revenue Recognition Standard: Resources and Registrant Reminder
The American Institute of Certified Public Accountants (AICPA) has established a new page on its website containing resources to help users understand and implement ASU 2014-09, “Revenue From Contracts With Customers,” which the FASB issued on May 28, 2014. Resources initially available on the site include:
For information on how the ASU is expected to affect financial institutions, see “How the New FASB Standard on Revenue Recognition May Impact Banks.”
As a reminder for registrants, Securities and Exchange Commission (SEC) staff accounting bulletin (SAB) Topic 11M, “Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period,” (SAB No. 74) requires registrants to discuss the potential effects of adoption of recently issued accounting standards in registration statements and reports filed with the SEC. The objectives should be to (1) notify readers that a standard has been issued which the registrant will be required to adopt in the future and (2) assist readers in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted.
As stakeholders, including preparers and auditors, evaluate the final standard, industry implementation guidance is expected to emerge, and the impact to registrants will unfold. If the impact is not known or reasonably estimable, a statement to that effect may be made. The staff expects the disclosures will evolve as more information becomes available. Until the actual impact is known, disclosure could be in the form of a range or directional trend (rather than continuing to state that the impact is not known).
From the Securities and Exchange Commission (SEC)
Final Report Published From Small-Business Forum
The SEC has published the final report from the Nov. 21, 2013, SEC Government-Business Forum on Small Business Capital Formation. The report describes the forum and includes 43 recommendations made by breakout groups addressing the following topics:
- Securities-based crowdfunding offerings
- Exempt securities offerings
- Securities regulation of smaller public companies
The breakout groups believe the SEC should consider recommendations in the following areas:
- Proposed amendments to Regulation D and Rule 156
- Accredited investor definitions
- Requirements related to raising capital by crowdfunding and crowdfunding portals
- Implementation of Title IV of the Jumpstart Our Business Startups Act
EDGAR Filer Manual Updated
The SEC has published a final rule, “Adoption of Updated EDGAR Filer Manual.” The final rule includes revisions to the “EDGAR Filer Manual” to reflect updates to the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Among the revisions in the update are changes to support the “2014 U.S. GAAP Financial Reporting Taxonomy.” In addition, the frequently asked questions screens of the EDGAR filing website and the EDGAR filer management website have been enhanced in the update to include a new “EDGAR Quick Reference Guides” hyperlink.
The final rule became effective June 20, 2014.
From the Public Company Accounting Oversight Board (PCAOB)
New Standard Adopted for Auditing Related Party Transactions
On June 10, 2014, the PCAOB adopted Auditing Standard (AS) No. 18, “Related Parties: Amendments to Certain PCAOB Auditing Standards Regarding Significant Unusual Transactions and Other Amendments to PCAOB Auditing Standards.” The new standard and the related amendments to other standards require specific audit procedures and are intended to strengthen the auditor performance requirements in three critical areas:
- Related party transactions
- Significant unusual transactions
- A company’s financial relationships and transactions with its executive officers
The PCAOB has issued a fact sheet describing the new requirements.
Subject to SEC approval, the new guidance will be effective for audits of financial statements for fiscal years beginning on or after Dec. 15, 2014.