Financial Institutions Executive Briefing – Aug. 19, 2015
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
Changes to Dodd-Frank Stress Tests Proposed
On July 17, 2015, the Federal Reserve Board (Fed) proposed changes to the mandated stress tests under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) for large bank holding companies and banking organizations with more than $10 billion in assets. These proposed changes would take effect for the 2016 capital plan and stress-testing cycles.
The proposal would eliminate the requirement to calculate a tier 1 common capital ratio, which is expected to be replaced by the common equity tier 1 capital ratio under Basel III. For bank holding companies with between $10 billion and $50 billion in assets and savings and loan holding companies with greater than $10 billion in assets, the proposed changes would remove fixed assumptions about dividend payments for company-run stress tests. Additionally, the application of stress testing for savings and loan holding companies would be delayed for one year.
The proposal also would delay the incorporation of the supplementary leverage ratio for one year for banks subject to the advanced approaches capital framework and indefinitely defer the use of the advanced approaches risk-weighted assets in stress testing.
Comments are due Sept. 24, 2015.
Final Rule Approved for Higher Capital Surcharge for Largest Banks
The Fed, on July 20, 2015, approved a final rule imposing capital surcharges on the largest U.S.-based global systemically important banks (GSIB), of which there are currently eight as identified by the Financial Stability Board based in Basel, Switzerland. The rule establishes the criteria for identifying a GSIB and the methods to use to calculate a risk-based capital surcharge, which is linked to each entity’s overall systemic risk. The rule will require substantially higher capital levels for GSIBs than those required by Basel III.
Banks subject to the rule would use the higher surcharge of two calculation methods. Based on current figures, estimated surcharges on U.S. banks would range from 1 percent to 4.5 percent; however, this will change over time based on inputs. The rule also requires U.S. banks with more than $50 billion in assets to calculate a measure of their potential significance.
The final rule is effective Dec. 1, 2015, and phases in from Jan. 1, 2016, through the end of 2018.
OCC Guidance on Resolution Plans Provided
U.S. bank holding companies with $50 billion or more in assets, nonbanks designated as systemically important by the Financial Stability Oversight Council, and large foreign banks with U.S. operations are required by Dodd-Frank to submit to the Fed and Federal Deposit Insurance Corp. (FDIC) their strategy for a rapid and orderly wind-down in the event of financial distress or company failure.
Based on their review of the resolution plans submitted late last year by entities with less than $100 billion in assets, the Fed and FDIC announced on July 28, 2015, that they have provided additional guidance, including areas for improvement in some cases, to each of the 119 firms that are scheduled to file updated resolution plans on or before Dec. 31, 2015.
In addition, the Fed and FDIC released an updated template for institutions filing tailored resolution plans. This optional template is designed to ease the preparation of tailored resolution plans.
July Issue of “The NCUA Report” Published
On July 22, 2015, the National Credit Union Administration (NCUA) posted the July 2015 issue of “The NCUA Report.” This latest issue includes columns from the NCUA board chairman as well as articles from several NCUA offices on the NCUA’s initiatives and information on supervisory, regulatory, and compliance issues.
Articles in this month’s report include:
- “Proposed Member Business Loan Rule Gives Credit Unions Flexibility, Opportunity”
- “Chairman’s Corner: Time for Credit Unions to Take the Wheel”
- “Board Member McWatters’ Perspective: MBL Rule Changes in the Works: Let’s Work Together to Get Them Right!”
- “Board Actions: Loan Rate Ceiling Extended Through March 2017”
- “The Key Information an MBL Committee Needs”
- “NCUA Board Approves Voluntary Diversity Assessment Standards”
New Deadlines Set for Credit Union Capital Planning and Stress Testing
For federally insured credit unions with assets of $10 billion or greater, the NCUA approved, on July 23, 2015, a final rule setting new deadlines for various activities in the annual capital planning and stress-testing cycle.
The new annual deadlines give covered credit unions until May 31, replacing the original deadline of Feb. 28, to submit capital plans. The NCUA will then have until Aug. 31 to provide stress-testing results to credit unions and accept or reject their capital plans.
The final rule will be effective Jan. 1, 2016.
From the Consumer Financial Protection Bureau (CFPB)
Resources Released for TILA-RESPA Integrated Disclosures Implementation
Both the CFPB and the Office of the Comptroller of the Currency (OCC) have released resources to help bankers prepare for the Truth in Lending Act and Real Estate Settlement Procedures Act (TILA-RESPA) integrated disclosures, which will be effective on Oct. 3, 2015.
The CFPB released a recording of its hourlong webinar “TILA-RESPA Integrated Disclosure, Part 5: Implementation Challenges and Questions.” In the webinar, originally held on May 26, 2015, the CFPB addresses rule interpretations and implementation challenges based on issues raised to the CFPB. Via its BankNet site, the OCC has provided a recording of its 80-minute session on TILA-RESPA integrated disclosures implementation. This recording is available only to OCC-supervised banks and thrifts.
First Monthly Report on Consumer Complaints Issued
On July 16, 2015, the CFPB issued the first in a series of monthly reports on consumer complaints, “Monthly Complaint Report, Vol. 1.” This first report details complaint volume by product, state, and company; highlights debt collection in its product spotlight section; and presents a geographically focused section on complaints in Milwaukee.
Since the CFPB started collecting complaints in July 2011, it has received more than 650,700 complaints, with complaints about mortgages, debt collection, and credit reporting being the most numerous. For June 2015, debt collection was the most-complained-about financial product or service, representing approximately 32 percent of the 23,400 complaints received. Following debt collection, mortgages and credit reporting complaints represented approximately 20 percent and 18 percent, respectively, of the total complaints for the month. Bank account or services complaints had the greatest month-over-month increase, up 17 percent from May 2015 to June 2015.
The report also includes a section on the most-complained-about companies; however, the CFPB cautions that it did not weight the data to account for the size of the companies’ customer bases, making the report less useful as a tool for comparison.
From the Financial Accounting Standards Board (FASB)
Revenue Recognition Effective Date Deferred for One Year
On Aug. 12, 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-14, “Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date,” to defer the effective date of ASU 2014-09, “Revenue From Contracts With Customers (Topic 606),” by one year. The board is permitting application as of the original effective date.
For public business entities (and certain not-for-profit entities and employee benefit plans), the effective date is revised to annual reporting periods beginning after Dec. 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after Dec. 15, 2016, including interim reporting periods within that reporting period.
For all other entities, the effective date is revised to annual reporting periods beginning after Dec.15, 2018, and interim reporting periods within annual reporting periods beginning after Dec. 15, 2019. However, all other entities may elect earlier only as of either:
- An annual reporting period beginning after Dec.15, 2016, including interim reporting periods within that reporting period
- An annual reporting period beginning after Dec. 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which an entity first applies the guidance
Guidance to Clarify the Effect of Derivative Contract Novations Proposed
On Aug. 6, 2015, the FASB issued a proposed ASU, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” For derivative contracts, “novation” refers to replacing one of the parties to the contract with a new party and may occur as a result of financial institution mergers, intercompany novations, an entity exiting a particular derivatives business or relationship, an entity managing against internal credit limits, or a change in response to laws or regulatory requirements.
The proposed guidance would apply to all reporting entities for which there is a change in the counterparty to a derivative instrument designated as a hedging instrument and would be applied prospectively to all existing and new hedge accounting relationships in which a change in the counterparty to a derivative instrument occurs after the effective date of the guidance.
According to the proposed guidance, a change in the counterparty to a derivative instrument designated as a hedging instrument does not, in and of itself, require dedesignation of that hedge accounting relationship if all other hedge accounting criteria continue to be met.
Comments are due Oct. 5, 2015.
Amendments to Clarify the Assessment of Contingent Call (Put) Options Proposed
The FASB issued a proposed ASU, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments,” on Aug. 6, 2015. The proposed amendments would clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts. In accordance with the proposed guidance, if a call (put) option is contingently exercisable, an entity would not have to determine whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks, which is required under the current guidance.
Under the proposed guidance, the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts would follow the four-step decision sequence provided in interpretative guidance from the Derivatives Implementation Group.
The proposed amendments would apply to all issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options and would be applied on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year, and interim periods within that fiscal year, for which the proposed amendments are effective.
Comments are due Oct. 5, 2015
From the Securities and Exchange Commission (SEC)
Pay Ratio Disclosure Rule Adopted
On Aug. 5, 2015, the SEC adopted a final rule requiring public companies to disclose the ratio of the annual total compensation of the CEO to the median of the annual total compensation of the company's employees as prescribed by Dodd-Frank. Companies must calculate the median employee using all employees, including full-time, part-time, and seasonal employees.
However, the final rule includes provisions designed to reduce the cost of compliance, including these:
- The method used to calculate the median employee is flexible.
- Calculation of the median employee needs to be calculated only once every three years, unless significant changes occur that would affect the median employee calculation.
- The median employee can be determined on any date within the last three months of the registrant’s fiscal year.
- Non-U.S. employees can be excluded from the calculation if it would violate foreign data privacy laws to obtain certain information.
- A company may exclude up to 5 percent of its overseas workers from its pay ratio calculation.
This rule does not apply to certain registrants, including emerging growth companies, smaller reporting companies, registered investment companies, multijurisdictional disclosure system filers, and foreign private issuers.
The rule will be effective 60 days after publication in the Federal Register.
From the Center for Audit Quality (CAQ)
Third Case Study Published by Anti-Fraud Collaboration
On July 28, 2015, the Anti-Fraud Collaboration, formed by the CAQ, Financial Executives International, The Institute of Internal Auditors, and the National Association of Corporate Directors, published its third case study of a potential material fraud at a fictitious public company. The purpose of this and previously issued case studies is to raise awareness of fraud detection and deterrence.
This new case study, the “Kendallville Bank Case Study,” describes possible material fraud at a fictitious regional bank. The plot centers on the questionable accounting decisions of a senior executive. The hypothetical example is designed to emphasize the significance of exercising skepticism as a participant in the financial reporting process at publicly traded companies.
As with the previous studies, the case study and available discussion guide are modeled after the Harvard Business School case study method, and the collaboration provides a series of videos on leading discussions using that method.