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
Credit and Strategic Risk Identified as Leading Issues for Small and Midsize Banks
On July 11, 2016, the Office of the Comptroller of the Currency (OCC) released its “Semiannual Risk Perspective
” report for spring 2016, which focuses on credit risk and strategic risk as the top risk priorities in its supervision of small and midsize banks. For larger banks, compliance and operational risks are the top concerns.
Credit risk has grown throughout the recent improvement in the economy, which has included strong loan growth combined with eased underwriting standards, as banks compete among themselves and with nonbank lenders for loans. The report notes that credit concentrations have grown at banks of all sizes, particularly in commercial real estate, financial services, and energy loans. The OCC also notes specific concerns about the record growth in auto lending, with total loan volume growing by 50 percent since 2010. According to the report, as delinquencies rise and collateral values decrease, “some banks’ risk management practices have not kept pace with the growth and increasing risk in these portfolios.” Strategic risk remains high as smaller and midsize banks struggle with increased nonbank competition, a high pace of mergers, a continuing low-interest-rate environment, and governance issues.
For larger banks, the report highlights operational and cybersecurity risks that result from their large and complex operations, as well as the ongoing challenge of integrating new rules into their compliance management systems.
Development of Responsible Innovation Evaluation Framework Confirmed
In a speech
at the OCC’s Forum on Responsible Innovation held in Washington, D.C., on June 23, 2016, Comptroller of the Currency Thomas Curry affirmed the OCC’s commitment to promoting responsible innovation within the financial industry. Curry said innovation that helps better meet the needs of consumers – whether by banks, financial technology (fintech) firms, or partnerships between the two – strengthens the industry as a whole.
“At its simplest, a responsible innovation is one that meets the changing needs of consumers, businesses, and communities; is consistent with sound risk management; and aligns with the company’s business strategy,” Curry said. “Responsible innovation within the federal banking system helps institutions achieve their public purpose without compromising their safety or soundness, and supports their long-term business goals.”
During the question-and-answer
session following his speech, Curry noted that, after increased requests from technology companies in the industry, the OCC is considering the potential implications of a limited-purpose charter option for fintech firms to address the concern that consumers are not disadvantaged. Curry also stated that “there is a real opportunity for fintech to close the gap in terms of the underbanked or unbanked,” and “the ability to cheaply provide essential banking services is . . . an area where . . . the fintech area can play a positive role.”
Potential Stress-Test Relief for Midsize, Regional Banks Discussed
The U.S. Senate Committee on Banking, Housing, and Urban Affairs met on June 21, 2016, to conduct a hearing on “The Semiannual Monetary Policy Report to the Congress,” during which Board of Governors of the Federal Reserve System (Fed) Chair Janet Yellen testified
. During the Q&A session after her presentation, Yellen told the committee that the Fed is “very likely” to exempt banks with less than $250 billion in assets from certain elements of the Dodd-Frank Act stress-testing regime.
Brokered Deposits FAQs Updated
The Federal Deposit Insurance Corp. (FDIC) finalized and released updates to its frequently asked questions on identifying, accepting, and reporting brokered deposits
on June 30, 2016, with a subsequent technical correction on July 14, 2016, that has been incorporated into the document. The FDIC’s views on brokered deposits remain very broad, with the result that most deposits involving a third party will be considered brokered.
The FDIC first issued FAQs on brokered deposits in January 2015, causing confusion at banks as the information seemed to broaden the scope of deposits deemed brokered. The latest updates are intended to clear up some of the confusion. However, if institutions have questions as they work through the determinations, the FDIC encourages bankers to contact FDIC offices with questions. The FDIC also emphasizes that institutions that need to reclassify deposits as brokered generally would not need to refile past call reports.
Concern Over HVCRE Treatment Expressed
In a June 8, 2016, letter
to the Fed, OCC, and FDIC, members of Congress express their concerns that the increased regulatory capital requirements for high-volatility commercial real estate (HVCRE) loans could disrupt the overall availability of development credit to the real estate sector. In the letter, the members of Congress criticize the “overly broad and complex” HVCRE definition and express several specific concerns including that the requirements would reduce the credit capacity for the commercial real estate (CRE) industry, increase project development costs, and sway borrowers to finance through the shadow banking sector.
In addition, the letter states, “These rules artificially bundle certain CRE loans into an overly broad HVCRE category. This designation, and the subsequent confusion created by its implementation, has deterred many banks from making this type of loan.”
The Congress members say that approximately $1 billion in outstanding CRE debt is maturing daily through 2018 and warn that a sudden contraction of bank credit could cause property values to decline and pose a threat to banks that have high HVCRE concentrations. They add that the CRE industry is an important driver of the U.S. economy and that an inadequate credit capacity would put jobs and tax revenue at risk.
Comments on NCUA Exam and Supervision Changes Requested
The National Credit Union Administration (NCUA) announced
on June 14, 2016, that it is requesting comments from credit union stakeholders interested in the NCUA’s initiative to modify supervision and examination procedures. Resulting recommendations from this process will be presented to the NCUA board in September.
The NCUA has provided five questions stakeholders should consider when they submit comments:
- “How can NCUA conduct future examinations in ways that minimize their impact on credit unions’ operations?
- “What concerns do credit unions have about the current examination and supervision program?
- “What steps should NCUA take to improve the efficiency of its examination program while ensuring it remains effective?
- “How can NCUA better use technology in examinations?
- “What metrics should NCUA consider to determine a credit union’s eligibility for an extended examination cycle?”
Comments are due Aug. 1, 2016, and should be submitted to ExamFlexibility@ncua.gov
. The NCUA also has created a web page
to provide details about the initiative.
From the Consumer Financial Protection Bureau (CFPB)
New Mortgage Servicing Exam Procedures Issued
The CFPB issued, on June 22, 2016, updated exam procedures
for its mortgage servicing rules. The CFPB notes that servicers should expect a greater emphasis from examiners on how they handle complaints from borrowers and requests from troubled borrowers, as well as discrimination issues.
In addition, the CFPB released a special edition of its “Supervisory Highlights
” publication focused on mortgage servicing. Within the report, the CFPB notes that some mortgage servicers still use failed technology that has harmed consumers. According to the report, multiple instances exist where borrowers received late or incorrect information about loan modifications due to technological breakdowns, and where borrowers faced runarounds following servicing transfers between companies with incompatible computer systems.
From the New York State Department of Financial Services
AML Monitoring Requirements Finalized
The New York State Department of Financial Services announced
on June 30, 2016, that it finalized its risk-based anti-terrorism and anti-money laundering (AML) rule for financial institutions chartered in New York. The final rule contains several revisions from the earlier proposed rule. For example, the final rule has removed the controversial requirement for an annual certification by a senior compliance officer with personal liability for noncompliance, replacing it with a requirement for a certification of compliance from a board or senior compliance officer to the best of their beliefs.
Other elements of the new rule require that each institution have both of the following:
- A transaction monitoring program designed to address minimum standards as described in the rule
- A watch-list-filtering program
The rule will be effective Jan. 1, 2017.
From the Financial Accounting Standards Board (FASB)
FASB Webinar on Credit Losses Standard Presented
On July 21, 2016, the FASB held a one-hour webinar to cover its recently finalized Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
,” which was issued on June 16, 2016. During the webinar, board members Hal Schroeder and Marc Siegel, along with practice fellow Jack Pohlman, covered topics including these:
- Current expected credit losses (CECL)
- Purchased credit deteriorated (PCD) assets
- Available-for-sale (AFS) debt securities
- Transition and effective dates
The FASB plans to archive the webinar
for viewing. Available educational resources
include an overview of the standards, information on understanding costs and benefits, and a short video. In addition, the FASB has established a Transition Resource Group (TRG) for Credit Losses
to assist the board with implementation issues.
From the Securities and Exchange Commission (SEC)
Disclosure Effectiveness Project – Amendments Proposed to Simplify Disclosure Requirements
On July 13, 2016, the SEC announced
that it is seeking comments from stakeholders on proposed amendments that would eliminate redundant and outdated disclosure requirements. This proposal is part of the ongoing disclosure effectiveness project as well as the implementation of the Fixing America’s Surface Transportation Act
(FAST Act), which directs the SEC to eliminate duplicative, overlapping, outdated, and unnecessary provisions of Regulation S-K.
In addition, the SEC is seeking comments on the interaction with two FASB projects: 1) an exposure draft, “Conceptual Framework for Financial Reporting: Chapter 8: Notes to Financial Statements
,” to clarify that an omission of immaterial information is not an accounting error with respect to disclosures in the notes, and 2) a project, “Disclosure Framework – Interim Reporting
,” where tentative decisions have been reached that interim reporting disclosures should be updated from annual financial statements if there is a substantial likelihood that the updated information would be viewed by a reasonable investor as significantly altering the total mix of information available to the investor.
The proposal would eliminate SEC disclosure requirements that are duplicated in other SEC rules or U.S. generally accepted accounting principles (GAAP), including disclosures on the following topics:
- Significant changes in debt subsequent to the balance sheet date
- Income tax rate reconciliation
- Title and amount of securities subject to warrants or rights, the exercise price, and the exercise period
- Related-party transactions
- Earnings per share (EPS) computation in annual filings
- Interim financial statements
- Material contingencies
- Reasons for making material accounting changes
- Examples of adjustments in order for financial statements to be fairly stated
- Retroactive application to common control transactions in comparative financial statements
- The effect of discontinued operations on interim revenues, net income, and EPS for all periods presented
- For bank holding companies, the carrying value and market value of certain securities, changes in the allowance for loan losses, and the method followed in determining the cost of investment securities sold
The proposal also would eliminate specified disclosure requirements that overlap with other disclosure requirements but might not require the exact same information, and it requests that commenters keep a few considerations in mind related to these:
- Prominence (for example, does the proposed relocation of disclosure affect an investor due to its prominence or context?)
- Financial statement location (for example, does the proposed revision to the location of disclosure inside or outside the audited or reviewed financial statements affect an investor?)
- Bright-line thresholds in existing SEC requirements that do not exist in the corresponding requirements
Comments are due 60 days after publication in the Federal Register.
Amendments to Smaller Reporting Company (SRC) Definition Proposed
On June 27, 2016, the SEC announced
proposed amendments to increase the financial thresholds in the definition of “smaller reporting company,” resulting in more companies qualifying as smaller reporting companies and qualifying for certain existing scaled disclosures provided in Regulation S-K and Regulation S-X.
Under the proposed rules, the current threshold of $75 million of public float would be increased to enable companies with less than $250 million of public float to provide scaled disclosures as smaller reporting companies. Entities that do not have public float would be permitted to provide scaled disclosures if they have annual revenues less than $100 million, an increase from the $50 million in annual revenues in the current definition.
The proposed amendments would not affect the $75 million threshold in the “accelerated filer” definition, and therefore companies with $75 million or more of public float that would qualify as smaller reporting companies still would be subject to the current requirements.
Comments are due on Aug. 30, 2016.
SEC Ongoing Work on Possible Rules Requiring Firms to Reveal Board Diversity and Non-GAAP Financial Measures Discussed
At the International Corporate Governance Network annual conference held in San Francisco on June 27, 2016, SEC Chair Mary Jo White presented the keynote address
during which she discussed the role of the SEC in corporate governance, the use of non-GAAP financial measures, and sustainability disclosures.
In her address, White indicated that the SEC staff is preparing a recommendation to the SEC to propose amending its rule requiring companies to disclose whether and how their nominating committees consider diversity and, if they have a policy on diversity, how they assess the policy’s effectiveness. The proposal would require companies to include more meaningful board diversity disclosures in their proxy statements.
On the use of non-GAAP measures, White noted that she has concerns that non-GAAP information, which is meant to serve as a supplement to GAAP information, has instead become the primary message to investors. She urged companies to thoroughly consider SEC guidance on non-GAAP measures and said that the SEC is observing the use of non-GAAP measures closely and is ready, if necessary, to act through the filing review process, enforcement, and additional rulemaking to achieve the optimal disclosures for investors and the markets.
From the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
Proposed Update to Enterprise Risk Management Framework Released
COSO released, on June 14, 2016, an exposure draft, “Enterprise Risk Management – Aligning Risk With Strategy and Performance
,” which proposes an update to the COSO “Enterprise Risk Management – Integrated Framework.” Entities use the framework to manage risk as those entities pursue value for stakeholders. The changes to the framework have been proposed in light of the evolution of enterprise risk management since the original publication in 2004.
This publication is separate from the COSO’s “Internal Control – Integrated Framework.”
Comments are due Sept. 30, 2016.
From the Center for Audit Quality (CAQ)
New Tool for Audit Committees to Assess Non-GAAP Measures Released
On June 28, 2016, the CAQ released a new publication to assist audit committees in assessing management’s presentation of non-GAAP financial measures that are outside the audited financial statements. The CAQ intends the publication, “Questions on Non-GAAP Measures: A Tool for Audit Committees
,” to help with determining whether non-GAAP measures provide investors with meaningful, accurate, and appropriate financial information.
The tool was developed from existing SEC rules, with input from the SEC’s updated Compliance and Disclosure Interpretations (CD&Is) on the use of non-GAAP measures by SEC registrants.
The new tool presents three core categories:
- Transparency – includes ways audit committees can consider the purpose, prominence, and labeling of non-GAAP information, specifically as they relate to traditional GAAP measurements
- Consistency – provides questions audit committees should ask management to determine whether non-GAAP measures are consistent and balanced
- Comparability – provides questions to promote comparability of non-GAAP measures presented – for example, whether other companies present a particular measure or similar measures and, if not, why the measure is important for one company but not its peers
Highlights of March CAQ SEC Regulations Committee Meeting Posted
are now posted on the CAQ’s website from the March 21, 2016, meeting of the CAQ SEC Regulations Committee with SEC staff (primarily from the Division of Corporation Finance). These were among the topics discussed:
- Transition questions related to the FASB’s leasing standard, which was issued in February
- FAST Act filing accommodations
- Financial Reporting Manual updates to supplementary quarterly financial data
- Non-GAAP measures
- Supplemental pro forma management discussion and analysis in connection with the new revenue recognition standard (ASC 606)
- Application of the FAST Act to pro forma financial information