Our take: The changing regulatory landscape

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Current topics - March 27, 2020

Congress passes $2 trillion rescue bill

Today, the House passed and the President signed into law the $2 trillion CARES Act by voice vote after the Senate passed it on Wednesday 96-0. The primary relief provisions include “recovery checks” to lower and middle income taxpayers, expansion of unemployment benefits, a small business grant and lending program and a lending program and loan guarantees for larger businesses. Specifically, most taxpayers earning under $99k will receive up to $1200 checks (with joint filers receiving up to $2400 and $500 for children). The bill also lengthens the duration of unemployment insurance from 26 to 39 weeks and provides an additional $600 per week for the first four months.

In terms of business relief, the bill includes $349 billion for fee-free loans for small businesses with under 500 employees to cover payroll, mortgages, rent and some debt obligations. These loans would be converted into tax-free grants for expenses equal to the amount spent by the borrower on payroll costs, mortgage interest payments/rent and utilities during an eight-week period after the origination date of the loan. Larger businesses will be able to access funds through direct lending, loan guarantees and existing Fed facilities that will be expanded through guarantees from the Treasury Exchange Stabilization Fund (ESF), which the bill provides with $500 billion of funding, including $25 billion which is earmarked for the airline industry. Notably, Treasury will be at first-loss position for this lending. Senators agreed on oversight of this lending in a manner consistent with the Troubled Asset Relief Program (TARP) in the 2008 crisis with a five person oversight panel, special inspector general along with the new addition of real-time reporting of all transactions authorized by the bill.

The bill also includes several less-publicized financial services related provisions, including removing Dodd-Frank restrictions on the FDIC’s authority to guarantee bank debt and Treasury’s ability to guarantee money-market mutual funds through the ESF. In addition, the bill allows the Comptroller of the Currency to exempt transactions from limits on lending to any one nonbank financial company and directs the banking agencies to reduce the community bank leverage ratio to 8%.

Our take

Unanimous Senate passage, followed by a voice vote in the often divided House of Representatives, of the largest rescue bill in US history in under a week shows the tremendous pressure Congress is facing to provide relief to individuals, families, businesses, states and the healthcare system. While the markets have already responded positively to anticipated and much-needed fiscal stimulus, its effectiveness will depend on its size relative to demand reduction as well as the speed and mechanisms by which it reaches recipients. For example, individual taxpayers that have direct deposit set up for tax payments or refunds will receive direct payments more quickly than others who will have to wait for checks in the mail. In addition, businesses will have to carefully assess the conditions and processes to access lending. The oversight provisions added for larger business lending will help to alleviate concerns that the ESF would function as an opaque “slush fund,” but as with TARP, the devil will be in the detail of how the oversight board will function and who will be on it. Although the Senate is now in recess until April 20th, we expect that this bill will not be the end of Congressional stimulus and relief. Both parties have a number of items on their wish lists for future legislation, such as additional aid to state and local governments, funding for treatment, and lending to businesses not eligible for programs under this bill, but both chambers will likely strive for broad agreement on any additional legislation in order to pass it through methods that do not require gathering in person.

For more, see PwC’s Tax Insights on the tax provisions of the economic stabilization legislation. 

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Agencies continue to offer relief and flexibility for crisis management

Since Monday’s special edition of Our take, the financial services regulatory agencies have continued to take actions to support the economy and markets in response to heightened volatility and uncertainty. Specifically:

  • 3/25 - Fed: The Fed released a statement explaining that it will temporarily stop conducting regular examination activity for institutions with less than $100b in total consolidated assets and defer a significant portion of examination activity for firms with assets above that threshold. It also explains that it will extend the time period for remediating supervisory findings by 90 days. However, the statement notes that this relief will not apply to areas that are critical to safety and soundness or consumer protection. The Fed will also increase its emphasis on monitoring issues such as liquidity and capital for all firms, and for large firms it will monitor for operational resiliency and potential impacts on financial stability. Firms must still submit capital plans by April 6, 2020 in order to demonstrate how they are managing their capital under current crisis conditions, planning for contingencies and positioning themselves to continue lending.
  • 3/26 - Fed: The Fed announced that it will not take action against firms with $5b or less in total assets that submit their March 31, 2020 regulatory financial reports (Call Report, FRY 9C, FR Y--11 non-bank subsidiaries) after the filing deadline as long as they ultimately submit them within 30 days of the deadline.
  • 3/27 - BCBS:   The Basel Committee on Banking Supervision announced that it will push back the implementation date for the Basel III capital standards, market risk framework and disclosure requirements by one year.
  • 3/26 - CFPB: The CFPB announced that it will not expect certain reporting at this time, including quarterly reporting under the Home Mortgage Disclosure Act (HMDA) and Regulation C, certain information related to credit card and prepaid accounts under the Truth in Lending Act, Regulations Z and E. It will also suspend some data collection activities.
  • 3/27 - Multiple agencies: The Fed, FDIC and OCC announced that banks will be able to adopt the standardized approach for measuring counterparty credit risk (SA-CCR) rule early. The announcement also explains that large banks can delay adjusting their capital treatment for reserves under the new current expected credit loss (CECL) standard by up to two years.
  • 3/23 - SEC: The SEC granted temporary relief relaxing restrictions on affiliate loans and interfund lending for registered investment companies in order to provide additional flexibility for short-term liquidity needs. The relief is available until 'at least’ June 30, 2020.
  • 3/23 - NYDFS: The New York Department of Financial Services (NYDFS) issued a regulation requiring firms to provide 90-day residential mortgage forbearance to impacted NY residents. The regulation also requires that firms waive ATM fees, overdraft fees and credit card late fees to anyone that can demonstrate financial hardship from the crisis.
  • 3/26 - Multiple agencies: The Fed, FDIC, OCC, CFPB and NCUA issued a joint statement encouraging firms to offer responsible small-dollar loans and to work with impacted consumers who are having difficulties with repayment.

Our take

The regulatory agencies continue to send a strong message that they want firms to focus as much as possible on mitigating the impact of the crisis and working with hard-hit borrowers and consumers. The announcements from NYDFS on mortgage forbearance and from multiple agencies on small-dollar lending follow a number of similar announcements in previous weeks that are intended to either directly aid consumers or encourage financial institutions to do so.

The Fed’s and CFPB’s separate relief to delay certain regulatory reporting obligations will allow firms to realign resources to more immediate priorities. The Fed’s unprecedented examination activity suspension and supervisory remediation relief could also allow institutions to put all hands on deck to manage the crisis. Some firms may wish to jump at the ability to postpone remediation activities, but it is important that they consider whether to avail themselves of this relief in light of not only the urgency of other demands but the criticality of the supervisory findings and how long they have been outstanding. This assessment could include having risk management teams and internal audit set up a process to determine the criticality of activities in order to decide which can be delayed and which need urgent additional resources as well as a governance framework to approve these decisions. It is also important to keep in mind that the other bank regulators, the FDIC and OCC, have not yet formally followed the Fed’s lead on remediation relief so firms need to continue addressing the Fed’s joint findings with those agencies under original timelines.

While the Fed has not delayed capital plan submissions, it is shifting focus to the way firms are managing the actual macroeconomic and market stress, which in some respects has surpassed the hypothetical stress test scenario. The Fed will likely be focused on firms’ current market outlooks and how they are translating those outlooks into revised financial and capital projections, including their ability to continue to be financial intermediaries and liquidity providers. In particular, it will want to understand how real time outlooks inform capital distribution decisions and when capital contingency plans will be triggered. In addition, the banking agencies granted relief to institutions that adopt CECL in 2020 by giving them the option to delay recognizing the impact of the “day-one” cumulative adjustment in regulatory capital, freeing up capital to better support lending activities during the crisis. Institutions will weigh this benefit versus some of the operational burdens. The optional SA-CCR early adoption on a best-efforts basis will potentially help global universal banks and other large domestic and foreign firms, which generally are the firms that are the most active in derivatives markets. Given the timing, it is likely too late for most firms to incorporate the change in their capital plans due on April 6, but the firms can incorporate them in their ongoing capital adequacy analysis that will be the focus of the Fed’s monitoring program this year.

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On our radar

These notable developments hit our radar this week:  

  1. LIBOR transition will face no delays for now. On Wednesday, the UK’s Financial Conduct Authority (FCA) released a statement explaining that the cessation of LIBOR has not been delayed due to the crisis and firms should assume that they cannot rely on it being published after the end of 2021. At the same time, it acknowledges that some interim milestones might be affected, an obvious reference to the loan market target dates of ceasing LIBOR-based issuances by the end of Q3 and substantially reducing LIBOR exposures by Q1 2021, which had been communicated earlier this year. For more information on this and other LIBOR transition topics, subscribe here to PwC’s biweekly LIBOR Transition Market Update.
  2. CFTC releases digital currency guidance. The CFTC on Tuesday issued guidance regarding what constitutes “delivery” of digital assets.

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Julien Courbe

Financial Services Advisory Leader, PwC US

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