Our take: financial services regulatory update - October 2, 2020

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Change remains a constant in financial services regulation. Read "our take" on the latest developments and what they mean.

Current topics – October 2, 2020

Agencies offer relief and flexibility for crisis management

Over the past week, the financial services regulatory agencies have continued to take actions to support the economy and markets in response to heightened volatility and uncertainty. Specifically:

10/1 – Congress - House Democrats passed a $2.2 trillion crisis response package, which contains:

  • A $1,200 payment to taxpayers who earned $75,000 or less in the last annual period, with those who earned more receiving reduced payments based on their income.
  • Extensions to the CARES Act $600 per week federal unemployment benefits, which would be retroactive to September 5th, 2020 and continue to January 31st, 2020.
  • $225b in funding for education
  • $436b in funding for state, local, territorial and tribal governments
  • $75b for testing and contact tracing
  • $28b for vaccine-related procurement, distribution and education

10/1 – Fed - The Federal Reserve (Fed) extended to March 31, 2021 several temporary measures intended to increase the availability of intraday credit. Specifically, the actions (1) suspend uncollateralized intraday credit limits (net debit caps) and waive overdraft fees; (2) permit a streamlined procedure for secondary credit institutions to request collateralized intraday credit (max caps); and (3) suspend certain collections of information that are used to calculate net debit caps.

10/1 – Fed - Fed Governor Michelle Bowman gave a speech explaining that while the housing market has remained strong during the crisis, its strength is partially due to the fact that homeowners have been able to work with their lenders which may not be a long-term solution. She also noted that access to affordable mortgage credit remains an obstacle for many would-be homeowners and suggests easing related compliance burdens, including revisiting the TILA-RESPA Integrated Disclosure to find areas to simplify.

9/30 – Fed - The Fed announced that it will extend its prohibition on share repurchases and cap on dividend payments for banks with $100b or more in total assets through Q4 2020.

9/29 – Fed, OCC and FDIC - The Fed, OCC and FDIC finalized a rule allowing financial institutions to exclude exposures from participation in the Paycheck Protection Program (PPP) or Money Market Mutual Fund Liquidity Facility (MMLF) from total leverage exposure, average total consolidated assets, advanced approaches total risk-weighted assets, and standardized total risk-weighted assets. It also requires that they apply a zero risk weight to PPP loans and, if they are subject to the Liquidity Coverage Ratio rule, exclude total net cash outflow amount associated with advances from the MMLF and PPPLF and inflow amounts associated with collateral securing the advances.

9/29 – Fed, OCC and FDIC - The Fed, OCC and FDIC finalized a rule allowing for the deferral of the requirement to obtain certain post-closing real estate appraisals for up to 120 days. The rule will be in effect until December 31, 2020. 

Our take

Amidst one of the most news-filled weeks in the last several months, the federal response to the crisis has not gone by the wayside. Although the House passed a bill outlining its latest position on relief spending, it does not represent a compromise that can be signed into law as Treasury Secretary Steven Mnuchin and a number of Senate Republicans have said that $2.2 trillion is above their appetite. The bill did not receive the support of any House Republicans as well as several Democrats that narrowly won their seats in 2018 and are facing tough re-election battles, but pressure from this group has not yet been enough to prompt House Speaker Nancy Pelosi (D-CA) to accept a $1.6 trillion offer from Mnuchin. Democrats have continued to push for more state and local government funding and child tax credits but will have to decide if some relief is better than no relief as the election approaches.

Meanwhile, the Fed and other regulatory agencies have not introduced any significant new initiatives over the last several months. This week saw them extend and finalize several measures established early in the crisis, but the agencies otherwise appear to be in a wait-and-see pattern regarding action from Congress and the trajectory of the economic recovery. The Fed opted to take the cautious approach of continuing its restrictions on share buybacks and cap on dividends before it has the results of the upcoming interim stress tests. If all the participating banks remain well above their capital minimums in the Fed’s new scenarios, we could see some return of discretion to increase payouts in Q1 2021. 

LIBOR transition: DOJ blesses ISDA IBOR Fallbacks Protocol

Yesterday, the US Department of Justice (DOJ) issued a formal business review letter to the International Swaps and Derivatives Association (ISDA), stating that it does not intend to challenge the upcoming IBOR Fallbacks Proposal on grounds of antitrust concerns. Specifically, the DOJ determined that ISDA’s protocol would not create anticompetitive effects by preventing other rates from being used or by choosing fallbacks that unfairly benefit one group of derivatives users at the expense of another. Once published, the protocol will provide a mechanism for market participants to amend derivatives master contracts, thereby facilitating the transition of legacy LIBOR-based derivative contracts to alternative reference rates upon LIBOR’s cessation.

Having received this confirmation from the DOJ, ISDA is now expected to solicit similar feedback from antitrust authorities in other jurisdictions, a process it had previously estimated to take one to two weeks. It now seems likely that the protocol will be made available for key market participants “in escrow” as early as mid-October, in order to demonstrate broad usage of the protocol by major market participants prior to its official launch. After the escrow period, expected to last two weeks, the protocol would officially be made available for all market participants before coming into effect about three months thereafter. 

Our take

The availability of the protocol, once published, will provide a clear path forward for derivative contracts once LIBOR disappears – provided that market participants sign the protocol. Regulators, alternative reference rate working groups and other industry groups have repeatedly urged market participants to adhere to the protocol once it becomes available. We expect that market participants will look to avail themselves of the safety net that the protocol provides with respect to managing the risks of LIBOR’s cessation. That said, there are bound to be some parties that will either choose not to sign or be unable to sign the protocol, requiring bilateral negotiations to remedy existing contracts. For example, the protocol may not be an effective solution for derivatives that require the benchmark fixing to be known in advance of the period, rather than a backward-looking benchmark that is applied in arrears, as is the case with the fallback rates employed in the protocol. As a result, a proactive transition of LIBOR-based exposures in advance of LIBOR’s anticipated cessation will remain a critical part of firms’ strategies. Even with respect to transactions that fall within the scope of the protocol, firms may see benefits of proactively transitioning contracts on terms they can agree on with their counterparties.

Subscribe to PwC’s LIBOR Transition Market Update here to read more about these and other developments.

On our radar

  1. California governor signs student loan borrower “bill of rights.” On Monday, California Governor Gavin Newsom signed into law a bill providing a wide range of protections for student loan borrowers. The bill contains a broad prohibition on unfair, deceptive or abusive acts or practices as well as specific requirements for a number of areas including timely crediting of payments, late fee caps, negative credit reporting, conflict resolution and communication. Notably, it gives consumers a private right of action for a lender’s failure to comply with the law.
  2. CSBS issues proposed requirements for nonbank mortgage servicers. Yesterday, the Conference of State Bank Supervisors (CSBS) released a proposal intended to bring nonbank mortgage servicers - which it notes has been growing in market share and now services approximately 40% of residential mortgages - in line with Federal Housing Finance Agency minimum standards. The proposal contains a wide range of requirements including those around capital, liquidity, risk management, data and governance.
  3. Brainard and Brooks on CRA. Yesterday, Fed Governor Lael Brainard gave a speech on the agency’s recent proposal for Community Reinvestment Act (CRA) reform, noting that a goal of the proposal is to converge with the OCC and FDIC on a unified approach. At a virtual consumer banking conference, OCC Acting Comptroller Brian Brooks indicated that he would be open to further updates to the CRA reform rule his agency finalized independently.
  4. Fed approves Morgan Stanley’s E*Trade acquisition. On Wednesday, the Fed announced that it has approved Morgan Stanley’s acquisition of E*Trade in a $13 billion all-stock deal. 

Contact us

Julien Courbe

Financial Services Leader, PwC US

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