Financial services regulatory expectations for COVID-19: #2

Financial services responses from public policy makers, regulators, and firms continue to grow and evolve. Early responses from the financial services regulators focused on preparedness, business continuity, and pandemic planning. (See KPMG Regulatory Alert here.) More recently, the responses by federal and state regulators are directed toward supporting ongoing credit and liquidity (and insurance coverage, as appropriate) to individuals and businesses, including through select changes to regulatory and financial accounting. Regulations imposed since the 2007-2008 financial crisis are intended to strengthen the capital and liquidity positions of U.S. banking organizations. These new actions are intended to address potential strains on portfolios that may develop; regulators and other agencies also encourage efforts to assist affected customers through foreclosure moratoriums, payment accommodations, loan modifications, and expanded CRA credit consistent with consumer protections and safe and sound practices. Though in the spirit of consumer and commercial protection, evolving state regulatory activity increases the potential for divergent regulation.

KPMG recognizes this is a difficult time. We are prepared to provide our clients assistance in developing strategies to manage disruption stemming from COVID-19.

Key Points

• The FRB has established six new facilities to support the availability of credit to households and businesses.
• The federal banking agencies advocated the use of capital and liquidity buffers and amended their capital rules to simplify the capital framework in this regard.
• The federal financial services regulatory agencies provided guidance and targeted regulatory relief to address remote workplace and “social distancing” constraints.
• Other federal agencies with authorities related to financial services products and services took actions to address impacts to the financial well-being of individuals and businesses caused by COVID-19, including a HUD and FHFA suspension of foreclosures and evictions, and the Department of Education’s suspension of interest accruals on federal student loans. 

Federal Regulatory Actions

Banking Regulators

In its role as a central bank, the FRB established multiple facilities to support the flow of credit to households and businesses, including:

• A Commercial Paper Funding Facility (CPFF) to purchase unsecured and asset-backed commercial paper rated at least A1/P1/F1 (as of March 17, 2020) directly from eligible companies, defined to be U.S. issuers of commercial paper, including U.S. issuers with a foreign parent company. Purchases under the CPFF will continue through March 17, 2021 unless extended by the FRB.
• A Primary Dealer Credit Facility (PDCF) to offer overnight and term funding with maturities up to 90 days to Primary Dealers of the New York Federal Reserve Bank. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities. The PDCF will be in place for at least six months and may be extended as conditions warrant.
• A Money Market Mutual Fund Liquidity Facility (MMLF) that will make loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds. “Eligible financial institutions” are defined as U.S. depository institutions, U.S. bank holding companies, and U.S. branches and agencies of a foreign bank. High-quality assets include unsecured and secured commercial paper, agency securities, and Treasury securities. Certain categories of state and municipal debt and other securities were subsequently added here and here. Credit extensions under the MMLF will be available through September 20, 2020 unless the facility is extended by the FRB.

On March 23, 2020, the FRB established additional facilities, including:

• The Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuances. This facility is open to investment grade companies and will provide bridge financing of four years. Borrowers may elect to defer interest and principal payments during the first six months of the loan, extendable at the Federal Reserve's discretion, in order to have additional cash on hand that can be used to pay employees and suppliers.
• The Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds. The SMCCF will purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds.
• The Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.

The FRB noted that the Department of Treasury would add funding to these facilities through the Exchange Stabilization Fund (ESF).  In addition, the FRB stated that it also expects to establish a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.

The federal banking agencies, including the FRB, OCC, and FDIC have individually and collectively taken the following actions:

• Encouraged banking entities to:
  • Use the Federal Reserve’s discount window.  The FRB later indicated a notable increase in discount window borrowing.
  • Use Capital and Liquidity Buffers to make credit available and undertake “other supportive actions” in a safe and sound manner.
• Modified regulatory capital requirements through:
  • An interim final rule to “neutralize” the effect of participating in the MMLF for regulatory capital purposes, including risk-based and leverage requirements. Under the interim final rule, eligible financial institutions may exclude exposures acquired pursuant to a non-recourse loan provided as part of the MMLF from total leverage exposure, average total consolidated assets, advanced approaches total risk-weighted assets, and standardized total risk-weighted assets, as applicable. Further, the institution’s liability under the MMLF must be reduced by the purchase price of the assets acquired with funds advanced from the facility. Comments are requested on this interim final rule for 45 days following publication.
  • An interim final rule to modify the definition of “eligible retained income” in order to “strengthen the incentives for a banking organization to use its capital buffers in adverse conditions.” Under the interim final rule, “eligible retained income” is defined as the greater of (1) a banking organization’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) the average of a banking organization’s net income over the preceding four quarters. This definition will apply with respect to all of a banking organization’s buffer requirements, including the fixed 2.5 percent capital conservation buffer, and, if applicable, the countercyclical capital buffer, the GSIB surcharge, and enhanced supplementary leverage ratio standards. It will also apply to all parts of the Stress Capital Buffer requirement when they become effective. Comments are requested on this interim final rule through May 4, 2020.
• Issued a joint Statement on Loan Modifications and Reporting that indicates the agencies will not criticize institutions for working with borrowers in a safe and sound manner, and will not direct supervised institutions to automatically categorize loan modifications as troubled debt restructurings (TDRs). They add that short-term (such as, six months) modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. These would include modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.
  
  The FDIC has also urged the Financial Accounting Standards Board (FASB) to delay certain accounting rules including implementation of the Current Expected Credit Losses (CECL) methodology, which would also impact regulatory capital.  The FDIC asked FASB to permit financial institutions currently subject to CECL an option to postpone implementation, and to impose a moratorium on the effective date for those financial institutions not yet subject to CECL.
• Expanded consideration of CRA credits to include retail banking services and retail lending activities in a financial institution's assessment areas that are responsive to the needs of low- and moderate-income individuals, small businesses, and small farms including waiving certain fees (e.g., ATM, overdraft, late payment), providing “alternative service options” in light of limited branch access, and payment accommodations to avoid delinquencies or negative credit bureau reporting. In addition, during the national emergency, financial institutions will receive credit for community development activities, including loans, investments, or services that support digital access or access to health services, the provision of food supplies, and activities to sustain small business operations.

Capital Markets Regulators

Recognizing that compliance with certain regulatory requirements will be challenging or impossible due to the national emergency declaration, which requires that personnel will be displaced from normal business sites and large gatherings of individuals will be prohibited:

• The CFTC:
  • Provided no action relief from recording of oral communications related to voice trading and other telephonic communications as well as certain time-stamping requirements for a variety of entities, including futures commission merchants, introducing brokers, swap dealers, retail foreign exchange dealers, floor brokers, swap execution facilities, and certain designated contract markets. The letters are available here and here.
  • Provided targeted relief by extending, for one year, the initial margin compliance deadline for market participants with the smallest uncleared swaps portfolios.
• The SEC provided:
  • Guidance for conducting annual shareholder meetings, including provisions to for changing the date and location, use of new technologies (e.g., “virtual” meetings), and alternative means, such as by telephone, for shareholders to present proposals.
    
  • Relief to certain investment funds and investment advisers related to requirements for in-person board meetings and certain filing and delivery requirements, such as certain in person board votes, annual and semi-annual filings, and client disclosures.
    
  • No-action relief regarding enforcement of the Consolidated Audit Trail (CAT) compliance rules through May 20, 2020, effectively extending the CAT filing deadline.

Other Federal Regulators

• The Department of Housing and Urban Development announced a foreclosure and eviction moratorium for single family homeowners with FHA-insured mortgages for 60 days. Separately, the Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac (together, the GSEs) will similarly suspend, for at least 60 days, foreclosures and evictions on single-family mortgages backed by the GSEs.
• The Department of Education suspended interest accruals on federal student loans for at least 60 days.
• The Department of Justice announced a series of temporary changes to its civil merger investigation processes, including additional time to review transactions and rescheduling of meetings in favor of videoconferencing.

State Regulatory Actions

Individual States are taking action to address the impact of the COVID-19 outbreak on financial services businesses, including insurance-related businesses, under their supervisory jurisdiction. In some cases, such as in New York and California, they have dedicated web pages to announce and document State actions to address COVID-19.

Banking Regulators

Working collectively through the Conference of State Bank Supervisors (CSBS), individual States participated in releasing joint interagency guidance with the federal financial services regulators, including:

• Relasing a statement encouraging financial institutions to “work constructively” with borrowers and other customers in areas affected by COVID-19 to help meet the customers’ financial needs. The Agencies committed to providing appropriate regulatory assistance to affected institutions, working to minimize disruption and burden related to examinations and inspections, and expediting reviews of requests to provide more conveniently available services to affected customers.
• Releasing a statement on loan modifications and reporting (jointly with the federal banking regulators).
• Updating a Statement on Pandemic Planning, which identifies actions financial institutions should take to minimize the potential adverse effects of a pandemic.

Insurance Regulators

• The National Association of Insurance Commissioners (NAIC) issued a brief outlining the types of insurance that may have provisions and exclusions triggered by the COVID-19 outbreak, including health, travel, life, business continuity, workers compensation, and general liability and directors and officers insurance.
• New York Department of Financial Services provided guidance to insurance companies to “do their part to alleviate the adverse impact caused by COVID-19 on those consumers and small businesses that can demonstrate financial hardship caused by COVID-19,” including offering payment accommodations, increasing resources for claims, and proactively reaching out to customers.