Greg Kilminster
Head of Product - Content
FRC publishes feedback on the new Corporate Governance Code
In a useful Q&A session, Maureen Beresford, Director of Corporate Governance and Stewardship at the Financial Reporting Council (FRC) has been answering questions about the key revisions of the UK Corporate Governance code (the Code).
As well as the frequently asked questions which cover sustainability, risk management and internal controls, the document links to a 15 minute interview with Beresford which covers both the changes to the Code and initial feedback.
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Van Eck associates to pay $1.75m civil penalty to settle SEC charges
Van Eck Associates Corporation, a registered investment adviser, has agreed to pay a civil penalty of $1.75 million to settle charges of not disclosing key information to the board of a newly launched exchange-traded fund (ETF).
According to the Securities and Exchange Commission (SEC) order, in March 2021, Van Eck Associates launched the VanEck Social Sentiment ETF to track an index based on “positive insights” from social media and other data.
The index provider informed Van Eck Associates that:
- it planned to retain a well-known and controversial social media influencer to promote the index in connection with the launch of the ETF; and,
- the licensing fee structure would be based on the fund’s management fees and include a sliding scale linked to the size of the fund.
However, Van Eck Associates failed to disclose both terms to the ETF’s board in connection with its approval of the fund launch and of the management fee.
As part of the settlement, Van Eck Associates agreed to a cease-and-desist order and a censure, in addition to the monetary penalty.
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CFPB updates appeals process for financial institutions
The Consumer Financial Protection Bureau (CFPB) has updated its appeals process for financial institutions. The procedural rule expands the CFPB officials who can evaluate appeals, the options for resolving an appeal, the matters subject to appeal, and makes additional clarifying changes.
The updated appeals process includes the following changes:
- The Supervision Director will select an appeals committee of three CFPB managers with relevant expertise who did not work on the matter being appealed, and who will advise the Supervision Director in conjunction with attorneys assigned by the CFPB’s General Counsel.
- The appeals committee will now have the authority to send a matter back to Supervision staff for consideration of a modified finding, in addition to upholding or rescinding the finding.
- Institutions can now appeal any compliance rating or finding, not just an adverse rating.
The updated process is based on changes to the CFPB’s organisational structure and the prudential regulators’ recent process changes.
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CFPB report finds large banks charge higher credit card interest rates than small banks and credit unions
The Consumer Financial Protection Bureau (CFPB) has issued the first set of results from the newly updated Terms of Credit Card Plans survey. The survey found that larger banks tend to charge higher credit card interest rates than smaller banks or credit unions.
According to the CFPB’s research, this is due, in part, to the lack of competition among the largest credit card companies. The high concentration levels and anti-competitive behaviour in the consumer credit card market are contributing to higher rates for consumers carrying a balance. Additionally, high-interest-rate products are driving consumers into persistent debt, limiting price competition and propping up higher rates.
To address these issues, the CFPB is working on several fronts to promote competition in the credit card market. This includes:
- Developing rules that enhance consumers’ freedom to switch providers.
- Addressing loopholes that obscure upfront pricing.
- Taking enforcement actions against illegal rewards conduct.
- Scrutinising comparison websites for deceptive design and business practices.
The CFPB plans to release data on credit card pricing and availability every six months, with the next release scheduled for later in the spring of 2024.
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Supervision with speed, force, and agility: speech by Michael S Barr
In a speech at the Annual Columbia Law School Banking Conference in New York, Michael S Barr, Vice Chair for Supervision at the Federal Reserve, spoke about banking supervision and what the Fed is doing to enhance it.
He began by noting three reasons for the failure of Silicon Valley Bank in March 2023.
- The bank’s management failed to manage the bank’s risks.
- The board failed to oversee management.
- Federal Reserve supervisors did not identify issues quickly enough nor act with enough force.
The report identifying these failings noted the need to improve the speed, force, and agility of supervision, and Barr’s speech addressed progress in these areas.
The goal of supervision
Barr moved on to discuss the primary aim of bank supervision, being to ensure the stability and efficiency of the banking system to bolster economic strength. He pointed out that regulation and supervision are vital to encourage prudent risk management by banks and ensure their capacity to support the economy during all circumstances.
Federal Reserve regulations outline minimum requirements for banks, tailored based on their risk profiles. Supervision complements regulation by evaluating individual banks’ risks and ensuring they possess adequate governance, capital, and liquidity to operate effectively. Supervisors focus on identifying and addressing key risk areas, aiding banks in addressing weaknesses before they escalate. While the goal isn’t to prevent all bank failures, said Barr, supervision aims to facilitate proactive measures to mitigate risks and prevent systemic instability. By concentrating attention on firms with significant systemic risk potential, supervision aims to safeguard the overall stability of the financial system, recognising that pinpointing such risks beforehand is challenging.
The benefits of supervision
Whilst it comes at a cost, Barr noted that intensely supervised banks are no less profitable – and safer – than others, and that those same entities have less volatile income and lower loan losses. He also noted that well-supervised banks have a reassuring influence beyond the banking industry itself, reassuring households and businesses.
Speed, force, and agility of supervision
Introducing the developments of the last 12 months, Barr said that the Federal Reserve has focused its efforts on improving the speed, force and agility of supervision and that supervisors have “focused on the macro-prudential, systemic perspectives, to form an understanding of the condition of the banking system broadly…and worked closely with banks to improve the resilience of banks so that they can effectively serve their customers”.
Intensifying supervision at the right pace
Barr noted the efforts being made to ensure that large and more complex regional banks are being assessed more frequently and intensely. He added that it is incumbent on a rapidly-growing bank to ensure it is investing in risk appropriately. The goal is to try to ensure that “the transition to heightened supervision for fast-growing banks is more of a gradual slope and not a cliff.”
Timely supervisory action and escalation
Turning to the specific interest rate and liquidity risk concerns that affected SVB, Barr noted that supervisory examiners have been spending more time understanding the financial and operational health of banks as well as ensuring steps are taken to bolster capital positions, reduce liquidity risk, or mitigate interest rate risk, as required.
To indicate regulators’ proportional response to issues, Barr noted a current specific risk: commercial real estate (CRE), adding that the Federal Reserve has issued “issued more supervisory findings and downgraded firms’ supervisory ratings at a higher rate in the past year” to reflect the changing economic conditions, notably the reduced demand for office space. This is not a change in policy, merely a reflection of the requirement that supervisors need to focus on the issues that affect banks the most at any given time “whether that is interest rate risk, CRE, or cybersecurity vulnerabilities” or something else.
Improving the agility of supervision
Barr noted that supervisors delayed acting with SVB as they wanted to gather more evidence. This delay meant the problems got worse. He said there was a need, therefore, to strike a balance between strong processes and acting with incomplete information. He added that efforts are underway to improve enforcement processes for consistency and agility in recommending and escalating actions. He also said there’s a sustained focus to better identify emerging risks and integrate this analysis into supervision, enabling forward-looking assessments and proactive risk mitigation.
Supervisors should be encouraged to consider a wide range of potential shocks and vulnerabilities, including unlikely scenarios with severe consequences. Thinking in this way will help supervisors ensure the banking system remains strong and resilient in the face of evolving challenges.
In conclusion, Barr said there is a requirement to explore new models of financial risk, challenge supervisory judgements and adjust supervision when changes within a firm or in the sector are apparent. But he also noted the Federal Reserve’s own failings with regard to SVB adding that the lack of speed, force and agility apparent with SVB is being addressed, but that it will take some time.
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US financial regulators release 2023 shared national credit report
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (the agencies) have released the 2023 Shared National Credit (SNC) report. This report evaluates the risks associated with the largest and most complex credit facilities that are shared by regulated financial institutions and nonbank investors.
As per the report:
- The credit quality associated with large, syndicated bank loans is moderate. However, the report notes declining credit quality trends due to the pressure of higher interest rates on leveraged borrowers and compressed operating margins in some industry sectors.
- The risks in leveraged loans remain high, and certain industries, including technology, telecom and media; health care and pharmaceuticals; and transportation services are also facing elevated risks.
- The real estate and construction sector has segmented risks, with some sub-sectors experiencing deteriorating trends, while others are stable or improving.
- Industries affected by the pandemic, including transportation services and entertainment/recreation, are showing significant improvement.
The report is based on reviews conducted in the first and third quarters of 2023 and primarily covers loan commitments originated on or before June 30, 2023. The next report is scheduled to be released after the completion of the third quarter 2024 SNC review.
Click here to read the full RegInsight on CUBE’s RegPlatform