December 5, 2018

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Congress extended the National Flood Insurance Program through December 7th, this Friday. With the program set to expire at the end of last week, the last-minute vote averted a lapse. Congress could extend the NFIP this week using a must-pass spending bill due this Friday or a separate six-month extension passed by the Senate.
Exposure to rising corporate debt - including bonds and loans - was among several key risk themes identified by the OCC in its semiannual risk report. With nonfinancial corporate debt at a 30-year high, the OCC urged banks to keep a close eye on whether current lending practices reflect accepted risk tolerances, warning that a downturn in the corporate debt market "may affect supervised institutions more profoundly than in previous periods."
While the OCC continues to see strong bank performance and overall sound asset quality, it is continuing to closely monitor rising credit risk, citing several successive years of incremental easing of underwriting standards, risk layering and concentration growth, the report noted.
Consistent with the previous semiannual risk report, the OCC flagged operational risk as an area of additional concern, particularly related to cybersecurity, the implementation of the Current Expected Credit Loss standard and the concentration of critical functions among a few large third-party service providers. The agency also warned of rising compliance risk related to new technologies banks are employing to counter money-laundering threats and interest rate risk in a rising rate environment.

The Report  >>
Banks are not basing decisions on how much to hold in reserve at the Federal Reserve Banks on a desire to earn the interest paid on excess reserves, according to a Fed survey of senior financial officers. When asked to identify drivers of the lowest reserve levels the bank was comfortable holding, 41.2 percent said that seeking the IOER rate was not important, and 43.1 percent said it was only somewhat important; no respondents said it was very important.
Instead, survey respondents - which included large U.S. banks and U.S. branches of foreign banks - tended to cite managing intraday payment flows, meeting potential deposit outflows and satisfying internal stress metrics as principal reasons. U.S. banks tended to place more weight on meeting outflows, while foreign banks were more focused on internal liquidity metrics.
Respondents indicated that their lowest comfortable level of reserve balances was significantly lower than the amount they held. When asked about whether the lowest comfortable level of reserves would change with different interest rate increases, bankers were roughly split between those that said the level would not change and those who indicated they could economize on reserve balances.
Fed Survey  >> 
The FDIC, along with the other federal banking regulators and FinCEN, issued a joint statement encouraging depository institutions to consider, evaluate, and, where appropriate, responsibly implement innovative approaches to meet their Bank Secrecy Act/anti-money laundering (BSA/AML) compliance obligations in order to strengthen the financial system against illicit financial activity.
In the statement, the Federal Reserve, the FDIC, FinCEN, the National Credit Union Administration, and the OCC recognize that private sector innovation, including adopting new technologies and finding new ways to use existing tools, can help banks identify and report money laundering, terrorist financing, and other illicit financial activity. To assist depository institutions in this effort, the statement makes clear that the agencies are committed to continued engagement with the private sector and other interested parties.
"New technology, such as artificial intelligence and machine learning, can provide better strategies for banks of all sizes to better manage money-laundering and terrorist-financing risks, while reducing the cost of compliance," said FDIC Chairman Jelena McWilliams.
Institutions are becoming increasingly innovative and sophisticated in their approaches to BSA/AML compliance, commensurate with their risk profiles. For example, some banks and credit unions are building or enhancing internal financial intelligence units devoted to identifying vulnerabilities and threats. Others are experimenting with digital identity technology to enhance their BSA/AML compliance programs.
Each of the agencies has established, or will establish, projects or offices to support the implementation of responsible innovation and new technology in the financial system. While bank management should continue to follow existing protocols for communication with their respective regulators, these projects and offices may serve as points of contact to facilitate communication related to innovation and new technology.
The Federal Financial Institutions Examination Council provided a second update on its Examination Modernization Project, which emphasizes risk-focused supervision.
The project identifies and assesses ways to improve the effectiveness, efficiency, and quality of community financial institutions safety and soundness examination processes, particularly through increased use of technology.  In March, the FFIEC issued a press release providing a first update on the Examination Modernization Project. 
As an initial step, the Fed Board, the FDIC, the NCUA, the OCC, and the State Liaison Committee (a state regulator-led, voting member of the FFIEC) reviewed and compared principles and processes for risk focusing examinations of community financial institutions.
This review concluded that the state and federal regulators have developed and implemented similar programs and processes for risk tailoring examinations.  

Learn More  >>
  THE BSA/AML Event of the Year! - March 12, 2019  
CFO Conference - April 4, 2019 
December 11, 2018