Agencies Finalize Pause on Certain Basel III Capital Provisions November 21, 2017
The Federal Reserve, FDIC and OCC today finalized a halt in the phase-in of certain Basel III capital rules for banks not using the Basel advanced approaches. Effective on Jan. 1, 2018, the rule pauses the full transition to the Basel III treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital of unconsolidated financial institutions and minority interests.
The pause comes as the agencies go through a larger rulemaking -- long recommended by ABA -- that would simplify the treatment of assets subject to common equity tier 1 capital threshold deductions and limitations on minority interest and replace the definition of high-volatility commercial real estate exposures with a more straightforward measure.
Since advanced approaches are principally used by banking organizations with over $250 billion in assets or foreign bank subsidiaries with over $10 billion in assets, the pause applies broadly to community, midsize and even several regional banks. Comments are due on the broader simplification rule by Dec. 26, and ABA intends to file a letter.
In the final rule, the agencies responded to a concern raised by ABA and others about the effects on capital of implementing the current expected credit loss model. “The agencies recognize that CECL will affect accounting provisions and, consequently, retained earnings and regulatory capital, and that the amount of the effect will differ among banking organizations,” they said. While they did not take action now for lack of time, they added that “the agencies are considering separately whether or not it will be appropriate to make adjustments to the capital rules in response to CECL and its potential impact on regulatory capital.” Read the final rule.
House Passes Landmark Tax Reform Bill November 17, 2017
The House yesterday voted 227 to 205 to pass H.R. 1, the landmark tax reform bill that would be the first major overhaul of the tax code in more than three decades. ABA President and CEO Rob Nichols welcomed the development, noting that ABA is “encouraged by the bill passed today and the progress Congress has made.”
Key provisions in the bill include a corporate income tax rate for C-corporations of 20 percent; an income tax rate of 25 percent for passive income from “pass-through” entities, including Subchapter S banks, but with restrictions on the ability of active shareholders to claim the lower corporate rate; new limitations on net interest deductibility; and retained homeownership provisions but subject to new caps going forward.
Nichols emphasized that opportunities remain to improve the House bill, as well as the separate bill that the Senate Finance Committee advanced late last night in a party-line 14-12 vote. In particular, “we appreciate that House members continue to listen to our concerns about the legislation’s treatment of pass-through businesses,” he said. “The current bill prevents a large number of community banks that operate as Subchapter S businesses from benefiting from a lower tax rate -- something we believe lawmakers never intended.”
Nichols also urged Congress to use this opportunity to correct the distortionary tax code advantages of credit unions and Farm Credit System lenders that compete with taxpaying banks.
Senate Unveils Tax Reform Bill; House Committee Passes Tax Plan November 13, 2017
As the legislative process continues for the first major tax code overhaul in three decades, Senate Finance Committee Chairman Orrin Hatch (R-Utah) on Thursday released his own draft of tax reform legislation. Meanwhile, the House Ways and Means Committee voted to approve an amended version of the tax plan its leaders released last week. The bill is expected to see a vote on the House floor late this week. The committee vote was 24-16 along party lines.
“We applaud Chairman Hatch and the Senate Finance Committee for unveiling a comprehensive tax reform proposal to grow the economy and create jobs, and we congratulate Chairman [Kevin] Brady and the House Ways and Means Committee for successfully passing the House proposal out of committee,” ABA President and CEO Rob Nichols said. “We are encouraged by the progress to date and the administration’s willingness to make tax reform a top priority.”
Key provisions in the Senate bill include:
- A corporate income tax rate for C corporations of 20 percent, but not implemented until 2019
- A 17.4 percent deduction for business income from “pass-through” entities, including Subchapter S banks -- limited to 50 percent of the individual taxpayer’s W-2 wages -- a different structure for pass-through taxation than in the House bill
- Restrictions on net interest deductibility similar to the House bill, with taxpayers prohibited from deducting net interest expense exceeding 30 percent of adjusted taxable income
- The same homeownership provisions but subject to different caps -- higher than in the House bill -- going forward
- Eliminating the deduction for deposit insurance premiums for banks with over $50 billion in assets and phasing in the elimination for banks with $10-50 billion in assets
- Broadening the tax base by partially eliminating historic tax credits and repealing net operating loss carrybacks
“As with the House proposal, we are carefully reviewing specific provisions in the Senate bill that could affect our members and our customers, including the treatment of pass-throughs, interest deductibility and limits on the deductibility of FDIC premium payments,” said Nichols. “We are particularly concerned that the current pass-through treatment in both bills could have unintended consequences on community banks that operate as Subchapter S businesses. We appreciate the willingness of the committees to work with us on this issue.”
Nichols also expressed his disappointment that the Senate bill fails to address the outdated, distortionary tax subsidies to credit unions and the Farm Credit System. “Lawmakers looking for appropriate and responsible ways to pay for tax reform should start with the billions in misguided tax subsidies these groups receive while offering the same services as taxpaying bank,” he commented.
The Senate Finance Committee is expected to begin considering its bill today, and the House bill is expected to receive a vote on the House floor later this week. Nichols sent a CEO Update to all bank CEOs on Friday afternoon outlining the current status of tax reform and ABA's advocacy thus far.
Read the Senate bill.
Deputy AG Cautions on Using Regulatory Guidance as Policy November 9, 2017
Read more about the House bill.
Read Nichols' CEO Update.
In a speech to a banking industry conference yesterday, Deputy Attorney General Rod Rosenstein cautioned regulatory agency heads from substituting informal guidance for notice-and-comment rulemaking, noting that the Administrative Procedures Act provides a clear method for “promulgating regulations that reflect our official interpretation of application of certain laws.”
Rosenstein addressed the topic in response to a question about the Government Accountability Office’s recent decision on the banking agencies’ leveraged lending guidance. In that case, the GAO determined the guidance properly constituted a rule and thus should have been issued via notice-and-comment rulemaking.
Speaking to reporters at the same conference, Acting Comptroller of the Currency Keith Noreika -- whose agency was one of the three issuing the leveraged lending guidance -- said the banking agencies would provide initial thoughts about the fate of the guidance in the coming weeks. “I think we’re pretty much in the same place, and I do expect us to say something,” he said.
OCC Policy to Make It Easier for Banks to Fix CRA Problems November 9, 2017
The OCC yesterday issued a revised policies and procedures manual spelling out its approach to licensing applications from banks that have non-satisfactory Community Reinvestment Act ratings, either overall or in a particular geographic region.
While low CRA ratings have historically blocked banks from branching, merging or converting charters, the revisions allow applicants to document for the OCC how a transaction -- such as an acquisition or a branch relocation -- would “help the bank to achieve its CRA objectives.” The OCC manual also spells out factors the agency will consider when evaluating an application in this situation.
ABA has advocated for regulatory agencies to address this element of CRA compliance, in which a bank can be blocked from taking actions that would help it ameliorate a low rating. The revised manual is part of a broader effort under Keith Noreika to tie CRA compliance examinations more closely to the community-serving purposes of CRA. Read the revised manual.
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