Bank Supervision Adapts to Pandemic Challenges
The last several months have been challenging ones for all of us, both personally and professionally. We’ve all had to adjust, especially when it comes to getting essential work done. For the Federal Reserve and other bank regulators, the challenge has been to maintain close oversight of our financial institutions and to assist banks as they work to keep credit flowing to their customers. It’s been a delicate balancing act, but one that appears to be working well thus far.
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Banks serving hemp producers no longer have to automatically fill out reports used to detect money laundering activities. This reduction in regulatory burden can be traced to the 2018 farm bill (officially titled the Agriculture Improvement Act of 2018), which legalized hemp by removing it as a Schedule 1 controlled substance. Properly licensed industrial hemp producers can now be treated the same as other bank commercial customers for anti-money-laundering regulatory purposes.
Since the end of the financial crisis more than a decade ago, lawmakers and regulators have worked to balance the needs of a growing, vibrant financial services sector with the regulations necessary to ensure a safe and sound one. In some ways, much has been achieved. The nation’s largest banking organizations are now subject to substantially higher capital and liquidity requirements. They are also regularly “stress tested” to understand the effects on capital should economic conditions deteriorate significantly.
At the same time, efforts are continuing to alleviate the regulatory burden faced by smaller banking organizations. Beginning this year, those that meet certain qualifications can opt into a simplified regulatory capital framework. The framework—dubbed the community bank leverage ratio (CBLR)—went into effect Jan. 1. The Federal Deposit Insurance Corp. estimates that more than three-quarters of all community banks will qualify to opt in.
Originally published as part of the "On the Economy Blog". This post is part of a blog series titled “Supervising Our Nation’s Financial Institutions."
Last month, I reviewed a new accounting standard for banks called the current expected credit loss model, dubbed CECL. The financial crisis made it apparent that the current methodology for credit loss reserves fell short.
CECL is designed to improve the quality of financial information, especially approaching and during times of economic stress.Gearing Up
The new accounting standard is being phased in, beginning in 2020 with the nation’s largest publicly traded banks. A recent proposal by rulemakers will defer transition for most other institutions—such as community banks and credit unions—until January 2023.1
Information provided by community banks about CECL preparation indicate that most have started the implementation process by gathering and analyzing data. Some have gone further by selecting a methodology and testing it.
Despite the progress, many bankers continue to express concerns about the transition. These concerns typically center on the time required to prepare, vendor fees, the time and effort needed to obtain and organize data, and even the uncertainty of knowing if they have “gotten it right.”
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Take Five is a popular video series featuring St. Louis Fed economist Dr. Bill Emmons. In each video, Emmons provides a quick, concise synopsis of the most recent meeting of the Federal Open Market Committee (FOMC).