Comment Period Closes for Fed, FDIC Resolution Planning Proposals
Also: notes on recent merger delays, and a few comments from SEC staff on banking organization securities filings
Set out below are short notes highlighting a few developments last week relating to U.S. banking regulation that I thought were interesting, although as always there are no claims that the developments in question are particularly significant.
Two Notable Comments on Fed, FDIC Resolution Planning Proposals
Last Thursday was the deadline for comment on three proposals related to resolution planning: the FDIC’s proposed changes to its IDI plan rule, proposed joint guidance from the Federal Reserve Board and FDIC on 165(d) plan submissions by certain large U.S. bank holding companies, and proposed joint Board/FDIC guidance on 165(d) plan submissions by certain non-U.S. banks with significant operations in the United States.
Looking at what has been posted in the comment files so far,1 the high-level themes across the comment letters are consistent with what readers would expect. In addition to more detailed commentary on various ambiguities or other questions raised by the proposals,2 there are disputes over the size or other threshold at which IDI plans should be required,3 claims of insufficient tailoring in the 165(d) guidance,4 calls for the IDI planning and 165(d) planning processes to be reconciled,5 and so on.
All valid areas of debate, of course, but also all things that have, to a greater or lesser extent, been previously discussed at length either here on this blog or elsewhere. So instead of summarizing the comment letters more broadly, I thought here I would just highlight two comment letters I found more interesting. Not because I necessarily agree with the points they make, but rather because they seem to attempt to lay down a marker on matters not necessarily confined to the resolution planning proposals on which they are commenting.
Council of Federal Home Loan Banks Comment Letter
The Council of Federal Home Loan Banks, a trade group for the 11 Federal Home Loan Banks, submitted a comment letter on the FDIC’s IDI plan proposal.
The first portion of the letter is said to be submitted in response to a statement made in the preamble to the proposal in which the FDIC observed that a bank’s resolution strategy “may assume continuation of Federal Home Loan Bank advances . . . provided that the identified strategy provides for timely repayment of those funds.”
This is good, the Council says, but it would be better if this was explicitly stated in the rule. So the Council proposes that the FDIC add the following as a new section of the rule:
If the CIDI is a member of a Federal Home Loan Bank, a resolution submission must include a discussion of its approach for using Federal Home Loan Bank liquidity if applicable. The resolution submission may assume the continuation of Federal Home Loan Bank advances and letters of credit obligations via a bridge depository institution, if the resolution submission demonstrates that the obligations remain fully collateralized and provides for timely repayment.
After making that recommendation, though, the letter shifts to what I assume is its main purpose: putting on the record certain of the Council’s initial views in reaction to the FHFA’s FHLBank System at 100 report released a few weeks ago.
That report, among other things, noted that Federal Home Loan Banks are “are not designed or equipped to take on the function of the lender of last resort” and observed that “reliance of some large, troubled members on the FHLBanks, rather than the Federal Reserve, for liquidity during periods of significant financial stress may be inconsistent with the relative responsibilities of the FHLBanks and the Federal Reserve.”
In its comment letter, the Council argues that the FHFA’s reform proposals and suggestions in its report “will likely limit FHLBank members’ access to FHLBank advances when they are most in need.” In the Council’s view, “the longstanding role of emergency lender for the FHLBanks to address run contagion and provide a liquidity backstop for the deposit insurance funds should not be disrupted.”
The trade group says it “would be pleased to work with the FDIC, the FHFA and the banking and credit union regulators, to constructively ensure that the FHLBanks remain a reliable liquidity source for troubled institutions.”
ICBA Comment Letter
For certain purposes $10 billion in total assets is a key dividing line in U.S. banking regulation. Banks below the $10 billion total asset threshold are generally thought of as community banks, although not all banks below that threshold really fit the definition and some banks above that threshold also regard themselves, not unreasonably, as such.
The Independent Community Bankers Association generally advocates for a lighter-touch approach to the regulation of community banks while, in turn, calling for heightened regulation of what it sees as too-big-to-fail “megabanks.” On occasion entertaining disputes can arise out of this “bank-on-bank warfare.”
All this is in the background to the FDIC’s IDI resolution plan rule, which as proposed would apply in full to banks with $100 billion or more in total assets, while also applying in (slightly) more limited form to banks with between $50 billion and $100 billion in total assets.
Proposing to set the thresholds at these levels raises a question: does the ICBA see banks in the $50 billion - $100 billion range as appropriately grouped with what ICBA regards as the megabanks, or are these institutions more akin to the community banks for which ICBA typically advocates?
A comment letter submitted by the ICBA suggests that, for purposes of this rule at least, they believe it is the latter.6
ICBA believes that the submission of resolution plans should be limited to those banking organizations with total consolidated assets of $100 billion or more. By the agency’s own admission and banker experience, the submission of information-only resolution plans by banks between $50 billion and $100 billion has created undue compliance burdens on these institutions without providing any better understanding of the activities of the enterprise that would aid in an orderly resolution. […]
ICBA disagrees with the agency’s general assertion that a bank with $50 billion in total assets is of sufficient size and complexity to need thorough resolution planning. Banks with total consolidated assets in the $50 billion to $100 billion range are generally traditional lenders that have expanded in size not to become more complex but to reach the scale necessary to generate returns that meet or exceed shareholder demands.
Elsewhere in the letter, ICBA argues that even if a bridge bank resolution strategy is not viable for resolving a bank of this asset size, “a whole bank sale is always a viable option since the number of potential acquirers is large.”
Further Merger Delays
Last week saw the extension of the outside date for two transactions to give the parties involved more time to secure necessary regulatory approvals or satisfy other outstanding closing conditions. There is also a third transaction that has been pending for a while where similar action may soon become necessary.
WaFd and Luther Burbank
When they first announced their planned merger last November, WaFd and Luther Burbank said they hoped the transaction could “close as early as the second calendar quarter of 2023.”
With it now late 2023 and regulatory approvals from the Federal Reserve Board and FDIC still yet to be received, the parties were quickly approaching the November 30, 2023 outside date set forth in their original agreement. So last week the parties agreed, as permitted by the merger agreement, to extend the outside date to February 29, 2024.
The extension in itself is not necessarily all that newsworthy, but it gives me occasion to discuss something about the regulatory application process for this transaction that I have not yet been able to figure out.
The parties filed their holding company merger application with the Federal Reserve Board in October 2023. This is well after what would be typical for a transaction announced in November 2022 — it usually takes somewhere between 1-2 months to prepare and file an application, and indeed the parties filed an application for the bank merger with the FDIC in early January 2023.
Waiting so long to file an application with the Federal Reserve Board was, of course, not the original plan. In its merger proxy filed March 24, 2023, WaFd stated that the Federal Reserve Bank of San Francisco had told it that no application under the Bank Holding Company Act would be required:
[I]n connection with communications with the Federal Reserve Bank of San Francisco (the “FRBSF”), Washington Federal was advised that prior approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) is not required for the merger and the momentary acquisition of control of LB Savings because it qualifies as a transaction not requiring Federal Reserve Board approval pursuant to 12 CFR 225.12(d)(2). Thus, a bank holding company application is not required for the transaction. Rather, Washington Federal must provide written notice of the proposed transaction to the FRBSF pursuant to the requirements of 12 CFR 225.12(d)(2). Washington Federal submitted the required notice to the FRBSF and the request for an exemption to the CDFPI on March 1, 2023.
The parties have, separately, been subject to adverse comments filed with the FDIC relating to the merger, but these comments were submitted in early February 2023, and while they may explain (in part) why the FDIC is moving deliberately with respect to the merger, I am not sure they work as an explanation for the apparent reversal on the waiver/no waiver question.7
Republic First Bancorp and the Norcross-Braca Group
When Republic First Bancorp announced in late October that it would receive a capital infusion of $35 million from South Jersey power broker George E. Norcross III, Gregory B. Braca and others (the “Norcross-Braca Group”) the bank indicated that the transaction was “expected to close in November 2023.”
Last week Republic First Bancorp announced that “to facilitate the receipt of regulatory approvals, the Company’s filing of its Annual Report on Form 10-K for the year ended December 31, 2022, and to satisfy other closing conditions as set forth in the Purchase Agreement” the outside date for the transaction has been extended to February 29, 2024.
It would be a little surprising if banking regulators were moving slowly on this approval, particularly if things were so dire that the FDIC was, as Bloomberg reported, in the process of conducting an auction for the bank in the days before the outside investment was announced. I assume, therefore, that the filing of the much delayed 10-K, the shareholder meeting, and the need for more time to satisfy the other closing conditions to the Norcross-Braca Group investment are the primary drivers of the need for an extension.
Provident Financial Services and Lakeland Bancorp
There were no public developments relating to this last week, so including it in what is nominally a weekly roundup post is cheating a little, but one still-pending transaction to watch in the next week or two is the proposed merger between the parent companies of New Jersey-based Provident Bank and Lakeland Bank, first announced in September 2022.
Unlike some other transactions where the reasons for regulatory approval delays are fairly opaque, here the reasons for the delay are thought to be better understood.
The parties signed their merger agreement on September 26, 2022 and publicly announced it the next day. The day after that, on September 28, 2022, the DOJ entered into a settlement with Lakeland Bank regarding alleged redlining in the Newark metropolitan area. (Provident Bank said in a statement to local media that it was “fully aware” of Lakeland’s plans to settle with the DOJ and “fully considered it when agreeing to the merger.”)
When originally announced, the parties expressed a desire to close by the second quarter of 2023, but given the DOJ settlement a few commentators saw that aspiration as aggressive, and indeed approval has now slipped as some expected.
Under the currently effective merger agreement, either party has the right to terminate the agreement if the merger has not been completed by the 15-month anniversary of the date the merger agreement was signed, putting the current outside date at December 26, 2023.
On an earnings call in late October, an analyst asked Provident Bank’s CEO Tony Labozzetta whether, in light of the approaching outside date, there had been “any discussions with Lakeland about possibly extending that merger deadline.” Labozzetta replied:
The answer is yes, but we’re hoping we don’t have to go there because we are as I mentioned in my talking points with relative to the merger, which I know is on everybody’s mind, we have provided everything that the regulators need for them to finalize their decision. And at this point, we’re waiting for their final decision. And we hope that we don’t have to be in an state in December where we’ve to consider that. But to your question is, yes, we are talking about it, and that’s under consideration.
Given the 15-day statutory waiting period that applies following approval of a bank merger,8 if the parties are still hoping to get the deal done without needing to extend the outside date, we are now at a point where regulatory approval would need to come in the next week or so.
Recent SEC Staff Comments
The SEC’s Division of Corporation Finance recently released staff correspondence with certain banking organizations regarding previous filings made by those organizations. This sort of correspondence is generally released only with a delay, hence the dates on some of the letters discussed below.9
Comerica and AOCI
In a letter sent in early October, the CorpFin staff observed that Comerica’s Q2 10-Q included “Non-GAAP measures tangible common equity, excluding AOCI, tangible common equity ratio, excluding AOCI, and tangible equity per share of common stock, excluding AOCI.” The staff asked Comerica to explain why the company believes these metrics to be helpful, and also asked a few leading questions about them. For example:
Tell us whether you will continue to present these measures and adjustments during periods where there is an accumulated other comprehensive gain rather than a loss, which would result in a reduction to these non-GAAP measures excluding AOCI. Refer to Question 100.03 of the Division of Corporation Finance’s Compliance & Disclosure Interpretations on Non-GAAP Financial Measures.
Tell us how you concluded it was appropriate to not also add back the impact of AOCI to the denominator (total tangible assets) so that both the numerator and denominator would be calculated on a consistent basis.
In response, Comerica explained why it had believed these metrics to be useful in previous periods, noting that, among other things, this treatment of AOCI is consistent how the currently applicable bank capital rules work.10
We included the non-GAAP financial measures referenced in the Staff’s comment because we believe that such presentation provided a greater understanding of our ongoing operations given that AOCI losses are speculative estimates subject to market volatility and may not be indicative of future realized losses. This is particularly important in the case of our portfolio of securities that are available-for-sale which is comprised of U.S. treasury securities and agency mortgage-backed securities considered to be risk-free of credit losses. We also believe these non-GAAP measures provided enhanced comparability with prior periods as well as a presentation that was more closely aligned with the way in which regulators assess capital adequacy for banking organizations of our size that, under the applicable regulatory capital rules, have elected the allowable “AOCI opt-out.”
Comerica then went on to say, however, that “[w]e intend to cease reporting the non-GAAP measures referenced in the Staff’s comment going forward given that interest rates have remained elevated through comparable periods, and accordingly, the utility for presenting such non-GAAP measures to stockholders and investors has diminished.”11
The purpose of mentioning this here, obviously, is not suggest that Comerica was doing anything wrong. Instead, I mention it because this sort of comment letter is often indicative of a trend in SEC staff comments, and may not be limited to Comerica.
BNY Mellon and Crypto
BNY Mellon timely filed its 10-K for fiscal 2022 in late February 2023. That 10-K included various high-level statements about the company’s plans for digital asset custody, including custody of cryptocurrencies.
The CorpFin staff these days is interested in anything having to do with crypto, even things that in all likelihood are not particularly material, and so in a letter dated September 30, 2023 the staff asked BNY Mellon to revise its future 10-K filings to “clarify the nature and extent” of the firm’s Digital Asset Custody platform and related initiatives.
BNY Mellon responded by noting that, going forward, it intends to include disclosure its 10-K along the lines of the following:
Our Digital Asset Custody platform offers custody and administration services for Bitcoin and Ether for select U.S. institutional clients. Our Digital Assets Funds Services provides accounting and administration, transfer agency and ETF services to digital asset funds. We expect to continue developing our digital asset capabilities and to work closely with clients to address their evolving digital asset needs. As of and for the year ended Dec. 31, 2023, our Digital Asset Custody platform and related initiative had a de minimis impact on our assets, liabilities, revenues and expenses.
Banc of California and PacWest
In all, I count 44 questions from the CorpFin staff for PacWest and Banc of California on the S-4 the parties filed in relation to their merger. You can read the staff’s questions and the companies’ responses here, here and here.
Thanks for reading! Comments on this post are welcome at bankregblog@gmail.com
The FDIC’s comment file for the IDI plan proposal is here, the FDIC’s comment file for the FBO 165(d) resolution planning guidance is here, and the FDIC’s comment file for the domestic 165(d) resolution planning guidance is here.
The Federal Reserve Board also has comment files for the foreign and domestic 165(d) guidance, but as of this writing has not been as quick as the FDIC in posting comment letters when received.
Just as one example, an area of focus for several commenters was the FDIC’s proposed credibility standard for evaluating IDI plans. The proposed standard would require a covered bank’s resolution plan to include, among other things, a resolution strategy that “provide[s] timely access to insured deposits, maximize[s] value from the sale or disposition of assets, minimize[s] any losses realized by creditors of the CIDI in resolution, and address[es] potential risk of adverse effects on U.S. economic conditions or financial stability.”
A comment filed by the American Bankers Association raises questions about how the “minimize losses to creditors” part of the above standard would interact with the agencies’ separately proposed long-term debt rule which, as applied to large banks other than U.S. GSIBs, would require issuance of long-term debt at the IDI level.
ABA observes that the FDIC when proposing the long-term debt rule “made clear that it in fact intends to impose (or, more specifically, to have the option to impose) losses on nondeposit creditors” of an IDI. If that is so, the ABA asks, how should banks that are required to maintain long-term debt think about their obligation to minimize losses to creditors for IDI plan purposes? What sorts of assumptions would they need to make?
The IDI plan rule would apply in full to banks with $100 billion or more in total assets (“Group A IDIs”), while requiring slightly less detailed “informational filings” from banks with $50 billion or more in total assets (“Group B IDIs”).
For comments making the case that the Group A or Group B thresholds are set too low, or should otherwise be adjusted, see, for example, comment letters from BOK Financial, Fifth Third, and a joint letter filed by eight banks.
Taking the other side are comment letters from Better Markets and Americans for Financial Reform, which argue that the IDI rule should not distinguish between Group A and Group B IDIs and that resolution planning requirements should apply in full to all banks at the $50 billion level and above.
For example, a comment letter filed by the Institute of International Bankers on the proposed foreign bank 165(d) guidance argues that the U.S. operations of foreign banks that would be subject to the proposed guidance are “a fraction of the size” of the U.S. GSIBs and so the guidance ought to be “much different from and much more flexible than guidance applicable to the U.S. GSIBs.”
See, for example, Section II.A of the Bank Policy Institute letter on the IDI rule proposal.
Emphasis in original.
One possibility is that the FRBSF changed its position, perhaps after consultation with the Board staff. But, to be clear, that is not the only possibility. It is also possible that the facts simply changed.
This oversimplifies a little. The default waiting period is 30 days, although this can be shortened (and usually is) to 15 days with the concurrence of the DOJ. The waiting period can also be further shortened in emergency circumstances, but those would not seem to apply here.
See this SEC overview of the filing review process. (“To increase the transparency of the review process, the Division makes its comment letters and company responses to those comment letters public on the SEC’s EDGAR system no sooner than 20 business days after it has completed its review of a periodic or current report or declared a registration statement effective.”)
They do not get into this in their response letter, but Comerica and other firms like it that have less than $100 billion in total assets would continue to be able to exclude the effects of AOCI on regulatory capital, even if the agencies’ Basel Endgame rule is adopted as proposed.
Comerica went on to say that it does, however, “intend to continue highlighting the stand-alone basis point impact of unrealized losses recorded within AOCI on our tangible common equity ratio as we believe that such presentation remains useful to stockholders and investors given the magnitude of the impact on our tangible common equity in the current interest rate environment.”