As 2018 unfolds, all eyes in the financial services industry continue to look to Washington,D.C. In addition to monitoring legislative moves toward regulatory reform and leadership changes at federal regulatory agencies, bank executives also are looking for indications of expected areas of regulatory focus in the near term.
Regulatory Relief and Leadership Changes
Both the U.S. House of Representatives and the Senate began 2018 with a renewed focus on regulatory reform, which includes rollbacks of some of the more controversial provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the sweeping reform passed after the 2008 financial crisis. These legislative actions are ongoing, and the final outcomes remain uncertain. Moreover, even after a final bill is signed, regulatory agencies will need time to incorporate the results into their supervisory efforts and exam processes.
Meanwhile, the federal financial institution regulatory agencies are adjusting to recent leadership changes. The Federal Reserve (Fed), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and Consumer Financial Protection Bureau (CFPB) have new leaders in place or forthcoming, some of whom have been vocal supporters of a more “common sense” approach to financial regulation and who generally are supportive of regulatory relief. In the case of the CFPB, the ultimate direction of the agency could remain uncertain until a permanent director is appointed later in 2018.
Regulators’ Priorities in 2018
Notwithstanding the regulatory reform efforts, following are some areas likely to draw the most intense scrutiny from regulatory agencies during 2018 examination cycles:
Credit-related issues. While asset quality continues to be generally sound industrywide, concerns over deteriorating underwriting standards and credit concentrations continue to attract significant regulatory attention, accounting for the largest share of matters requiring attention (MRAs) and matters requiring board attention (MRBAs).
The federal banking regulators have encouraged banks in recent months to maintain sound credit standards within risk tolerances, understand the potential credit risks that might be exposed if the economy weakens, and generally strengthen their credit risk management systems by incorporating forward-looking risk indicators and establishing a sound governance framework. At the portfolio level, regulators are particularly alert to high concentrations in commercial real estate, commercial and industrial, agriculture, and auto loans, according to the FDIC.
Information technology and cybersecurity risk. The Federal Financial Institutions Examination Council (FFIEC) updated its Cybersecurity Assessment Tool in May 2017. Although its use is voluntary, federal and state banking regulators typically consider a bank’s use of the FFIEC tool or some other recognized assessment or framework as part of their assessment of an organization’s cybersecurity risk management, controls, and resilience.
On a broader scale, in February 2018, the Department of Justice announced a new cybersecurity task force. Although the task force is not directed specifically at the financial services industry, its first report, expected to be released this summer, could provide useful insight into the scope of the task force’s activities and potential guidance into what types of regulatory actions and controls to expect in the coming years.
Bank Secrecy Act and anti-money laundering (BSA/AML) compliance. The industry has seen a steady increase in enforcement actions—some of which have included severe sanctions— when regulators perceived banks had pared back resources in this area too severely. Compliance with Office of Foreign Assets Controls (OFAC) requirements and efforts to prevent terrorist financing are also continuing to draw regulatory scrutiny.
Consumer lending practices. Regulatory priorities in this area are likely to remain somewhat fluid given the leadership changes occurring at the CFPB, where a permanent director is to be appointed by September. Additionally, legislative efforts that could affect the structure and authority of the bureau also are underway.
Third-party and vendor risk management. It has been nearly five years since the OCC released OCC Bulletin 2013-29, which expanded the scope of banks’ third-party risk management responsibilities and established the expectation for a formal, enterprise-wide third-party risk management effort. Since then, regulatory agencies have issued several follow-up publications, such as OCC Bulletin 2017-7, which spells out supplemental exam procedures. Also in 2017, the FDIC’s Office of Inspector General issued a report with guidance regarding third-party contract terms, business continuity planning, and incident response provisions, and the Fed published an article, “The Importance of Third-Party Vendor Risk Management Programs,” which includes a useful overview of third-party risk issues.
Despite the industry’s hopes for regulatory relief in some areas, all financial services organizations should continue to focus on maintaining sound risk management policies and practices that reflect today’s environment of continuing change and growing competitive pressures.