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Federal Reserve Board finalizes standards for Fed-regulated banks engaged in certain types of foreign exchange transactions with retail customers

Release Date: April 4, 2013

For immediate release

The Federal Reserve Board on Thursday announced the finalization of standards for banking organizations regulated by the Federal Reserve that engage in certain types of foreign exchange transactions with retail customers.

The rule, issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, establishes requirements for risk disclosures to customers, recordkeeping, business conduct, and documentation for retail foreign exchange transactions. Regulated institutions engaging in such transactions will be required to notify the Federal Reserve and to be well capitalized. They will also be required to collect margin for retail foreign exchange transactions.

The types of transactions covered by the rule include foreign exchange transactions that are futures or options on futures, over-the-counter options on foreign currency, and so-called rolling spot transactions. The rule covers entities regulated by the Federal Reserve including state-chartered banks that are members of the Federal Reserve System, bank and savings and loan holding companies, Edge Act and agreement corporations, and uninsured, state-licensed branches and agencies of foreign banks.

The Federal Reserve consulted with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation in developing the rule. The agencies have engaged in separate rulemakings as specified by Dodd-Frank.

The rule will be effective on May 13, 2013.  

For media inquiries, call 202-452-2955.

Federal Register notice: HTML | PDF

Increase in required electronic loan data fields

Federal Deposit Insurance CorporationBoard of Governors of the Federal Reserve SystemOffice of the Comptroller of the CurrencyConference of State Bank Supervisors

For immediate release
March 22, 2013

Increase in Required Electronic Loan Data Fields
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Agencies issue updated leveraged lending guidance

Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of the Comptroller of the Currency

For immediate release

March 21, 2013

Agencies Issue Updated Leveraged Lending Guidance

Federal bank regulatory agencies today released updated supervisory guidance on leveraged lending, which has been increasing since 2009 after declining during the financial crisis.

The guidance from the Federal Reserve Board, the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency (the agencies) covers transactions characterized by a borrower with a degree of financial leverage that significantly exceeds industry norms. The guidance replaces guidance issued in April 2001.

Before the financial crisis, the volume of leveraged credit transactions grew tremendously and participation by non-regulated investors willing to accept looser terms increased. While leveraged lending declined during the crisis, volumes have since increased and prudent underwriting practices have deteriorated. For example, some debt agreements have included features that weaken lender protection by excluding meaningful maintenance covenants and including other features that can limit lenders’ recourse in the event of weakened borrower performance. In addition, capital and repayment structures for some transactions, whether originated to hold or to distribute, have been aggressive. Management information systems at some institutions have proven less than satisfactory in accurately aggregating exposures on a timely basis.

It is important that banks provide leveraged financing to creditworthy borrowers in a safe and sound manner.

The guidance issued today focuses attention on the following key areas:

  • Establishing a sound risk-management framework: The agencies expect that management and the board of directors identify the institution’s risk appetite for leveraged finance, establish appropriate credit limits, and ensure prudent oversight and approval processes.
  • Underwriting standards: An institution’s underwriting standards should clearly define expectations for cash flow capacity, amortization, covenant protection, collateral controls, and the underlying business premise for each transaction, and should consider whether the borrower’s capital structure is sustainable, regardless of whether the transaction is underwritten to hold or to distribute.
  • Valuation standards: An institution’s standards should concentrate on the importance of sound methods in the determination and periodic revalidation of enterprise value.
  • Pipeline management: An institution should be able to accurately measure exposure on a timely basis; establish policies and procedures that address failed transactions and general market disruptions; and ensure periodic stress tests of exposures to loans not yet distributed to buyers.
  • Reporting and analytics: An institution should ensure that management information systems accurately capture key obligor characteristics and aggregates them across business lines and legal entities on a timely basis, with periodic reporting to the institution’s board of directors.
  • Risk rating leveraged loans: An institution’s risk rating standards should consider the use of realistic repayment assumptions to determine a borrower’s ability to de-lever to a sustainable level within a reasonable period of time.
  • Participants: An institution that participates in leveraged loans should establish underwriting and monitoring standards similar to loans underwritten internally.
  • Stress testing: An institution should perform stress testing on leveraged loans held in portfolio as well as those planned for distribution, in accordance with existing interagency issuances.

This guidance applies to financial institutions supervised by the agencies that engage in leveraged lending activities. The number of community banks with substantial involvement in leveraged lending is small and they should be largely unaffected by this guidance.

Federal Register notice: HTML | PDF

 

Media Contacts:
Federal Reserve Board Eric Kollig 202-452-2955
FDIC Greg Hernandez 202-898-6984
OCC Stephanie Collins 202-649-6870

Federal Reserve releases summary results of bank stress tests

Release Date: March 7, 2013
For immediate release
The nation’s largest bank holding companies have continued to improve their ability to withstand an extremely adverse hypothetical economic scenario and are collectively in a much stronger capital posi…

Federal Reserve Board publishes report containing summary information on debit card transactions in 2011

Release Date: March 5, 2013

For immediate release

The Federal Reserve Board on Tuesday published a report containing summary information on the volume and value, interchange fee revenue, certain debit card issuer costs, and fraud losses related to debit card transactions in 2011. The report is the second in a series to be published every two years pursuant to section 920 of the Electronic Fund Transfer Act (EFTA).

The Board’s Regulation II (Debit Card Interchange Fees and Routing), which implements this provision of the EFTA, provides that a debit card issuer subject to the interchange fee standard (a covered issuer) may not receive an interchange fee that exceeds 21 cents plus 5 basis points multiplied by the value of the transaction, plus a 1-cent fraud-prevention adjustment, if eligible. The regulation does not apply to debit card issuers with consolidated assets of less than $10 billion, certain government-administered debit cards, and certain prepaid cards. The interchange fee standard became effective on October 1, 2011. 

Covered issuers’ costs of authorizing, clearing, and settling (ACS) debit card transactions, excluding fraud losses, varied greatly across respondents in 2011, with the median issuer having an average ACS cost of 11 cents and the issuer at the 75th percentile having an average ACS cost of 36 cents. Issuers with the highest debit card transaction volume generally had the lowest ACS costs per transaction as reflected in an overall average of 5 cents per transaction. Conversely, issuers with the smallest debit card programs generally had the highest ACS costs per transaction. 

The Board estimated debit-card fraud losses to all parties (merchants, cardholders, and issuers) to be $1.38 billion in 2011, with an average loss of approximately 8 basis points per debit card transaction, down slightly from 2009. The median covered issuer’s average fraud loss per transaction was nearly 5 basis points, the same as in 2009. The median covered issuer had average fraud prevention and data security costs of slightly less than 1.5 cents per transaction.

The Board does not plan to propose revisions to the Regulation II interchange fee standard or the fraud-prevention adjustment based on these survey data. Sixty-seven percent of covered issuers had average ACS costs below 21 cents (the base component of the interchange fee standard) in 2011. This proportion is lower than the 80 percent of covered issuers with average ACS costs below 21 cents in 2009 due to the addition of first-time survey respondents, most of whom are foreign banking organizations or other covered issuers with very small debit card programs and high ACS costs per transaction. Issuers that responded to both the 2009 and 2011 data collections typically reported ACS costs per transaction that were lower in 2011 than in 2009. Covered issuers that had average ACS costs below 21 cents in 2011 processed well over 99 percent of all reported covered transactions, the same proportion as in 2009. 

The median issuer fraud loss, which serves as the basis for the ad valorem portion of the interchange fee standard, is essentially unchanged from 2009 (5 basis points). Further, when rounded to the nearest cent, the median fraud-prevention and data security costs remained at

1 cent per transaction (the current fraud-prevention adjustment).

2011 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transactions (PDF)

For media inquiries, call 202-452-2955