Banking

US Banking Regulators Finalize Nonbank Lending Reporting Requirements | Insights


On May 22, 2024, the US federal banking regulators finalized a new set of reporting requirements for bank loans and commitments to fund finance facilities, private credit lenders, and other nonbank financial entities.1This change reflects not only the rapid growth in this sector but also the regulators’ desire to better understand and supervise concentrations of credit and risk in the US banking system.

The new reporting requirements will take effect for the reporting period ending December 31, 2024 (i.e., reports filed in the first quarter of 2025). These requirements will apply to all insured depository institutions with $10 billion or more in total assets—approximately 160 banks.2 While banks will not be required to report the individual names of direct or underlying obligors, banks and intermediaries should understand how they may be affected by the ways in which regulators and investors use this new information.

BACKGROUND

Banks are required to file several types of reports with their regulators, including those with respect to the bank’s financial condition, the results of its operations, and risk exposure.3 One of the most common regulatory reports is the quarterly Consolidated Reports of Condition and Income (the “call report”), which banking regulators, including the Office of the Comptroller of the Currency (OCC), use to assess a bank’s financial condition.

Banks are required to sort credit exposures into many categories for reporting purposes—including loans secured by real estate, credit cards, and loans to foreign governments—and report the amount outstanding each quarter. Since 2010, banks have been required to report aggregate loans to nondepository financial institutions, which includes loans to direct lenders and other private credit intermediaries. In December 2023, the federal banking regulators proposed requiring banks to disaggregate this category.

FINAL REPORTING REQUIREMENTS

The final reporting requirements largely adopt the proposal, with minor modifications.  

Expanding the Definition of Nondepository Financial Institutions

The final reporting requirements expand the definition of nondepository financial institutions to include a wider range of financial entities. (See Appendix A for the text of the new definitions.) Specifically, the revised form instructions state that nondepository financial institutions are financial entities that provide services similar to those of traditional banks, but which do not accept deposits from the general public, and are not regulated by the federal banking agencies. These include mortgage companies, insurance companies, investment funds (such as mutual funds, money market funds, hedge funds, and private capital funds), pension funds, broker-dealers, securitization vehicles, and other financial entities engaged in credit intermediation, asset management, market-making, and other financial services activities. Further, the regulators clarified that loans to nondepository financial institutions may include loans related to commercial real estate activities that are not secured by real estate, but will not include securities-based margin loans, regardless of borrower type, that are predominately secured (greater than 50% of the underlying collateral) by securities with readily determinable fair values.

Disaggregating the Loans into Five Categories

As with the proposal, the final reporting requirements will require banks with $10 billion or more in total assets to disaggregate the category of loans to nondepository financial institutions into five new categories:4

  • Loans to mortgage credit intermediaries
  • Loans to business credit intermediaries
  • Loans to private equity funds
  • Loans to consumer credit intermediaries
  • Other loans to nondepository financial institutions
Notes on Certain Categories:

Additionally, banks with $10 billion or more in total assets will be required to report unused commitments to lend to nondepository financial institutions and disaggregate the information using the same five categories.

Changing the Effective Date

The final reporting requirements will take effect for the reporting period ending December 31, 2024 (i.e., reports filed in the first quarter of 2025), which is delayed from the proposal’s effective date of June 30.

Noting Possible Conforming Changes

The regulators also note that they expect to consider conforming changes to the country exposure reporting requirements (FFIEC 009).
Interestingly, the final reporting requirements do not apply to any holding companies of banks, which file the FR Y-9C instead of a call report. The regulators note holding company reporting forms are exclusively the domain of the Federal Reserve Board and, therefore, would require a separate, standalone proposal to be changed. 

IMPLICATIONS

While call reports do not create or trigger regulatory requirements, regulators use call reports to understand and monitor activities of banks, and may intervene if they believe a reported metric is indicative of problematic or unsafe conduct.7 For example, the OCC requires its banks to identify and measure categories of loans that constitute more than 25% of capital and more closely monitor and control such concentrations.8 Banks that fail to appropriately manage concentration risk may receive negative feedback from regulators. This can lead to banks reducing the availability of credit or increasing its price if the banks are nearing a limit or have been cautioned by regulators. Further, some examiners may use certain reporting metrics to identify and criticize activities that are lawful but disfavored (e.g., high volatility commercial real estate lending, brokered deposits, negative amortization mortgages).

Additionally, investors and competitors may use information from call reports to identify market trends and opportunities. This can lead to competitors being more likely to target a bank’s customers for a particular product, or investors being less likely to invest in a bank that stops growing in certain categories.

Lastly, the reporting trigger of $10 billion in total assets is not well-aligned with bank lending practices, and may impose a disproportionate burden on some banks that was not apparent from the proposal or comment letters. For example, approximately 70 of the 160 banks affected by the change report less than $100 million in loans to nondepository financial institutions. These banks will need to disaggregate and continuously track loans to nondepository financial institutions, even though that is only a small part of their lending businesses. In contrast, there are approximately 30 banks with less than $10 billion in assets who report more than $100 million in such loans. These banks will not be required to disaggregate their lending to nondepository financial institutions, even though it may be a significant business for them.9

 


 

1 89 Fed. Reg. 45,046 (May 22, 2024).

2 US branches and agencies of foreign banks will be required to use the same definition of loans to nondepository financial institutions, but will not be required to disaggregate that line item even if they have $10 billion or more in assets.

3 12 U.S.C. §§ 161, 324, 1464, 1817.

4 In a change from the proposal, these categories will be reported only for the consolidated reporting entity, instead of separately for the consolidated entity and its office in the United States.

5 The revised instructions state that “other” loans include loans to private equity funds and private debt funds even though there are separate categories for those loans. It is unclear what this change is intended to accomplish.

6 See our earlier Legal Update on the impact of the proposal on fund finance. 

7 Regulators are more likely to take action if a reported metric indicates that a bank has violated a legally binding limit such as the limit on loans to one borrower, single-counterparty credit limits, or limitations on interbank liabilities. See 12 C.F.R. pts. 32, 206, 252.

8 OCC, Concentrations of Credit (Oct. 2020).

9 In some cases, banks below the $10 billion threshold have reported loans to nondepository financial institutions as constituting more than 25% of their total lending.

 



Source link

Leave a Response