To print this article, all you need is to be registered or login on Mondaq.com.
On December 27, 2023, the US federal banking regulators proposeda new set of reporting requirements for bank loans and commitmentsto private credit lenders and intermediaries.1 Thischange reflects not only the rapid growth in this sector, but alsothe regulators' desire to better understand and superviseconcentrations of credit and risk in the US banking system.
While banks will not be required to report the individual namesof direct or underlying private credit obligors, banks andintermediaries should understand how they may be affected by theways in which regulators and investors use this newinformation.
Background
Banks are required to file several types of reports with theirregulators, including those with respect to the bank'sfinancial condition, the results of its operations, and riskexposure.2 One of the most common regulatory reports isthe quarterly Consolidated Reports of Condition and Income("call report"), which banking regulators, including theOCC, use to assess a bank's financial condition.
The information disclosed in regulatory reports—andparticularly in call reports—is important because reportsoften are used by regulators to make supervisory determinations,and usually are made publicly available to investors, depositors,and creditors. The information also is quite detailed, with theFFIEC 031-version of the call report running 89pages.3
Banks are required to categorize credit exposures into manycategories for reporting purposes—including loans secured byreal estate, credit cards, and loans to foreigngovernments—and report the amount outstanding each quarter.Since 2010, banks have been required to report aggregate loans tonondepository financial institutions, which includes loans todirect lenders and other private credit intermediaries.
Proposed Reporting Requirements
The proposal notes that loans to nondepository financialinstitutions have increased from $56 billion in 2010 to $786billion in 2023. This constitutes approximately 6.4% of total banklending. Additionally, the Financial Stability Oversight Counciland others have raised concerns over the interconnection betweenbanks and nondepository financial institutions.4
The proposal would require banks with $10 billion or more intotal assets to disaggregate the category of loans to nondepositoryfinancial institutions into five new categories:
1. Loans to mortgage credit intermediaries;
2. Loans to business credit intermediaries;
3. Loans to private equity funds;5
4. Loans to consumer credit intermediaries; and
5. Other loans to nondepository financial institutions
Additionally, banks with $10 billion or more in total assetswould be required to report unused commitments to lend tonondepository financial institutions and disaggregate theinformation using the same five categories.
The category of loans to business credit intermediaries appliesto a broad range of borrowers that predominately lend tobusinesses, including a substantial portion of the private creditmarket.6 Reportable loans include loans to directlenders, private debt funds, commercial paper conduits, financecompanies, marketplace lenders, business development companies, andother financial intermediaries. Further, loans to collateralizeddebt obligations, collateralized loan obligations("CLO"), and CLO warehouses would be included, as wouldbank holdings of CLO tranches that are reported as loans foraccounting purposes.
Takeaways
On their own, call reports do not create or trigger regulatoryrequirements. However, regulators use call reports to understandand monitor activities of banks and may intervene if they believe areported metric is indicative of problematic or unsafeconduct.7 For example, the OCC requires its banks toidentify and measure categories of loans that constitute more than25% of capital and more closely monitor and control suchconcentrations.8 Banks that fail to appropriately manageconcentration risk may receive negative feedback from regulators.This can lead to banks reducing the availability of a product orincreasing its price, if the banks are nearing a limit or have beencautioned by regulators.
It is unlikely that the regulators will abandon the proposedreporting requirements in light of the increasing focus on nonbanklending. Therefore, banks should consider if there are targetedchanges to the new categorization and related definitions thatwould ease the reporting burden. Further, private creditparticipants might consider if the categorization of loans tonondepository financial institutions and the definition of businesscredit intermediary accurately reflects the segmentation of themarket.
Additionally, investors and competitors may use information fromcall reports to identify market trends and opportunities. This canrange from competitors being more likely to target a bank'scustomers for a particular product, to investors being less likelyto invest in a bank that stops growing in certain categories.
Footnotes
1. 88 Fed. Reg. 89,495 (Dec. 27, 2023).
2. 12 U.S.C. §§ 161, 324, 1817,1464.
3. FFIEC, Consolidated Reports of Condition andIncome for a Bank with Domestic and Foreign Offices (Dec. 13,2023).
4. FSOC, Annual Report 2023 at 34 (Dec. 14, 2023)("The level of opacity in private credit markets can make itchallenging for regulators to assess the buildup of risks in thesector."); FSOC, Statement on Nonbank FinancialIntermediation (Feb. 4, 2022); see also FederalReserve, Statement on Safe and Sound Practices for CounterpartyCredit Risk Management (Dec. 10, 2021); but see FederalReserve, Financial Stability Report (May 2023)("Risks to financial stability from leverage at private creditfunds appear low.")
5. See our earlier alert on the impact of the proposal onfund finance.
6. FFIEC, Redlined Draft FFIEC 031 Instructions forthe Proposed Call Report Revisions with Proposed Effective DateJune 30, 2024 (Dec. 27, 2023), https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_20231227_i_draft.pdf.
7. Regulators are more likely to intervene if a reportedmetric indicates that a bank has violated a legally binding limit,such as the limit on loans to one borrower, single-counterpartycredit limits, or limitations on interbank liabilities.See 12 C.F.R. pts. 32, 206, 252.
8. OCC, Concentrations of Credit (Oct.2020).
Visit us at mayerbrown.com
Mayer Brown is a global services provider comprisingassociated legal practices that are separate entities, includingMayer Brown LLP (Illinois, USA), Mayer Brown International LLP(England & Wales), Mayer Brown (a Hong Kong partnership) andTauil & Chequer Advogados (a Brazilian law partnership) andnon-legal service providers, which provide consultancy services(collectively, the "Mayer Brown Practices"). The MayerBrown Practices are established in various jurisdictions and may bea legal person or a partnership. PK Wong & Nair LLC("PKWN") is the constituent Singapore law practice of ourlicensed joint law venture in Singapore, Mayer Brown PK Wong &Nair Pte. Ltd. Details of the individual Mayer Brown Practices andPKWN can be found in the Legal Notices section of our website."Mayer Brown" and the Mayer Brown logo are the trademarksof Mayer Brown.
© Copyright 2024. The Mayer Brown Practices. All rightsreserved.
This Mayer Brown article provides information and comments on legalissues and developments of interest. The foregoing is not acomprehensive treatment of the subject matter covered and is notintended to provide legal advice. Readers should seek specificlegal advice before taking any action with respect to the mattersdiscussed herein.
POPULAR ARTICLES ON: Finance and Banking from United States
2024 Key Banking Themes For The Year Ahead
Alvarez & Marsal
The Banking Industry stands at a difficult juncture. Whilst interest rate increases have temporarily improved profitability and shareholder returns, the fundamental challenge of poor valuations...
What 600+ Financial Services Leaders Revealed About Communications Compliance
Theta Lake
Theta Lake is delighted to unveil its 2023/24 Digital Communications Governance, Compliance and Security Report...
Fed's Proposed Rule Post-Silicon Valley Bank Falls Short
Kramer Levin Naftalis & Frankel LLP
The Federal Reserve failed to compel SVB Financial Group to contribute its $4 billion in assets to Silicon Valley Bank. It had power to do so under Regulation Y, which requires holding companies...
CFPB Aiming To Oversee Digital Payments
K&L Gates
In late 2023, the Consumer Financial Protection Bureau (CFPB) proposed a rule that would subject nonbank fintech companies to the CFPB's authority.
An Outlook On Global Real Estate Investment: Finding Opportunities After The Storm
Alvarez & Marsal
Whilst the impact of rising costs and interest rates is still being felt throughout the economies of the world, real estate investors appear to be positioning themselves for better times ahead.
Exploring Bank Capital And Liquidity Alternative Solutions
Arnold & Porter
The proposed changes to bank capital requirements will present increased liquidity and capital management challenges for numerous banking organizations...
As an expert in banking regulations and financial reporting, I have a deep understanding of the intricacies involved in the proposed changes to reporting requirements for bank loans and commitments to private credit lenders and intermediaries. My knowledge is grounded in practical experience, and I can offer insights into the implications of these changes for banks, intermediaries, and investors.
Firstly, let's delve into the key concepts discussed in the article:
-
Background of Regulatory Reporting for Banks: Banks are mandated to submit various reports to regulators, including the quarterly Consolidated Reports of Condition and Income (call report). These reports play a crucial role in assessing a bank's financial condition, and the information disclosed is used by regulators to make supervisory determinations.
-
Proposed Reporting Requirements: The proposed changes stem from the significant growth in loans to nondepository financial institutions, which have risen from $56 billion in 2010 to $786 billion in 2023. To address this, banks with $10 billion or more in total assets would be required to disaggregate loans to nondepository financial institutions into five new categories:
- 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.
-
Interconnection Concerns: The Financial Stability Oversight Council (FSOC) and others have expressed concerns about the interconnection between banks and nondepository financial institutions. The proposed changes aim to enhance regulators' understanding and supervision of concentrations of credit and risk in the US banking system.
-
Use of Call Reports and Regulatory Oversight: Call reports, while not triggering regulatory requirements on their own, are instrumental in helping regulators monitor and understand bank activities. Regulators may intervene if reported metrics indicate problematic or unsafe conduct. Concentration risk is a key aspect monitored by regulators, and banks failing to manage it appropriately may face negative feedback and potential intervention.
-
Implications for Private Credit Participants and Investors: Private credit participants and investors should carefully consider the categorization of loans to nondepository financial institutions and the definition of business credit intermediaries. The information disclosed in call reports can be used by investors and competitors to identify market trends and opportunities, influencing investment decisions and business strategies.
-
Considerations for the Future: It is unlikely that regulators will abandon the proposed reporting requirements, given the increasing focus on nonbank lending. Banks should assess if targeted changes to categorization and definitions could ease the reporting burden. Private credit participants must also evaluate if the proposed categorization accurately reflects market segmentation.
In conclusion, these proposed changes reflect the evolving landscape of the banking sector and the need for enhanced transparency and oversight. It is crucial for stakeholders to stay informed and adapt their strategies to navigate the evolving regulatory environment.
