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Happy Holidays from ICBA
As 2013 comes to an end, ICBA thanks all of its members for their support and wishes everyone a happy holiday season. ICBA offices will be closed Dec. 23-25 and Jan. 1, and ICBA NewsWatch Today will resume publication on Monday, Jan. 6.
Volcker Rule
ICBA Remains Deeply Concerned with Volcker Rule Despite Agency Document
ICBA said it remains deeply concerned with Volcker Rule provisions that could cause many community banks to have to write down their holdings of collateralized debt obligations (CDOs) backed by trust-preferred securities (TruPS). Despite the release by federal banking regulators of frequently asked questions on the regulatory treatment of TruPS CDOs, there are many underlying questions that remain unanswered for community banks that could potentially be affected by the rule, ICBA said in a national news release.

Under the regulators’ frequently asked questions released yesterday, the agencies outline the questions many community banks should consider in determining whether they will be forced to divest their TruPS CDOs under the Volcker Rule. The document discusses whether TruPS CDOs are “covered funds” prohibited by the rule or can be restructured to not be considered covered funds. It also discusses whether investment in a TruPS CDO constitutes an ownership interest in a covered fund.

The agencies said the FAQs are intended to clarify that banking entities that have holdings in TruPS CDOs are not required to sell these holdings immediately under the final rules, but instead may use the conformance period to determine if they can be brought into conformance by the end of the period, which is July 21, 2015. However, ICBA said the document is not a permanent solution for community banks potentially affected by the Volcker Rule.

Regulators last week issued final regulations implementing the Volcker Rule, which bars depository institutions and their affiliates from engaging in short-term proprietary trading for their own account. It also prohibits these institutions from owning, sponsoring or having certain relationships with hedge funds or private equity funds.

While the Volcker Rule includes some key community bank exemptions, it also indicates that CDOs backed by TruPS could be considered prohibited by the rule. This would require all banks, including community banks, to divest their holdings of CDOs backed by TruPS by July 2015 and to immediately recognize the impairment, before year-end 2013, under “other than temporary impairment” accounting standards. If community banks are forced to write these investments down, they may have to do so at “fire sale” prices that would result in a permanent loss of capital, rather than holding these investments to maturity.

The FAQ released yesterday follows repeated ICBA calls for the banking agencies to address the implications of the CDO TruPS issue. ICBA also this week called on Congress to seek the proper fix to the TruPS provision and, if necessary, to hold committee hearings on the issue and on community bank concerns.

Several lawmakers have responded with letters to the agencies urging a solution, including House Financial Services Committee Chairman Jeb Hensarling (R-Texas) and Subcommittee on Financial Institutions and Consumer Credit Chairman Shelley Moore Capito (R-W.Va.); Senate Banking Committee Ranking Member Mike Crapo (R-Idaho); Sens. Joe Manchin (D-W.Va.), Roger Wicker (R-Miss.) and Mark Kirk (R-Ill.); and the Indiana and Mississippi congressional delegations, which consist of 17 members of Congress.

ICBA will continue working with the regulators and Congress to address the issue. Read the Agency FAQs. Read ICBA Release.

Target: 40 Million Card Accounts Compromised by Card Breach
Target confirmed that payment card data of approximately 40 million customers might have been breached between Nov. 27 and Dec. 15. The retail giant said unauthorized access to payment card data might have affected customers making credit and debit card purchases in its U.S. stores.

Target said in a message to customers that the information involved in this incident included customer name, credit or debit card number, and the card’s expiration date and three-digit security code. Customers who shopped on Target.com or in Canada were not affected, the Minneapolis retailer said.

According to news reports, the breach involved virtually all of Target’s nearly 1,800 U.S. stores. Investigators believe the customer data was obtained from software installed on point-of-sale terminals that retrieved information from payment card magnetic stripes.

Target said it is working closely with law enforcement and financial institutions and has identified and resolved the unauthorized intrusion. The retailer said it alerted authorities and financial institutions immediately after it was made aware of the unauthorized access and is working with a third-party forensics firm to investigate the incident. Target encouraged customers who have discovered suspicious or unusual activity on their accounts or who suspect fraud to report it immediately to their financial institutions.

MasterCard has begun distributing Card Alert files, and Visa is expected to do so in the next day or so. In the interim, banks may be able to obtain a report from their processor(s) of accounts that transacted at Target during the Nov. 27-Dec. 15 timeframe.

ICBA encourages community banks to carefully consider the decision to reissue cards and to take into account the following factors before doing so:
  • whether to consolidate the multiple card alert files to eliminate submitting multiple files and incurring additional expense;
  • card reissuance costs, which include a fee per card type to create new card records, card-production fees and letters;
  • whether there is enough custom card stock to meet the reissue order (ordering new inventory can take eight to 12 weeks); and
  • the reissuance impact to cardholders during the peak holiday season.
The association also suggests that banks notify their cardholders of the event if and when they have identified cardholder records that have been affected.

ICBA Bancard and Visa offer communications best practices on data breaches in their “Understanding a Data Compromise and How to Respond” guide. ICBA will continue monitoring this case and report additional information as it is available. Read Target Statement and Message to Customers.

Go Local
ICBA Announces Main Street Holidays Facebook Contest Winner
The winner of ICBA’s first Main Street Holidays Facebook photo contest is Bank of Missouri in Perryville, Mo. The winning photo had the most Facebook likes from Monday, Dec. 16, through 9 a.m. (Eastern time) today.

Bank of Missouri’s photo of Main Street Cape Girardeau, Mo., had more than 1,500 likes on ICBA’s Facebook page during the week. The other top five finalists included Paducah Bank, 1st Bank of Sea Isle City, City Bank and Trust Co., and First Federal of Northern Michigan.

Bank of Missouri won a $300 gift card for a local charity in its area. View the Winning Photo. View the Album of Finalists. Read ICBA Release.

ICBA Urges Congressional Action on Patent Abuse
ICBA this week pressed for Congress to advance measures that will protect community banks from patent-assertion entities, which assert infringement of business-method patents of dubious quality by legitimate businesses. In a statement for the record for a Senate Judiciary Committee hearing and in a coalition letter to Senate Commerce Committee leaders, ICBA called for initiatives to address demand letters and indemnify end users.

ICBA noted that community bankers have increasingly received vaguely worded demand letters from PAEs claiming patent infringement. To address this issue, ICBA urged Congress to pursue legislation that would strengthen demand letter transparency by requiring PAEs to provide minimum disclosures to better identify themselves, the patent in question and the specific nature of the infringement they allege.

ICBA also wrote that community banks, as end users of products and services often bought “off the shelf” from vendors, should not be on the hook for PAE infringement claims. Congress should amend current law to ensure that vendors that sell products or services to community banks provide the appropriate warranties and indemnification to protect the end users from patent-infringement claims, ICBA said.

Additionally, ICBA and a coalition of other trade groups advocated patent-reform legislation to address problems with patent-assertion entities. In a joint letter to Sen. Charles Schumer (D-N.Y.), the coalition expressed support for his legislation to improve the post-grant review process for covered business methods established under the America Invents Act. The Patent Quality Improvement Act of 2013 (S. 866) would make the program permanent to ensure that that full spectrum of low-quality business-method patents will be subject to review if asserted under the threat of litigation.

The coalition also expressed its support for legislation introduced by Sen. Orrin Hatch (R-Utah) to enable fee shifting in unsuccessful patent-infringement lawsuits, or allowing the court to award the prevailing party reasonable fees and other expenses. By allowing fee shifting, the Patent Litigation Integrity Act of 2013 (S. 1612) would help discourage PAEs from filing frivolous lawsuits, the coalition wrote.

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Agencies Release Annual CRA Asset-Size Adjustments
Federal regulators announced the annual adjustment to the asset-size thresholds used to define certain institutions under Community Reinvestment Act regulations.

"Small bank" or "small savings association" means an institution that, as of Dec. 31 of either of the prior two calendar years, had assets of less than $ 1.202 billion. "Intermediate small bank" or "intermediate small savings association" means a small institution with assets of at least $300 million as of Dec. 31 of both of the prior two calendar years, and less than $1.202 billion as of Dec. 31 of either of the prior two calendar years.

These asset-size threshold adjustments are effective January 1, 2014. Read More from the Agencies.

Regulators Propose Supplemental Guidance on Income Tax Allocation
Federal banking regulators are seeking comment on supplemental guidance on income tax allocation agreements involving holding companies and insured depository institutions. The proposed guidance is intended to reduce confusion regarding ownership of tax refunds.

The proposed guidance would supplement regulators’ 1998 policy statement by instructing insured depository institutions and their holding companies to review their tax allocation agreements to ensure the agreements expressly acknowledge that the holding company receives any tax refunds as an agent. Additionally, all banking organizations would be asked to insert specific language in their tax allocation agreements to further clarify tax refund ownership.

Comments on the proposed guidance are due by Jan. 21. Read More from the Agencies.

OCC: Industry Risks Elevated Amid Slow Growth, Low Interest Rates
National banks and federal savings associations face risks as they seek to improve profits amid slow economic growth and a prolonged low-interest-rate environment, the Office of the Comptroller of the Currency reported. The OCC’s semiannual assessment of risk finds that banks are layering risk back into the system in ways that are difficult to quantify, which is why risk management must remain a top priority.

According to the report strategic risk remains elevated as many banks re-evaluate their business models, cyber-threats are growing in sophistication and frequency, competition for limited lending opportunities is intensifying, Bank Secrecy Act and anti-money-laundering risks continue to rise, and price volatility remains low. Read the Report.

Fed: Credit, Debit Cards Account for Two-Thirds of Noncash Payments
Credit and debit card payments now account for more than two-thirds of all noncash payments, while the number of checks paid continued to decline, according to the 2013 Federal Reserve Payments Study. The total number of noncash payments, excluding wire transfers, grew by 4.4 percent annually from 2009 to 2012, which was down slightly from the 4.7 percent rate of 2003-12.  Credit card payments grew at an annual rate of 7.6 percent, and debit card payments were up 7.7 percent over the same period. Read More from the Fed.

Regulators Extend Comment Period for Proposed Diversity Policy Statement
Federal financial regulators extended the comment period for their proposed policy statement for assessing diversity policies and practices of the institutions they regulate. The agencies extended the deadline from Dec. 24 to Feb. 7. The proposed policy statement is intended to promote transparency and awareness of diversity policies and practices within federally regulated financial institutions.

Take This Week’s Quick Poll
Take this week’s Quick Poll on arbitration clauses, and view results from the previous poll on new bank charters. View the Archive.

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