CSBS Issue Talking Points

CSBS Issue Talking Points

November 1 9 , 2021

These issue briefings provide CSBS talking points and positions on a range of issues. They are provided as a guide when discussing these issues with external audiences. They are intended to be used for background purposes and are not for distribution.

For questions, please contact:

Karen Lawson, Senior Vice President of Policy Klawson@csbs.org (202) 802-9547

Climate Risk Management

CSBS Position

In recent years, extreme weather events and societal transition to reduced carbon emissions caused multiple state and federal regulators to consider the impact of climate risk on the financial sector. Both state and federal regulators continue to educate themselves and their constituents on the subject to better understand climate risk and determine an appropriate action plan.

Summary

Climate-related financial risk falls under two categories: physical risk and transition risk. Physical risk exists when damage to property or assets is caused by an increase in the frequency and severity of weather events and long- term shifts in climate patterns. Transition risk arises from the potential for loss resulting from a shift toward a lower-carbon economy which can be driven by policy, technology advancements, and consumer sentiment. Climate risk management is a primary focus for many leaders across the financial services industry. In May 2021, President Biden issued an executive order directing financial regulators to analyze, assess and mitigate the risk climate change poses to the financial system. The Federal Reserve created two committees to identify and assess financial risks from climate change and develop an appropriate program to ensure the resilience of supervised institutions. Additionally, New York Department of Financial Services and Washington State Department of Financial Services have released guidance to their institutions outlining the different impacts of climate-related financial risk and the potential steps towards integration of climate into their risk management processes. On Oct. 21, 2021, the Financial Stability Oversight Council (FSOC) released a Report on Climate-Related Financial Risks. This report details current efforts of FSOC members to incorporate climate-related financial risks into their regulatory and supervisory activities and identifies areas where additional action may be needed. The recommendations in the report cover a wide range of topics, including education and awareness, reporting and disclosures, and data access and availability. Notably, the report recommends that financial regulatory agencies consider how they may incorporate climate-related financial risks into their supervisory programs. State regulators must remain involved in the development of policies addressing climate-related financial risks to promote the needs and perspectives of financial institutions and the communities they serve across the country. Federal regulators and policymakers have communicated considerable interest in developing an economic strategy to advance climate resilience in financial services and will move forward with or without the states. Why It Matters to State Regulators

Talking Points

• Climate risk is an emerging area of focus for many leaders across the financial sector. • State regulators continue to educate and enhance their familiarity with climate-related financial risk to fully assess the severity of the issue. • State regulators will continue robust coordination with their federal counterparts to appropriately address climate-related financial risk and ensure a more efficient and effective state regulatory system.

SME Contact: Camille Polson, Senior Analyst, Policy Development: 202-407-7165 or cpolson@csbs.org

Date Updated: October 2021

FOR STATE REGULATOR USE ONLY

Cybersecurity: Nonbanks

CSBS Position

The rise of nonbank cybersecurity risk is a concern to state regulators because of the potential harm to consumers and institutions. As a result, the CSBS Board of Directors approved nonbank cybersecurity supervision as a high priority by in March 2018 and included it in the 2021 Networked Supervision priorities. The Board also approved initiatives to support this position, including development of a nonbank cybersecurity exam program, cybersecurity and IT examiner training and a model data security law. Several trends occurring in the nonbank financial services industry have increased the need for robust cybersecurity and IT policies: a greater use and reliance on technology, nonbanks obtaining a larger percentage of industry market share and the possession of an ever-growing amount of consumer and business data. As these trends grow, so do the number and sophistication of cybersecurity attacks. According to recent congressional testimony, cyberattacks against the American financial sector increased by 238% in the first five months of 2020. In response, state regulators have issued and continue to develop supervisory solutions to ensure nonbank financial institutions have robust cybersecurity policies in place. Solutions available to state regulators include: • Baseline Nonbank Cybersecurity Exam Program: Focused on the critical parts of a cybersecurity program, this provides regulators a tool to examine the smaller, less complex nonbank institutions. • Enhanced Nonbank Cybersecurity Exam Program: This tool to examine larger nonbank institutions can be customized based on a set of core controls; an updated exam program will be released in early 2021. • CSBS Model Data Security Law: CSBS approved model statutory language to be used by state regulators wishing to address nonbank data security (cybersecurity). • Nonbank Ransomware Self-Assessment Tool, or RSAT: This ready-to-use tool can assess an organization’s efforts to control and mitigate risks associated with the threat of ransomware. As the primary regulator of nonbank financial institutions, state regulators have a responsibility to ensure these entities have robust cybersecurity policies and procedures. A security breach at a nonbank financial institution would lead to a loss of consumer information, disruption in business activities, and creates a reputational risk to state regulators. A high-profile security breach of a nonbank institution could also lead to calls for federal preemption. • Nonbank cybersecurity supervision was approved as a high priority by the CSBS Board of Directors in March 2018 and is included in the 2020 – 2023 CSBS Strategic Plan. • Robust cybersecurity and IT policies in the nonbank financial services industry are crucial in protecting companies and their customers; the need for these policies will only continue to grow. • State regulators have developed several tools (listed above) to ensure nonbank entities have the proper policies in place. • The risks of a cybersecurity breach include the loss of consumer information, disruption to business activities, reputational risk to state regulators and possibly federal preemption. Summary Why It Matters to State Regulators Talking Points

SME Contact: Mike Bray, Senior Manager, Nonbank Supervision & Enforcement: 202-559-1953 or mbray@csbs.org

Date Updated: January 2021

FOR STATE REGULATOR USE ONLY

Innovation

CSBS Position

The U.S. financial services marketplace is one of the most innovative and competitive in the world. In the past 25 years, state-regulated nonbanks have been responsible for significant innovations in financial services, including mobile payments, online lending, and electronic mortgage applications. States continue to promote safe innovation by strengthening consumer protection and risk management while minimizing regulatory burden for industry.

Summary

State regulators have pioneered the adoption of new regulatory technology and implemented innovative new cooperative agreements to reduce regulatory burden and streamline the licensing process for companies while creating supervisory efficiencies for regulators.

Why It Matters to State Regulators

Supporters of preemption and the OCC’s fintech charter often cite innovation and the need for more products and services for underserved consumers as reasoning for preemption. Supporters claim that state regulation hinders innovation. The reality is that states are laboratories of innovation, and the state system is directly responsible for much of the financial services innovation that we see today. The state system encourages new entrants and enables them to scale quickly, creating an innovation and competitive nonbank marketplace. • States support a diverse range of business models in financial services by aligning companies’ underlying business activity – rather than technology – with existing state law. • As of Q1 2021, a total of 142 state-licensed companies filed the Money Service Business (MSB) Call Report met the CSBS definition of a fintech company (multiple state licenses with two or fewer physical locations). • As of the end of July 2021, a total 71 companies acquired their first money transmission license. Thirty- three of those companies are licensed in only one state, 26 are now licensed in two to nine states and another 12 are licensed in 10 or more states. • State regulators protect consumers when companies exit the market. 30 companies that held money transmitter licenses in 2020 are no longer licensed as of the end of July. • In 2020, the six largest money transmitters moved 68% ($1.24 trillion) of the industry’s funds, leaving 300 companies competing for the remaining 32%. 214 of those companies make up the bottom 1% of the market. • In 2020, the top 10 mortgage companies were responsible for 26.5% of the market ($686 billion). The top 100 companies were responsible for 57.3% ($1.5 trillion). Total volume in 2020 was $2.6 trillion, leaving $1.1 trillion in volume for the remaining 14,084 companies. State collaboration and advancements in technology are making the state system more effective and reducing regulatory burden. • States are implementing a series of industry recommendations as part of CSBS’s Vision 20 20 initiative, including: o The Multistate Money Services Businesses Licensing Agreement (MMLA), which streamlines the money transmitter licensing process among 28 states, and o MSB Networked Supervision, which will allow 75+ MSBs to operate nationwide with just one comprehensive exam. Talking Points

FOR STATE REGULATOR USE ONLY

• States are building on the success of Vision 2020 with a strategy known as Networked Supervision that leverages technology, data and states’ collective knowledge to strengthen consumer protection and drive local and state economic growth. • The state system developed the NMLS in 2008 to license all nonbank mortgage and many other financial services; the NMLS is also used by the CFPB to register mortgage professionals working in banks and credit unions. • A regulatory platform built by the states, called the State Examination System, facilitates state interaction with license holders and fellow states through robust data management, risk scoping, collaboration tools and more. • States have dramatically ramped up their engagement with fintech companies; to simplify fintechs’ licensing process, every state in the country named an innovation point-of-contact for money transmission, payments and lending. • States are building on this engagement, including the Illinois Department of Financial and Professional Regulation, which established an Office of Innovation, and the Massachusetts Division of Banks which hosts regular webinars to discuss emerging fintech issues and offers Fintech Innovation Hours for banks and fintech firms to discuss financial technology with the Division’s leaders. • States are connecting virtual currency firms with consumers. In September, the Wyoming Division of Banking issued its first Special Purpose Depository Institution (SPDI) charter. The charter allows virtual currency firms to take deposits and conduct certain fiduciary activities. SPDIs are prohibited from making loans with customer deposits of fiat currency and therefore are not required to be FDIC insured. • States issue stand-alone virtual currency business licenses. The New York State Department of Financial Services has granted 25 virtual currency licenses since it introduced virtual currency regulation in June 2015, and Louisiana will soon begin issuing licenses pending the finalization of rules. The NYDFS has also proposed a conditional licensing framework for virtual currency that would allow new entrants to begin operating in the state by partnering with a current licensee. • States are enabling regulator-fintech collaborations. Through programs like the Independent Community Bankers of America and Little Rock Venture Center’s ThinkTech Accelerator program, and New York Department of Financial Services’ techsprint, state regulators are helping financial institutions, regulators and fintech firms work collaboratively to engineer new services and achieve accurate, real- time compliance validation. States are finding new ways to encourage responsible innovation in a rapidly changing financial services sector.

SME Contact: Laura Fisher, Vice President, Communications: 202-360-4918 or LFisher@csbs.org

Date Updated: July 2021

FOR STATE REGULATOR USE ONLY

LIBOR Transition

CSBS Position

Financial institutions should be prepared for the end of the London Inter-bank Offered Rate (LIBOR) by stopping the use of LIBOR in new transactions after Dec. 31, 2021. All contracts that reference LIBOR should have fallback language for when LIBOR is no longer available.

Summary

U.K. and U.S. regulators have announced that LIBOR will no longer be published after June 30, 2023. Financial institutions should have prepared for that event well in advance of the end date by identifying and quantifying all uses of LIBOR and remediating any contracts as necessary. U.S. bank regulators have announced that all financial institutions should stop using LIBOR in new transactions as soon as practicable and in any event by Dec. 31, 2021 to avoid risks to safety and soundness. New contracts written before Dec. 31, 2021 should either use a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation.

Why It Matters to State Regulators

LIBOR is used in many financial products, from adjustable-rate mortgages to trust preferred securities. Institutions will need to work with counterparties and service providers to avoid operational, financial and consumer protection risks. Litigation and reputation risk could be substantial for an institution that does not adequately prepare.

CSBS has issued three LIBOR fact sheets:

• Fact Sheet, June 2018 raises awareness of the issue • Fact Sheet II, February 2019 discusses fallback language and AARC activities • Fact Sheet III, October 2019 includes a checklist for financial institutions and a companion job aid for examiners to use when evaluating how an institution is managing the transition

Timeline

• FSOC that regulators and market participants identify alternative benchmarks in 2014; the Alternative Reference Rates Committee (ARRC) was established in response. • The Future of LIBOR speech by Andrew Bailey of the UK Financial Conduct Authority (FCA) in July 2017 announced the end of LIBOR www.fca.org.uk/news/speeches/the-future-of-libor • FFIEC issued a statement July 2, 2020 that highlights the risks that will result from the transition away from LIBOR, and encouraged supervised institutions to continue their efforts to transition to alternative reference rates in order to mitigate risks • The UK authority that publishes LIBOR - the Intercontinental Exchange - announced on Nov. 30, 2020 its intention to cease the publication of one week and two-month LIBOR on Dec. 31, 2021. The other tenors of U.S. dollar LIBOR: overnight and one, three, six and twelve-month U.S. dollar LIBOR will continue to be published until June 30, 2023. • Also on Nov. 30, 2020 the ICE Benchmark Administration (IBA) and the FCA issued announcements about the proposed path forward for the transition away from U.S. dollar LIBOR. This was accompanied by an associated statement by the International Swaps and Derivatives Association (ISDA) . • ICE also announced its intention to end the publication of all GBP, EUR, CHF and JPY LIBOR settings on Dec. 31, 2021. The consultation on these intentions is open for feedback until Jan. 31, 2021. The ICE Benchmark Administration will make statements about these intentions after the consultation is closed. • The Federal Reserve, FDIC and OCC issued a statement on Nov. 30, 2020 referencing the ICE consultation and urging that all institutions stop writing contracts that use U.S. dollar LIBOR as soon as possible, but in any event by Dec. 31, 2021. The extension of LIBOR publication until June 30, 2023 would allow for some legacy contracts written using LIBOR to mature before publication ends. FOR STATE REGULATOR USE ONLY

• On March 5, 2021, the ICE Benchmark Administration Ltd published results of their consultation last year about the end of LIBOR. It confirms the previously announced dates for the cessation of LIBOR. • In April 2021, New York and Alabama passed legislation that addresses LIBOR cessation in contracts without appropriate fallback to another rate. The legislation also provides a safe harbor for contract parties that select SOFR as the replacement rate for LIBOR. 1. ARRC website www.newyorkfed.org/arrc 2. SOFR website https://apps.newyorkfed.org/markets/autorates/sofr 3. FCA website www.fca.org.uk/ 4. ICE website https://ir.theice.com/home/default.aspx 5. ICE Benchmark Administration Limited (IBA) launched a webpage ICE LIBOR (theice.com) to provide a comprehensive overview of all of IBA’s solutions designed to help stakeholders prepare for the transition to new U.S. Dollar interest rate benchmarks

Reference Material

SME Contact: Daniel Berkland, Director, Supervisory Processes: 202-559-1987 or DBerkland@csbs.org

Date Updated: August 2021

FOR STATE REGULATOR USE ONLY

NMLS Modernization

CSBS Position

CSBS is committed to providing state regulators with robust tools and technology that will enable them to manage nonbank supervision more efficiently. As the nonbank financial services industry continues to grow, the need for more sophisticated, data-driven technology systems is vital. Building a modernized Nationwide Multistate Licensing System (NMLS) will help us accomplish this goal as we drive toward Networked Supervision.

Summary

The next generation nationwide multistate licensing and supervisory technology system is being developed to anticipate and accommodate the evolving needs of the state system of financial regulation. CSBS’s goal is to build a new system that:

• Empowers state authority through data-driven solutions • Promotes efficient operations and networked supervision among regulators • Creates an optimized user experience

The modernized NMLS will employ a new licensing requirements framework that creates efficiencies for both state regulators and industry and supports Networked Supervision. With this new framework, state regulators will move away from managing the licensing process based on state-specific requirements and instead follow agreed upon standard requirements. This standardized approach will be established and implemented first for the money services business industry (MSB). The debt, consumer finance and mortgage industries will transition to the modernized NMLS in phases. The modernized NMLS will be data-driven and use analytics to automate processes, identify risks, prioritize resources and provide reports and visualizations for decision making. This functionality will allow states to manage annual license renewals based on exceptions and risks. In addition, the State Examination System will share and coordinate examination schedules to limit examinations through multiple agency participation or post-examination sharing. State regulators are the primary stakeholders of the modernized NMLS. State regulators, with CSBS support, will take the lead in determining and adopting standard requirements for the new licensing framework. State regulators will also drive internal changes to their existing licensing process and may influence changes to their state laws in preparation for a modernized NMLS. Consistent with networked supervision, the new NMLS will: • Include a single source of standardized data that all regulators require • Support interdependent reviews by state agencies based on uniform standards that allow agencies to rely on another agency’s work • Use common nationwide licensure and compliance thresholds by industry • A modernized NMLS will benefit for both state regulators and industry: o State agencies will experience greater operational efficiencies, including the ability to rely on another agencies’ work . o Industry will have a more streamlined, user-focused experience as they go through the state licensing process. • Development for the modernized NMLS began in 2021 and will focus initially on the MSB industry, the first industry to transition to the modernized NMLS. • CSBS staff will support state regulators as they collaborate to establish, define and implement standardized licensing requirements that will drive how the licensing process is managed in the modernized NMLS. FOR STATE REGULATOR USE ONLY Development for the modernized NMLS began in 2021. Why It Matters to State Regulators Talking Points

• CSBS staff are reaching out to state agencies to gain commitments for MSB industry licensing requirements adoption based on the Money Transmitter Model Law, which establishes a national standard.

SME Contact: Vonnetta Cornish, Senior Manager, NMLS Communications: 202-728-5752 or vcornish@csbs.org

Date Updated: September 2021

FOR STATE REGULATOR USE ONLY

Ransomware

CSBS Position

Ransomware has become the most visible cyber threat to our nation’s networks. While financial institutions have implemented good cybersecurity practices, the rapid advancements in ransomware and its potentially devastating consequences require that every financial institution review and update its controls. We continue to work with the state regulators and industry to ensure that resources are made available to assist with mitigating this risk. CSBS has partnered with the U.S. Secret Service and Bankers Electronic Crimes Taskforce to issue ransomware self-assessment tools for state regulators to share with banks/nonbanks they supervise.

Summary

During 2020, ransomware events shifted from encrypting data in place to include exfiltration and public shaming to ensure payment. CSBS initiated a Ransomware Campaign that consisted of three goals:

1. Issue tools for state bank regulators 2. Provide tools to improve community banking industry security against ransomware 3. Host tabletop exercises for industry

In May 2020, CSBS issued a Ransomware Playbook for state bank regulators to assess a ransomware event impacting one of their supervised institutions intended as a resource to allow state regulatory staff to collect appropriate information and document the situation. The playbook is an assessment tool for senior staff or lead IT Examiners when an institution reports a ransomware event. In October 2020, CSBS joined with the Bankers Electronic Crimes Task Force and the U.S. Secret Service to issue a Self-Assessment Tool (R-SAT) in an effort to help mitigate ransomware attacks. The R-SAT has 16 questions designed to help financial institutions assess their efforts to mitigate risks associated with ransomware and identify gaps for increasing security. The document provides executive management and the board of directors with an overview of the institution’s preparedness towards identifying, protecting, detecting, responding and recovering from a ransomware attack. In December 2020, CSBS and the U.S. Secret Service issued a similar self-assessment resource for nonbank financial institutions.

Why It Matters to State Regulators

State regulators offered this tool because the rapid advancements in ransomware and potentially devastating consequences to their financial institutions. There is no single measure to prevent successful ransomware attacks. It requires strong adherence to fundamental cybersecurity controls but, some measures are very important: strong backup practices and the use of Multi-Factor Authentication.

Talking Points

• Incidents of ransomware across industries have been on the rise and appear to be spreading. One global cyber insurer reported 775 ransomware incidents for its U.S. customers in 2019, representing a 131% increase from the year prior. Eleven percent of those customers were financial institutions. • By using the R-SAT, an institution (bank or nonbank) can assess its efforts to control and mitigate risks associated with the threat of ransomware and identify gaps that require increased security.

SME Contact: Mary Beth Quist, Senior Vice President, Bank Supervision: 202-728-5722 or mbquist@csbs.org

Date Updated: January 2021

FOR STATE REGULATOR USE ONLY

Small Business Data Collection

CSBS Position

State regulators believe the implementation of the Dodd- Frank Act’s small business lending data collection requirements should be tailored to ensure the requirements do not have a disproportionately negative impact on community banks or disrupt small business lending in local communities.

Summary

Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act and granted the Consumer Financial Protection Bureau (CFPB) the authority to collect data on applications for credit by small businesses. Section 1071’s purposes are to: (1) facilitate enforcement of fair lending laws; and (2) enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, small businesses. The statute required the CFPB to collect a set of mandatory data points and provided the authority to collect other data points that are necessary to achieve the purposes of the statute. The CFPB, under the Obama and Trump administrations, was slow to implement the DFA 1071 requirements. Rulemaking is now moving forward following the settlement of a lawsuit in U.S. court in which plaintiffs sought to prove that the CFPB had violated the Administrative Procedures Act by failing to issue a regulation to implement 1071 in a timely manner. Under the agreement, the CFPB agreed to release an outline of a regulatory proposal to implement 1071 (which it did in September 2020), establish a Small Business Regulatory Enforcement Fairness Act panel (which it did in October 2020), negotiate deadlines for each additional step in the rulemaking process and issue periodic progress reports on rulemaking to the court. On September 1, 2021, the CFPB finally issued a notice of proposed rulemaking. Comments are due January 6, 2022, and CSBS is currently working on analyzing the proposal. Community banks hold a relatively small percentage of total industry assets but are responsible for a large share of small loans to businesses. A lack of transparency regarding how the small business loan data will be used in the examination or compliance assessment process could cause banks to reduce their small business lending. State regulators are concerned that the new data collection requirements could impose disproportionate compliance costs on smaller financial institutions. In sum, while the CFPB is required to promulgate rules under Dodd-Frank as well as pursuant to the terms of a settlement, the proposed data collection requirements should be tailored to the community bank business model. • After being stalled for multiple years, rulemaking on DFA 1071 small business reporting requirements is moving forward due to a court-mandated agreement. A proposed rulemaking was issued on September 1, 2021, and state regulators are currently assessing the scope and impact of the proposal. • We’ll closely monitor and will assess the proposed rulemaking to ensure it does not impose a disproportionate burden on smaller institutions. • Small business lending is highly individualized; underwriting and loan pricing depend on many heterogeneous variables that are difficult to capture in a standardized dataset. Why It Matters to State Regulators Talking Points

SME Contact: Alisha Sears, Senior Analyst, Policy Development: 202-759-9403 or asears@csbs.org

Date Updated: October 2021

FOR STATE REGULATOR USE ONLY

State Examination System

CSBS Position

State regulators have a goal of an integrated, 50-state system of licensing and supervision called Networked Supervision. The State Examination System (SES) is a software system created by CSBS to hasten the realization of this goal. Launched in October 2019, SES provides an efficient and secure platform for states to conduct exams, investigations and complaints in a collaborative, networked manner that preserves state control over information sharing. Through SES, state regulators have a powerful tool to bring uniformity, efficiency and a less burdensome supervisory process for companies that ensures the state system remains the chosen environment for financial service providers. SES is an end-to-end system. Examiners can use it to schedule the exam, create the scope, prepare and send information requests, receive information request responses, create the exam plan, conduct reviews with exam procedures, build the report of examination and track ongoing issues. With complaints, agency users can intake a complaint they receive, transmit it to the company and review company responses in the system. Industry users can use SES to efficiently exchange data and documentation for that exam or complaint. While SES is built to support nonbank supervisory activities, the system could be modified to support bank examinations if agencies need such a system in the future. SES is a no-cost solution to a common agency problem: lack of a single platform for their exams, investigations, complaints and other supervision work. SES solves that problem and takes it further by allowing agencies to leverage the work already done by one regulator, or network, and utilize it to complete their own supervision responsibilities Further, SES improves intra-agency information sharing, i.e., the information shared within state agencies. Staff responsible for the licensing functions should have access to the information generated through the supervisory function of the agency and vice versa. Picking up where a previous regulator left off allows the incoming regulator to focus on new risks or follow-up on risks already identified. SES allows for partnering with other state agencies on supervisory activities as much as possible, which will reduce regulatory burden for companies that are supervised by more than one agency. Having a view into the supervisory findings from one agency will allow another agency to better allocate resources and schedule their own supervisory activities. State regulators will also share exam manuals and procedures which will help drive uniformity and consistency across the states. • By mid-2021, 49 state agencies had onboarded to SES, and over 1,300 exams were conducted or were underway. • SES expanded in late 2020 to offer complaints processing and handling services, now used by 14 agencies; by mid-2021, over 1,000 complaints had been handled through the system. • The states’ Networked Supervision goals are furthered by adoption of SES, as it brings agencies onto a single, more uniform platform on which to conduct their supervision activities. • The mortgage One Company, One Exam program is being conducted on SES, with over 70 examiners participating from 36 agencies. • CSBS continues to create a common core of regulatory materials that can be integrated into the SES platform and shared across all states, including information requests, procedures and work programs. Summary Why It Matters to State Regulators Talking Points

SME Contact: Kyle Thomas, Vice President, Business Services: 202-407-7131 or KThomas@csbs.org

Last Updated: September 2021

FOR STATE REGULATOR USE ONLY

State Regulatory Experience in Federal Agency Leadership

CSBS Position

CSBS strongly believes state regulators’ unique perspectives are a foundational piece of the federal financial regulatory fabric. Federal law requires state regulatory representation as part of federal agency leadership, such as the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve Board. Congress also recognized the importance of state regulatory participation in interagency policy forums, such as the Federal Financial Institutions Examination Council (FFIEC) or Financial Stability Oversight Council (FSOC). Unfortunately, recent appointments to the FDIC Board have not met the letter or the spirit of the law. CSBS uses a variety of advocacy approaches, through commissioners and CSBS staff, to try to influence the White House, Senate leadership and other stakeholders on the need to meet the Federal Deposit Insurance Act’s requirement that at least one FDIC Board member have state bank supervisory experience. Congress has long recognized the key role and unique insight of state regulators and the value they provide as federal agency leaders. Over the years, Congress has passed into law measures that ensure state regulators serve on the FDIC Board or as governors of the Federal Reserve. Congress also has provided state regulators with responsibility for federal policy in interagency contexts, such as the FFIEC’s State Liaison Committee or FSOC’s non -voting state banking member. Despite clear congressional intent, implementation of these legal requirements can be inconsistent. For example, the FDIC Board has not included a member with “ State bank supervisory experience ” since 2012, when the White House and Congress stretched this language to say a former Federal Reserve Bank president met this requirement by having supervised state member banks. In past Congresses, CSBS has supported bipartisan, bicameral legislation that would clarify the need for a state bank regulator on the FDIC Board. Summary

Why it Matters to State Regulators

Stat e regulators charter and supervise nearly 80% of the nation’s banking industry (including the vast majority of community banks) and serve as the primary regulators of nonbank financial services companies. Their insight is critical in understanding how federal regulations impact local institutions and credit markets.

Talking Points

• Congress has long promoted state regulators' membership in interagency bodies and leadership at federal agencies; however, congressional intent and historic precedent are not always followed, leaving out the critical perspective of state regulators in federal policymaking. • The Administration and Congress must ensure state regulators’ vital voice is included in federal agency leadership. • The FDI Act requires that one member of the FDIC Board have state bank supervisory experience. The letter and the Congressional intent behind the law are clear: this requirement can only be met with an individual who has worked in state government as a state regulator of state-chartered banks.

SME Contact: Camille Polson, Senior Analyst, Policy Development: 202-407-7165 or cpolson@csbs.org

Date Updated: February 2021

FOR STATE REGULATOR USE ONLY