FDIC Proposes Regulations to Provide Parity With National Banks

On September 22, the FDIC published in the Federal Register a notice of proposed rulemaking to amend the FDIC’s regulations implementing Section 24(j) of the Federal Deposit Insurance Act (FDI Act) to clarify the application to a state bank of certain state laws with respect to services provided by the state bank outside of its home state. Section 24(j) of the FDI Act was originally enacted as part of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Riegle-Neal Act) and later amended by the Riegle-Neal Amendments Act of 1997 to preempt the application of certain host state laws to a branch of a state bank operating in the host state. This provision of the FDI Act states that the laws of a host state apply to any branch in the host state of an out-of-state state-chartered bank to the same extent as such state laws apply to a branch in the host state of an out-of-state national bank. The proposed rule would clarify that, for purposes of Section 24(j), the laws of a host state, including laws regarding community reinvestment, consumer protection, fair lending, and establishment of intrastate branches, apply to any branch in the host state of, or any services provided in the host state by, an out-of-state state-chartered bank to the same extent as such state laws apply to a branch in the host state of, or any services provided in the host state by, an out-of-state national bank. Another provision in the Riegle-Neal Act defines a “host state” as a state, other than the bank’s home state, in which the bank maintains, or seeks to establish and maintain, a branch, but the proposed rule would state that a “host state” refers to a state, other than the home state of a state bank, in which the state bank maintains a branch or provides services. The proposed rule would clarify that, to the extent a host state’s law is inapplicable to an out-of-state state-chartered bank pursuant to Section 24(j) of the FDI Act, as interpreted by the FDIC, the laws of the bank’s home state are applicable. The release that accompanied publication of the proposed rule in the Federal Register states that the FDIC has statutory authority to issue regulations to define terms as necessary to carry out the provisions of the FDI Act and explains that the FDIC believes that Section 24(j) of the FDI Act “must be read in the context of the statutory framework” created by the 1997 amendments to the Riegle-Neal Act which were intended “to reestablish parity between interstate State banks and interstate national banks.” The FDIC also clarified that the proposed rule would not constitute a determination by the FDIC that any particular host state law is preempted by federal law. Comments on the proposed rule are due by November 23.

On September 22, the FDIC published in the Federal Register a notice of proposed rulemaking that would revise the agency’s procedural and review processes under the Bank Merger Act (BMA). The FDIC expects the proposed rule to improve the speed, certainty, and predictability of their bank merger processes. The proposed rule would establish procedures and timelines for substantial completeness determinations; create new rapid processing procedures for “de minimis merger transactions” (a new category of transaction that would include qualifying corporate reorganizations and non-affiliate transactions); expand eligibility for expedited processing for certain other corporate reorganizations and non-affiliate transactions; tailor standard application processing timelines; clarify what constitutes a “merger in substance”; establish a new notice and non-objection process for “significant asset transfers”; limit discretion to remove an application from expedited processing; and codify the agency’s approach to evaluating the BMA’s statutory factors, including a tailored review of the facts and circumstances of a transaction, such as its structure, scale, materiality, and plans to remediate any previously unresolved deficiencies, as well as competition evaluations such as by establishing HHI screen safe harbors and by including shares of credit unions in the initial HHI screen. Comments are due by November 23.

On September 24, the Federal Reserve issued two notices of proposed rulemaking related to implementation of the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act). The first proposed rule (Applications Rule) would establish procedures for an insured state member bank to seek approval from the Federal Reserve for a subsidiary to become a permitted payment stablecoin issuer (PPSI). The second proposed rule (Framework Rule) would establish a regulatory framework consistent with the requirements of the GENIUS Act to regulate PPSI subsidiaries of insured state member banks and state-chartered depository institutions that are state qualified payment stablecoin issuers that have transitioned to federal oversight under Section 4(d) of the GENIUS Act or are seeking a waiver from the requirement to transition to federal oversight.

The Framework Rule would establish rules applicable to Federal Reserve-supervised PPSIs, including with respect to permissible and prohibited activities, required reserve assets, redemptions and fees, audits and reports, capital standards, custody, and other matters. The Framework Rule would also address certain requirements that may apply upon a proposed change in control of a Federal Reserve-supervised PPSI.

The Framework Rule would amend the Federal Reserve’s Regulation Y under the Bank Holding Company Act of 1956 (BHC Act) to address the authority of a bank holding company to make controlling investments in certain PPSIs and to engage in certain digital asset-related activities. These revisions would confirm that a bank holding company may, without prior Federal Reserve approval, indirectly own the equity securities of a PPSI that is controlled by the bank holding company’s subsidiary insured depository institution, provided that such insured depository institution has received the prior approval of the appropriate federal banking agency. Also, a banking holding company would be permitted, without prior Federal Reserve approval, to own the equity securities of other PPSIs that are of the kinds and amounts explicitly eligible by federal statute for investment by a national bank in reliance on Section 4(c)(5) of the BHC Act provided that the bank holding company controls the PPSI. The Framework Rule would clarify that a bank holding company may, in connection with the payment stablecoin activities and investments contemplated by the GENIUS Act or other permissible activities and investments, (i) act as principal or agent with respect to any payment stablecoin; (ii) pay fees to facilitate customer transactions; (iii) pay fees and undertake other activities as necessary to conduct testing on distributed ledger-based platforms; and (iv) hold as principal non-payment stablecoin digital assets necessary to conduct the activities described in (ii) or (iii), provided that such principal holdings would not be permitted to exceed quantities reasonably expected to be necessary to meet near-term demand for the conduct of such activities. A savings and loan holding company could also rely on these authorities under Section 16(d) of the GENIUS Act and Section 10(c)(2)(F)(i) of the Home Owners’ Loan Act of 1933, as implemented by the Federal Reserve’s Regulation LL, but the proposed Framework Rule does not explicitly address the extent to which the procedural requirements of Regulation LL may apply to the conduct of such activities.

The Federal Reserve has proposed implementing through the Framework Rule the prohibition on tying in section 4(a)(8) of the GENIUS Act, which would apply to all PPSIs regardless of their primary federal or state regulator. These rules would prohibit a PPSI from providing services to a customer on the condition that the customer (i) obtain an additional paid product or service from the PPSI, or any of its subsidiaries, or (ii) agree to not obtain an additional product or service from a competitor of the PPSI. With respect to a non-financial services public company that has been authorized to issue stablecoins by the Stablecoin Certification Review Committee pursuant to Section 4(a)(12) of the GENIUS Act, neither the company nor its affiliates may provide services to a customer on the condition that the customer (i) obtain an additional paid product or service from the company or its affiliates, or any subsidiary of the company or its affiliates, or (ii) agree to not obtain an additional product or service from a competitor of the company or its affiliates. The Framework Rule would establish a procedure for the Federal Reserve to grant exceptions from these limitations.

Comments on both the Applications Rule and the Framework Rule must be submitted by November 30.

On September 30, the Federal Reserve announced the finalization of two rules intended to enhance transparency and accountability and to reduce capital volatility. It also seeks public comments regarding proposed additional revisions to the 2027 stress test models.

The first final rule requires the Federal Reserve to invite public input annually on the stress test scenarios and material model changes. It also amends the Policy Statement on the Scenario Design Framework for Stress Testing and the Stress Testing Policy Statement relating to the content of the results disclosed to firms. It also adjusts the global market shock component, stress test calendar, and FR Y-14 reports, and announces final models for the 2027 stress test. The final rule is effective 30 days after publication in the Federal Register.

The second final rule modifies the Federal Reserve’s stress capital buffer requirements by averaging the stress capital declines projected in each of the prior two annual supervisory stress tests to determine the applicable stress capital buffer requirement. The rule also modifies the annual effective date from October 1 to January 1 and FR Y-14 reporting relating to the stress capital buffer requirement. The final rule is effective 60 days after publication in the Federal Register, and results averaging will begin starting with the stress capital buffer requirements effective on January 1, 2029.

Consistent with the foregoing developments, the Federal Reserve also seeks public comment on proposed model changes for the 2027 stress test and proposed changes to the FR Y-14 report, including a revision to the noninterest income model. Comments are due 60 days after publication in the Federal Register.