January 10, 2024 - The prudential bank regulators recently proposed revisions to depository financial institutions’ quarterly Consolidated Report of Condition and Income filings (i.e., call reports) to address an observed lack of granularity and inconsistency of reporting on loans to nondepository financial institutions (NDFIs). These filings are used by the regulators to inform monetary and public policy decisions.

The proposed revisions center on reclassifying and/or adding line items to capture, among other things, off balance sheet transactions, non-domestic office exposure and loan performance data, such as nonaccruals and delinquencies and would break out loans to mortgagers, commercial and consumer lenders and private equity funds. Certain items would apply only to banks with $10 billion or more in total assets.

From the regulators’ perspective, the proposed additional layer of reporting would allow for better analysis of bank financial statements and performance metrics as banks scale up exposure to NDFIs. Reported loans to NDFIs, which are defined in the proposal as a group of nonbanks including insurance companies, mortgage companies, private equity funds, hedge funds, broker-dealers, REITs, marketplace lenders, special purpose entities, and other financial vehicles, have increased from 0.8% of filers’ total loan exposure ($56 billion) in March 2010, when the regulators began collecting data on bank lending to NDFIs, to more than 6% of total loan exposure ($786 billion) as of June 2023. According to the proposal, “The revisions would group together loans exposures that exhibit similar underlying risk characteristics while addressing the diversity in practice on the reporting of these loans that exists today.”

Specifics of the recommended reporting clarifications aside, the proposal speaks to the heightened attention regulators are paying to the interconnection of nonbanks to the financial system. In November, the Financial Stability Oversight Council (FSOC), the interagency group charged with monitoring and assessing the stability of the U.S. financial system, finalized guidance that provides it with more flexibility to designate nonbanks as systemically important financial institutions and subject designees to supervision by the Federal Reserve. (FSOC is chaired by the Treasury Secretary; its members include the prudential bank regulators, the SEC, the CFTC, and other regulatory bodies.) We cover the guidance here.

Further, in its 2023 Annual Report released in December, FSOC notes that nonbanks’ role in providing financial services “is an important area to monitor for vulnerabilities and potential risks to the broader financial system,” and that it will “continue to assess and respond to potential risks posed by evolving nonbank activities.” The report specifically highlights potential risks tied to nonbank mortgage servicers and the growth in private credit, indicating that it supports “enhanced” data collection on nonbank lending to nonfinancial businesses to provide additional insight into the potential risks associated with the rapid increase in private credit.” 

The proposed revisions would take effect on June 30, 2024.

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