BPInsights: April 15, 2019

BPInsights: April 15, 2019

TOP OF THE AGENDA

Federal Reserve Issues Foreign Bank Tailoring Proposal

On April 8, the Federal Reserve issued a proposal to tailor prudential standards for foreign banking organizations (FBOs) operating in the United States. As anticipated, the tailoring framework set forth in the proposal is largely consistent with and uses the same set of asset and risk-based indicator thresholds as the framework proposed for domestic bank holding companies earlier this year. The proposal generally measures a foreign bank’s U.S. footprint by assessing its combined U.S. activities (CUSO), defined as an FBO’s intermediate holding company (IHC) and all U.S. branch and agency offices.

Of note, the proposal neither alters the IHC structural requirement, which still applies to any FBO with non-branch U.S. assets of $50 billion or more, nor recalibrates the level of internal TLAC required of U.S. IHCs of non-US GSIBs. The proposal, which would for the first time apply liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) requirements to IHCs without a U.S. depository institution subsidiary, also contains a request for feedback on whether the Federal Reserve should impose standardized liquidity requirements, like LCR and NSFR, on U.S. branch and agency offices currently subject only to non-standardized internal liquidity stress buffer requirements.

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Bank CEOs Highlight Regulatory Improvements, Industry Condition in House Hearing

The CEOs from the nation’s largest banks testified before the House Financial Services Committee on April 10 to update lawmakers on regulatory improvements made in the past 10 years. The hearing was an opportunity for a segment of the banking industry to highlight regulatory improvements, including higher capital and regular stress tests. The executives also noted the positive impact they make in communities through serving-low income and minority borrowers, minimum wage increases and data privacy efforts. A sample article on the hearing can be found below.

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INDUSTRY NEWS

White House Requires Independent Agencies to Submit Proposed Rules and Guidance to the OMB for CRA Review

On April 11, the Acting Director of the Office of Management and Budget released a memo reinforcing the obligations of federal agencies under the Congressional Review Act (CRA) and requiring federal bank regulators and other independent agencies such as the SEC and CFTC to submit their pending formal regulatory actions, including regulations and guidance, to the OMB’s Office of Information and Regulatory Affairs (OIRA) before being finalized. The memo, entitled “Guidance on Compliance with the Congressional Review Act,” sets forth a process that the OIRA will use to classify pending regulatory actions as either “major” or “minor”. Actions designated as “major” – which could include agency rulemakings, guidance and no-action letters – would be subject to Congressional review, and possible nullification, under powers granted through the CRA. The new policy, which would not apply to Federal Reserve monetary policy actions, takes effect on May 11.

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Quarles Remarks on Progress in Transition from LIBOR

In April 10 remarks at a Financial Stability Board (FSB) roundtable on interest rate benchmark reform, FSB Chair and Federal Reserve Vice Chair for Supervision Randal Quarles addressed progress in the transition from the London Inter-bank Offered Rate (LIBOR) to risk-free rates. Quarles highlighted the importance of performing due diligence in the use of reference rates, citing work done by jurisdictional working groups to identify, create or substantially reform the Secured Overnight Financing Rate (SOFR) and other risk-free alternative rates to ensure the availability of “robust, transaction-based rates that accurately represent well-defined underlying markets and are consistent with internationally-recognized standard.” Quarles also indicated that the Fed’s supervisory teams are including the transition away from LIBOR in their monitoring discussions with large firms, and that they expect to see an “appropriate level of preparedness” at its supervised institutions.

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Federal Reserve Releases Proposed Changes to Living Will Requirements

On April 8, the Federal Reserve released proposed changes to its Dodd-Frank Act Section resolution planning, or “living will,” requirements. Under the proposal, U.S. GSIBs — designated as “category I” banks — would file living wills every other year, alternating between full and targeted plans, rather than the current annual requirement. Category II and III banks would alternate full and targeted plans on a three-year basis, while domestic category IV firms would be released from the living will requirements entirely. The proposal will be issued jointly with the Federal Deposit Insurance Corporation.

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FDIC Announces Open Meeting on Resolution Plan Requirements

The FDIC’s Board of Directors will meet in open session on April 16 to consider and issue an advanced notice of public rulemaking on the FDIC’s resolution plan requirements for insured depository institutions – the so-called “IDI plans.” At the same meeting, the FDIC will also consider and issue its version of the proposed changes to the Dodd-Frank Act resolution planning requirements issued by the Federal Reserve on April 8 and approve its version of the capital and liquidity tailoring proposal for foreign banking organizations, undertaken jointly with the Office of the Comptroller of the Currency and issued April 8 by the Federal Reserve. The versions are expected to be identical to the ones issued earlier this week by the Federal Reserve.

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Washington Post Paints Inaccurate Portrait of Leveraged Lending Industry

The Washington Post’s recent article, “How regulators, Republicans and big banks fought for a big increase in lucrative but risky corporate loans,” paints a simplistic and inaccurate portrait of what is going on in the leveraged lending industry.  The article’s basic narrative is that previous regulators were trying to prevent banks from taking improvident risks but Members of Congress, the banks, the current financial regulators and even the GAO stymied them, leaving the country on the precipice of a new financial crisis. Given the importance of the industry, which is a multi-trillion-dollar source of funding to America’s growing mid-sized businesses, it is worth setting the record straight, which BPI does in this blog.

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Correcting the Record on Real-Time Payments

Where to start with the inaccuracies and misimpressions in the recent BankThink piece by Thomas Hoenig and Bruce Summers, “Real-time-payments Monopoly Puts Financial System at Risk”? First, in an article raising the specter of monopoly power in The Clearing House’s real-time payments system, they fail to mention that the Justice Department has already reviewed that system for antitrust purposes and found it to be pro-competitive. Further, they fail to mention that the Clearing House system, which they speak of only in the conditional or future tense, is actually open, operating, and serving business and retail customers.

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Credit Denial in the Age of AI

Aaron Klein, a fellow in economic studies at the Brookings Institution, published an important paper that raises many essential public policy questions about risk-based credit decisions in the age of artificial intelligence (AI), machine learning (ML), and digital technologies. In his paper, he reviews the history of credit and discriminatory practices, how AI can change the dynamics of credit denials, and ways policymakers and banking officials can safeguard consumer lending. The report is part of “A Blueprint for the Future of AI,” a series from the Brookings Institution that analyzes the new challenges and opportunities from artificial intelligence and other emerging technologies.

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SEC Commissioner Peirce Calls Guidance ‘Secret Law’

The Securities and Exchange Commission’s regulatory guidance could be creating a “minefield of secret law that hurts businesses,” SEC Republican Commissioner Hester Pierce said on April 8. Politico reported on Peirce’s comments at the SEC’s annual conference in Washington. “This secret law, as a practical matter, binds market participants like law does, but is immune from judicial and even commission review,” Peirce said. “I believe there is a line that can be crossed where nonpublic staff guidance goes from being merely helpful lore to something that is more akin to secret law that for all practical purposes binds at least some, though perhaps not all, market participants without any opportunity for review or appeal.” In November 2018, BPI and the American Bankers Association petitioned regulators for rulemaking on the use of guidance.

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EVENTS

FDIC Hosts Fintech and Banking Conference

On April 24, the Federal Deposit Insurance Corporation (FDIC) and Duke University’s Fuqua School of Business and Innovation and Entrepreneurship Initiative will host the Fintech and the Future of Banking conference in Arlington, VA. FDIC Chairman Jelena McWilliams and Treasury Secretary Steven Mnuchin will deliver remarks about the role of financial technology and innovation in banking.

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NYU and BPI Host Household Finance Conference

The New York University Salomon Center for the Study of Financial Institutions and BPI will host a “Conference on Household Finance” on April 26 in New York.

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Financial Regulation Conference with Policymakers

The Antonin Scalia Law School’s Financial Services Regulation Law Concentration will host its first full day public policy conference on the “Smart Regulation and the Future of Financial Services” on May 16. Craig Phillips, Counselor to the Secretary of the Treasury, will be the opening keynote speaker and SEC Commissioner Hester Peirce and Craig Phillips, counselor to the Treasury secretary, are among the speakers.

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SIFMA and BPI Host Prudential Regulation Conference

The Securities Industry and Financial Markets Association (SIFMA) and BPI will host the 6th Annual Prudential Regulation Conference on June 4 in Washington DC. This year’s conference will assess how the post-crisis prudential regulatory framework is affecting capital markets, including market liquidity, capital formation and innovation.

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November 19-21: The Clearing House + BPI 2019 Annual Conference

The Clearing House and BPI will host the 2019 Annual Conference from November 19 to 21. The event provides a forum for the industry’s leaders to examine the changing dynamics of the bank regulatory and payments landscapes with two and half days of high-level keynote speakers, in-depth expert panels, and networking. Register today.
The Pierre, New York

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RESEARCH RUNDOWN

A Better Measure of First-Time Homebuyers & Who’s on First? Characteristics of First-Time Homebuyers

These two posts propose a new measure for first-time homebuyers and explore the characteristics of first-time homebuyers. Under this new measure, the share of first-time buyers in 2016 is roughly the same as it was in the early 2000s. The second post finds that average mortgage balances for first-time buyers have been trending higher, their credit scores have been increasing, and the average student loan balance roughly doubled between 2000 and 2016. Despite these findings, the post reports that the average age of first-time buyers declined over that period which could reflect easier access to mortgage credit.

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Estimating System Demand for Reserve Balances Using the 2018 Senior Financial Officer Survey

With proprietary data from a confidential survey of senior financial officers conducted by the Federal Reserve in September 2018, the authors use a variety of methods to determine the lowest comfortable level of reserve balances in the banking system. Surprisingly, they estimate the desired range to be between $650 billion to $900 billion, well-below the current level of reserve balances and consensus views on the optimal level of reserve balances.

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The Information Value of Past Losses in Operational Risk

This paper finds that past operational losses are useful to predict future operational losses for U.S. banks, even after considering a broad range of financial characteristics. The authors explore the drivers and predictors of operational risk and conclude that the predictive role of past losses likely reflects hard to measure factors like internal controls, risk culture and risk appetite.

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Risk Management in Financial Institutions

This paper studies the impact on risk management of shocks to bank capital emanating from unexpected declines in house prices. Using data on interest rate and foreign exchange derivatives, the paper finds that better capitalized institutions hedge more. As a result, capital constraints could reduce both lending and the hedging of risks banks face.

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