BPInsights: April 26, 2019

TOP OF THE AGENDA

Federal Reserve Releases Proposed Changes to Control Regulations

On April 23, the Federal Reserve Board issued a proposal to revise its rules for determining control of a banking organization. The proposal, which primarily addresses the portion of the Bank Holding Company Act’s definition of control regarding one company’s influence over the management or policies of another, would codify a significant portion of the Board’s historical practices and precedents in addition to introducing certain targeted adjustments.

The proposal would implement a tiered framework for determining controlling influence based on a company’s level of voting ownership of another institution, as well as other relationships between the two companies. It sets forth three tiers of voting ownership between 5% and 24.99% and would also consider factors including the size of a company’s total equity investment, individuals serving at both companies, and the scope of business relationships. The proposal also introduces several additional presumptions of control, and would establish a new presumption of non-control for companies that own less than 10 percent of the voting securities of another and do not trigger any of the additional presumptions. Comments on the proposal are due within 60 days of its publication in the Federal Register.

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INDUSTRY NEWS AND EVENTS

Small-Time Crimes a Dealbreaker for Banking Jobs

The Wall Street Journal reported on banks requesting changes to a law preventing them from hiring employees with certain criminal records. Under a 1950 law, banks are barred from hiring anyone convicted of a crime of dishonesty or breach of trust and the only way to obtain an exemption is to get a waiver from the Federal Deposit Insurance Corporation.The Journal reported that over the past decade more than 40% of about 1,200 requests from people with criminal records seeking permission to work at a bank were rejected or unresolved. In an April 8th letter to lawmakers, BPI said the law can “pose unnecessary and inappropriate obstacles to banks’ ability to employ qualified individuals with limited criminal records…who have taken steps to rehabilitate themselves.” BPI is asking lawmakers to revisit the statute.

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Fintech Firm Robinhood Seeks Bank Charter

Fintech firm Robinhood Markets Inc. has applied for a national bank charter, according the Office of Comptroller of the Currency. In its application, Robinhood said it wants to start a bank that can offer “credit cards, loans and other products through mobile applications,” according to Politico. In December 2018, Robinhood drew criticism when it said its brokered cash services were federally insured. The company claimed its backing from the Securities Investor Protection Corp., a non-profit corporation, was akin to the Federal Deposit Insurance Corporation.

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Do Liquidity Regulations Reduce Moral Hazard?

A BPI blog post explores weighing the costs against the benefits of designing and calibrating a liquidity regulation. While liquidity regulations make it less likely that a bank will fall victim to a run, they also prevent a bank from performing its core mission: engaging in liquidity and maturity transformation by taking short-term liquid deposits and making illiquid and often longer-term loans.

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CFPB Announces Changes to Enforcement Policies

On April 23, the Consumer Financial Protection Bureau (CFPB) announced changes to its investigation policies, emphasizing its move towards increased transparency as part of its enforcement processes. Under its new policy, Civil Investigative Demands (CIDs), or notices of investigation, will include more information about the provisions of law that may have been violated and generally specify the business activities subject to CFPB authority. In addition, the CFPB will, in cases where a significant part of the purpose of the investigation is to determine the extent of CFPB authority over the relevant activity, identify that issue in the CID. The new policy follows a 2017 report from the CFPB’s Office of Inspector General that encouraged updating Office of Enforcement policies to reflect recent court decisions and is consistent with responses the CFPB received to a 2018 request for information that included its use of CIDs in enforcement investigations.

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Fed Approves New GSIB Information Collection

On April 19, the Federal Reserve finalized new reporting requirements requiring U.S. global systemically important banks (GSIBs) to report balance sheet and exposure breakdowns for their 35 largest country exposures by instrument, currency, maturity and sector, but with several changes as recommended by BPI. The effective date of the reporting was delayed from March 31 to September 30, 2019.

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CFPB Issues Comment Request on Remittance Rule

On April 25, the Consumer Financial Protection Bureau (CFPB) issued a request for information (RFI) on its Remittance Rule, which requires companies sending international money transfers on behalf of consumers to disclose the exact exchange rate, amount of certain fees, and amount expected to be delivered. Comments will be due within 60 days of the RFI’s publication in the Federal Register. A previous joint trade letter by The Clearing House, Consumer Bankers Association, Bankers Association for Finance and Trade and American Bankers Association raised concerns regarding the sunset of the temporary exception under Regulation E. The RFI, which follows the CFPB’s assessment of the rule’s efficacy in achieving its goals, specifically requests information regarding the expiration of the temporary exception, which allows certain companies to provide estimates, rather than exact figures, for some required information.

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UPCOMING EVENTS

BPI Testifies in Senate Committee on Regulators’ Use of Guidance

Tune in to the Senate Banking, Housing, and Urban Affairs Committee on April 30 at 10 am for testimony from Greg Baer, BPI President and CEO, on regulators’ use of guidance. The Senate Banking Committee will hold a hearing entitled, “Guidance, Supervisory Expectations and the Rule of Law: How do the Banking Agencies Regulate and Supervise Institutions?” BPI and the American Bankers Association in November 2018 took the rare step of petitioning the banking agencies and the CFPB for a formal rulemaking regarding the use of supervisory guidance.

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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 are hosting a “Conference on Household Finance” on April 26 in New York.

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House Committee Holds Housing Hearing

On April 30 at 10 am, the House Financial Services Committee will hold a hearing titled, “Housing in America: Assessing the Infrastructure Needs of America’s Housing Stock.”

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House Committee Holds Payday Lending Hearing

The House Financial Services Subcommittee on Consumer Protection and Financial Institutions will convene a hearing on April 30 at 2 pm entitled, “Ending Debt Traps in the Payday and Small Dollar Credit Industry.”

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Senate Commerce Committee Holds Cybersecurity Hearing

The Senate Commerce, Science and Transportation Committee holds a hearing on April 30 at 2:30 pm on cybersecurity.

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Federal Reserve Holds FOMC News Conference

Federal Reserve Chairman Jerome Powell will hold a news conference on May 1 following the April 3 to -May 1 Federal Open Market Committee Meeting. The news conference will be webcast on the Federal Reserve’s website.

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Senate Commerce Committee Holds Data Privacy Hearing

The Senate Commerce, Science and Transportation Committee will convene a hearing on May 1 at 10 am on policy principles for a federal data privacy framework.

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House Financial Services Committee Holds Diversity Hearing

The House Financial Services Subcommittee on Diversity and Inclusion will convene a hearing on May 1 at 2 pm entitled, “Good for the Bottom Line: A Review of the Business Case for Diversity and Inclusion.”

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Fed’s Clarida, Bowman Deliver Remarks on Monetary Policy

Federal Reserve Vice Chairman Richard Clarida and Federal Reserve Governor Michelle Bowman speak on May 3 at the Hoover Institute’s Strategies for Monetary Policy: A Policy Conference in Stanford, Calif. Clarida speaks at 11:30 am (8:30 am local) on “Models, Markets, and Monetary Policy.” Bowman delivers introductory remarks at 3 pm (12 pm local) for the panel, “Friedman and the Long History of Monetary Policy Rules.”

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Senate Banking Committee Holds Hearing on Data Privacy

The Senate Banking, Housing, and Urban Affairs Committee holds a hearing on May 7 at 10 am on “Privacy Rights and Data Collection in Digital Economy.”

House Subcommittee Holds Hearing on Minority Homeownership

House Financial Services Subcommittee on Housing, Community Development and Insurance will convene a hearing on minority homeownership on May 8 at 10 am.

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House Financial Services Committee Holds Markup

The House Financial Services Committee will hold a markup on May 8 at 2 pm. The markup will continue May 9 at 10 am.

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Senate Banking Committee Holds Regulators Hearing

The Senate Banking, Housing and Urban Affairs Committee holds a hearing on May 15 at 9:30 am with financial regulators. Witnesses include Comptroller of the Currency Joseph Otting, Federal Reserve Vice Chair for Supervision Randal Quarles, Federal Deposit Insurance Corporation Chairman Jelena McWilliams, and National Credit Union Administration Chairman Rodney Hood.

House Subcommittee Holds Hearing on Workers’ Rights

House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets will convene a hearing on May 15 at 10 am entitled, “Promoting Economic Growth: A Review of Proposals to Strengthen the Rights and Protections for Workers.”

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House Subcommittee Holds Sanctions Hearing

On May 15 at 2 pm, the House Financial Services Subcommittee on National Protection, Entrepreneurship and Capital Markets will convene a hearing on assessing the use of sanctions in national security.

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House Financial Services Holds Regulators Hearing

On May 16 at 10 am, the House Financial Committee will convene an oversight hearing on prudential regulators.

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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, SEC Commissioner Hester Peirce, and Jeremy Newell, Executive Vice President, General Counsel, and Chief Operating Officer of BPI, are among the speakers.

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House Financial Services Holds HUD Oversight Hearing

On May 21 at 10 am, the House Financial Services Committee will hold an oversight hearing on the Department of Housing and Urban Development.

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SIFMA and BPI 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 the capital markets, including market liquidity, capital formation and innovation.

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Federal Reserve to Host Monetary Policy Strategy Conference

The Federal Reserve System will sponsor a research conference on June 4-5 at the Federal Reserve Bank of Chicago “as part of the FOMC’s 2019 review of its monetary policy strategy, tools, and communications practices.” The conference will include academic speakers on themes for review and community leaders who will share their perspective of the labor market and effects of interest rates on their communities. Attendance is by invite only.

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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.
The Pierre, New York

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RESEARCH RUNDOWN

Changes in Monetary Policy and Banks’ Net Interest Margins: A Comparison across Four Tightening Episodes

This note analyzes changes in banks’ net interest margins (NIMs) during monetary policy tightening episodes. As the Federal Open Market Committee raises the policy rate, banks’ interest income should rise, however it’s not clear how this will affect NIMs because it also depends on the rate at which banks’ interest expense increases. In contrast to the previous three monetary policy tightening episodes, the results in the note show that NIMs rose during the most recent episode due to a slower increase in interest expenses. The abundant amount of deposits and liquid assets in the banking system likely helped explain the slow increase in interest expense in the most recent tightening episode.

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Indicative Forward-Looking SOFR Term Rates

In 2017, the Alternative Reference Rate Committee (ARRC) selected the Secured Overnight Financing Rate (SOFR) as the recommended replacement for U.S. dollar LIBOR. While LIBOR is reported daily for tenors ranging from overnight to a year, SOFR is an overnight rate. This will require the development of forward-looking term rates based on SOFR. This note describes an approach to computing forward-looking term reference rates based on SOFR futures contracts. Market-implied SOFR rates are estimated using prices from SOFR futures contracts, then compounded to produce forward-looking term rates. This approach could be adapted to incorporate a variety of SOFR-based derivatives contracts.

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Policy Uncertainty, Financial Stability, and Stress Testing

This paper analyzes stress test forecasts produced by a representative bank model used to estimate bank performance during the 2009 Supervisory Capital Assessment Program. The paper finds sizable differences between the forecasts produced by the representative bank stress test model, an individual bank model and actual bank performance over the first three years of the financial crisis. Given the large variance in bank projections under stress, the results indicate that the outcome of the stress tests conducted by U.S. regulators depend in large part on regulators’ judgement.

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Housing Consumption and Investment: Evidence from Shared Equity Mortgages

Regulations put in place since the Great Recession have reduced household credit availability and made it more difficult for many households to purchase a home. UK’s Equity Loans (ELs) program was introduced to mitigate some of credit constraints faced by households and reduce their exposure to house price risk. The ELs provide capital of up to 20 percent of the property’s purchase price in exchange for an equal share of the property’s future value. By exploiting changes in the EL program, the paper finds households took advantage of the program to buy more expensive homes rather than reducing the amount owned and house price risk exposure.

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