BPInsights: April 5, 2019

BPInsights: April 5, 2019


Some Facts About Bank Branches and LMI Customers

A popular narrative has grabbed headlines over the last few years regarding the growth of the so-called “banking deserts” – that is, areas where American consumers do not have access to branches, and therefore presumably to banking services. Critics allege that this problem predominately affects low-to-moderate income geographic areas and that big banks and regional bank M&As are to blame; however, these stories are not based on actual data or analysis.

The actual share of the U.S. population living in banking deserts is about unchanged in the post-crisis period and the share of ‘unbanked’ households is at an all-time low. A new report released on April 4 demonstrates that assertions about banking deserts and inclusiveness in the U.S. banking system have been contrary to observable evidence.

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FinTech Ideas Festival

BPI and BITS, in partnership with CNBC as the event’s exclusive broadcast partner, hosted our 2nd FinTech Ideas Festival in San Francisco with focus on the future of technology and financial services. The invite-only conference for CEO’s and C-Suite executives brought together 200 notable influencers from the most successful and game-changing financial services and technology companies, including speakers such as Marc Andreessen (Andreessen Horowitz), Beth Mooney (KeyBank), Ajay Banga (Mastercard), Bharat Masrani (TD Bank), Cathy Bessant (Bank of America), and many more.

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Federal Regulators Propose Capital Deductions for Investments in TLAC Debt

The Federal Reserve, the Office of Comptroller of the Currency, and the Federal Deposit Insurance Corporation on April 2 issued a joint proposed rule that would require advanced approaches banks to deduct from regulatory capital any investments in unsecured long-term debt issued by global systemically important banks (GSIBs) for purposes of meeting the Fed’s TLAC (or “total loss absorbing capacity”) rule.  There are related public disclosure and regulatory reporting changes contained in the proposal.

This proposal is intended to reduce interconnectivity and systemic risk in the banking system – and, in particular, limit contagion should a GSIB fail and its unsecured long-term debt is “bailed in” to help cover any losses and recapitalize the institution. The proposal is complementary to existing requirements in the US agencies’ regulatory capital rules that generally require banks to deduct from regulatory capital investments in their own capital instruments and the instruments issued by other banks and financial institutions, subject to certain limits and thresholds.

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Agencies Issue Proposed SLR Changes

On March 29, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued a notice of proposed rulemaking (NPR) implementing section 402 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), which would exclude central bank deposits from the denominator of the supplementary leverage ratio (SLR) for banking organizations “predominantly engaged in custody, safekeeping, and servicing activities.” According to the proposal, a bank holding company (BHC) and its bank subsidiary would be considered “predominantly engaged” if the U.S. top-tier BHC has an average ratio of assets under custody (AUC)-to-total-assets of at least 30:1 for the last four quarters; the amount of central bank deposits eligible for exclusion from the SLR would equal the average daily balance of deposits with a qualifying central bank over the quarter. The NPR also indicates that the agencies expect to issue a separate proposal for public comment regarding revised regulatory reporting requirements necessary to reflect the changes in the proposal.

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Quarles Remarks on CCyB

In published remarks March 29, Federal Reserve Vice Chair Randal Quarles reiterated his support for a zero-percent countercyclical capital buffer (CCyB) in the U.S., noting that “financial system vulnerabilities … [are] not outside their normal range….”  He indicated that “[b]ecause we set high, through-the-cycle capital requirements in the United States that provide substantial resilience to normal fluctuations in economic and financial conditions, it is appropriate to set the CCyB at zero in a normal risk environment. Thus, our presumption has been that the CCyB would be zero most of the time.”  However, Quarles also noted that it is “important” for regulators to “learn from other countries’ experiences with the CCyB,” highlighting, in particular, the “additional flexibility” provided by the UK approach to integrating the CCyB into capital buffer requirements.

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FSB to Meet on Monday to Consider FBO Tailoring Proposal

On April 1, the Federal Reserve Board announced that it would meet in open session Monday, April 8 at 10 am ET to consider issuing a proposed rule on tailoring prudential standards for foreign banking organizations. The Board will also consider issuing a proposal on changes to resolution planning requirements.

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Fed, FDIC Issue Feedback and Expectations for Regional Banking Group Resolution Plans

On March 29, the Federal Reserve and the Federal Deposit Insurance Corporation issued letters providing feedback on the 2017 resolution plans filed by 14 US regional banking groups, and also establishing expectations for these firms’ next resolution plan filings, are due by year-end 2019. The agencies did not identify any deficiencies or shortcomings in the 2017 plans and indicated that they generally expect each bank’s 2019 submission to include only updated financial statements and material changes from its previous plan. On Monday, April 8, the Federal Reserve will issue a proposal for revisiting its resolution planning requirements, which will provide greater clarity about the precise requirements for the resolution plans filed by domestic and foreign banking organizations going forward.

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FASB Rejects Regional Banks’ Proposed CECL Changes

On April 3, the Financial Accounting Standards Board (FASB) unanimously rejected changes proposed by several regional banks to the Board’s current expected credit loss (CECL) standard.  The changes inter alia would have limited the expected loan losses running through the income statement to losses over a 12-month period. The Federal Reserve Board, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency, also on April 3, issued Frequently Asked Questions on CECL, focusing on the application of the standard and related supervisory expectations.

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FDIC and OCC Signal Possible Effort to Modernize CRA at CBA Conference

Attending a conference of the Consumer Bankers Association, both FDIC Chairwoman Jelena McWilliams and OCC Comptroller Joseph Otting signaled an interest to modernize the Community Reinvestment Act (CRA). CRA has not been updated since the 1990s, prior to the introduction of technology in banking. The regulators are hopeful innovation can occur within the next year. Chairwoman McWilliams and Comptroller Otting also encouraged small-dollar lending, departing from 2013 contradictory guidance.

Senate Confirms Mark Calabria as Director of FHFA

The Senate confirmed Mark Calabria to be director of the Federal Housing Finance Agency with a vote of 52-44.  Calabria previously served as the chief economist for Vice President Mike Pence.

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Fed Publishes Final Changes to Payments System Risk Policy

On April 1, the Federal Reserve published final changes to its Payments System Risk policy governing access to intraday credit for foreign banking organizations’ (FBO) U.S. branches and agencies. The finalized changes are nearly identical to those initially proposed in December 2017, though new policy includes minor changes to accommodate FBOs’ home-country leverage calculations and provided for an extended one-year compliance period. As a result of the new policy, which takes effect April 1, 2020, most FBOs will experience a reduction in net debit caps and, consequently, a reduction in their Federal Reserve accounts’ daylight overdraft capacity.

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Why Is LIBOR Being Replaced Rather Than Reformed?

The London Interbank Offered Rate (LIBOR) is a reference rate based on the interest rates at which large banks indicate they can borrow unsecured funds from other banks at their London offices. The efforts to reform LIBOR intended initially to establish multiple alternative reference rates, or at least two: a risk-free rate and a rate that reflected bank credit risk. Public and private organizations attempted to revise LIBOR so that it could continue to serve as the risk-sensitive benchmark, but the efforts were stymied by the thinness of the underlying market for term unsecured bank borrowing. This blog posts explores efforts to reform LIBOR.

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House Holds Two Housing Reform Hearings in Conjunction with Start of National Fair Housing Month

April is National Fair Housing Month, and the House Financial Services Committee (HFSC) held two hearings on housing reform. At the beginning of the 116th Congress, Chairwoman Maxine Waters (D-CA) made housing reform a policy priority. On April 2, the HFSC held a hearing entitled, “The Fair Housing Act: Reviewing Efforts to Eliminate Discrimination and Promote Opportunity in Housing.” This hearing continued the ongoing conversation and addressed discriminatory practices in mortgage lending. On April 2, the HFSC Subcommittee on Housing, Community Development, and Insurance held a hearing entitled, “The Affordable Housing Crisis in Rural America: Assessing the Federal Response.” This hearing further exemplified the committee’s commitment to housing finance reform. Members of the subcommittee broadly agreed that the federal government’s response to the housing crisis is insufficient and called upon their fellow legislators to address the issue.

House Financial Services Subcommittee Holds Hearing on Capital Markets and Investor Protections

On April 3, the HFSC Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets held a hearing entitled, “Putting Investors First: Reviewing Proposals to Hold Executives Accountable.” The Subcommittee discussed the 8-K Trading Gap Act, the Insider Trading Prohibition Act, mandatory arbitration, capital formation, executive compensation, accredited investors, and whistleblowers.

Senate Banking, Housing, and Urban Affairs Committee Held Hearing on Reforms to Investment Advisory System

On April 2, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled, “The Application of Environmental, Social, and Governance Principles in Investing and the Role of Asset Managers, Proxy Advisors, and Other Intermediaries.” Members of the committee debated how heavily environmental, social, and governance principles should be considered in the evaluation of corporations. Senators and witnesses broadly agree that reforms should be made to the advisory system, but they disagree on the extent to which the system should be changed.

White House Nominates Michelle Bowman to Full 14-Year Term on Federal Reserve Board

On April 4, the White House announced Michelle Bowman’s nomination to a full 14-year term as a Member of the Board of the Governors of the Federal Reserve System where she will represent the interests of community banks. She was previously appointed to the role in November 2018, to fill the remaining term of a seat that had been vacant since 2014. Her nomination was one of nine nominations sent to the Senate.

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House Subcommittee Hearing on CRA’s Impact

The House Financial Services Subcommittee on Consumer Protection and Financial Institutions will hold a hearing on April 9 at 10 am entitled, “The Community Reinvestment Act: Assessing the Law’s Impact on Discrimination and Redlining.”

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House Committee Hearing with Treasury Secretary Mnuchin

The House Financial Services Committee will hold a hearing on April 9 at 2 pm with Treasury Secretary Steven Mnuchin on his annual testimony on the state of the international financial system.

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Fed’s Quarles Delivers Remarks

The Antonin Scalia Law School’s Financial Services Regulation Law Concentration and the Law & Economics Center’s Program on Financial Regulation & Technology are hosting a forum with Federal Reserve Board Vice Chair for Supervision Randal Quarles on April 9 at 5 pm at the Law School.

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House Committee Hearing with GSIB Bank CEOs

On April 10 at 9 am, the House Financial Services Committee will convene a hearing entitled, “Holding Megabanks Accountable: A Review of Global Systemically Important Banks 10 years after the Financial Crisis.”

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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 Future of Financial Regulation on May 16. Craig Phillips, Counselor to the Secretary of the Treasury, will be the opening keynote speaker and SEC Commissioner Hester Peirce will be the luncheon speaker. Full agenda to come.

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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Trends in Household Debt and Credit

Using quarterly data from 1999 to the present, the authors show the evolution of household debt and credit over the past decades. The authors track the great run-up in debt due to the housing boom, the changes that took place during the financial crisis and great recession and the recovery experienced since 2013. While total household debt has recovered in nominal terms, its characteristics have changed significantly.  In particular, tight underwriting standards for mortgage loans have reduced the share of mortgage debt in total debt, but the share of auto and student debt rose significantly.  The higher amount of non-mortgage debt could make it more difficult for younger and lower credit-score borrowers to have access to homeownership.

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Towards a Sectoral Application of the Countercyclical Capital Buffer

This research report summarizes the work done by the Basel Committee Research Task Force (RTF) in relation to a sectoral approach to the countercyclical capital buffer (CCyB). The RTF finds evidence that a sectoral approach would increase the resiliency in the banking system at a lower cost than the Basel III CCyB which applies to all loans. Despite several potential challenges related to an efficient design, a sectoral buffer would allow a more targeted approach to reducing excessive credit growth and credit risks in certain segments of the economy.

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Marketplace Lending and Consumer Credit Outcomes: Evidence from Prosper

This paper studies the impact of peer-to-peer lending on credit scores and overall debt levels. After borrowers apply to a loan on Prosper, credit card borrowing declines and credit scores rise. In addition, borrowers that hold nonbank debt report an increase in the level of mortgage debt likely because of the increase in credit scores. Despite the higher level of mortgage debt, the delinquency rate of nonbank borrowers is lower relative to non-borrowers.  In conclusion, the results indicate that nonbank debt does not increase borrowers’ risk but could expose them to significant risk in a downturn.

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Are New Repo Participants Gaining Ground?

The repo market has been the focus of significant post-crisis regulation leading to increased costs for bank holding companies operating in this space. This blog post looks at the impact of regulation and the role of new participants in the interdealer repo markets. Despite, significant growth in the repo market in recent years, new market participants only make about 3-6% of total gross activity, therefore strongly contradicting popular belief that new entrants were behind most of the market growth and broker-dealers associated with BHCs pulled back from this type of activity.

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