BPInsights: August 01, 2020

BPInsights: August 01, 2020

Stories Driving the Week

OCC Should Undertake an Open Transparent Process Before Considering a New Payments Charter

BPI joined with six other leading financial trade associations in sending a letter to the Office of the Comptroller of the Currency (OCC) expressing concerns that a proposed new narrow-purpose payments charter may introduce serious risks and unintended consequences to the financial system, and urging the OCC to proceed “carefully, deliberately, and transparently” in considering such a charter.

The letter emphasized that a national banking charter serves as a source of instant credibility for financial institutions, and if an institution operating under a new payments charter were to violate that trust, the consequences would reflect poorly on the entire banking industry. The letter also raises concerns that parent companies of these charter recipients would not be considered a bank holding company, and thus subject to supervision and oversight as required under the Bank Holding Company Act.

The letter calls for the OCC to provide details on how these new business models would be regulated, requests that the OCC to cooperate with other banking regulators to “ensure that no current policy lines are directly or indirectly moved as a consequence of this action” and asks the agency subject any new charter or policy change to robust public comment.  Learn More >>

Banking And Consumer Groups Call On Congress To Close ILC Loophole

The Bank Policy Institute (BPI), Center for Responsible Lending (CRL) and Independent Community Bankers of America (ICBA) urged Congress to impose a three-year moratorium on industrial loan company licensing applications, in a letter submitted on July 29. The moratorium on Federal Deposit Insurance Corporation approvals would provide Congress time to close the ILC loophole and ensure ILCs and their parent companies don’t pose unnecessary risks to consumers and taxpayers.

ILCs are FDIC-insured, state-chartered institutions that can generally engage in the full range of banking activities, such as taking deposits and making loans. But unlike banks, their parent companies are not subject to the Bank Holding Company Act, which means those companies are not subject to any federal supervision, regulations or standards. For this reason, there has historically been considerable opposition to the charter, and both Congress and the FDIC have placed temporary moratoria on ILCs.

Big Tech company ownership of an ILC introduces a new concern: that consumer data, including sensitive personal financial information, will be inadequately safeguarded and used in inappropriate and unauthorized ways. With global e-commerce giant Rakuten recently joining tech firms such as Square and Nelnet in applying to form ILCs, the risk associated with this legal loophole is greater than ever.

In March, the FDIC issued a notice of proposed rulemaking related to parent companies of industrial banks and industrial loan companies. BPI, CRL, ICBA and a coalition of civil rights groups wrote to the FDIC requesting that the FDIC not approve ILC deposit insurance applications until its ILC rulemaking is final. However, in recent months, the FDIC has approved some ILC applications and is reviewing others, including some whose parent companies engage in commercial activities. Learn More >>

Supervisory Stress Tests For Loan Losses: A Five-Year Overview With Reflections

In a new blog post authored by Paul Calem, Senior Vice President of Research for BPI, Calem examines loss rate projections for the major consumer and commercial loan segments of DFAST 2020 and compares the evolution of loss rates reported in the supervisory stress test between 2016 through 2020. His results indicate that banks and the public would benefit from increased transparency not only on elements of conservatism, but also regarding the relative importance of portfolio changes, changes in the severity of supervisory scenarios and changes in supervisory models as sources of the year-over-year change in projected loss rates.

In particular, he finds the DFAST 2020 loss rate projections for the first-lien mortgage and consumer loan segments exceeded the projected loss rates obtained from banks’ own models, an unlikely discrepancy given that these models receive strict vetting from Federal Reserve examiners and other regulatory agencies. Although the Fed’s assumptions are neither clear nor transparent, this discrepancy may indicate that the Fed applies more conservative assumptions or overlays compared to banks.

He concludes that greater transparency along this dimension would enhance the value of the stress tests by providing information about market risk trends, and would help maintain the public’s confidence that the stress tests reliably monitor risk. Learn More >>

Senate Republicans Introduce Phase 4 Legislation; Democrats Consider Heroes Act to Be Opening Bid

Senate Republicans introduced their version of the latest pandemic response legislation this week, titled the HEALS Act, which, among other items, contains several provisions regarding the Paycheck Protection Program (PPP). The legislation would extend the PPP through the rest of the year and allow heavily impacted businesses the opportunity to acquire a second loan. It also includes ‘hold harmless’ language for lenders administering PPP loans and simplified forgiveness for small PPP borrowers. Currently, Senate Republicans and White House officials are engaged in negotiating with Democrats, who are standing by their legislation passed earlier this summer, the HEROES Act.  These negotiations are expected to continue in the coming weeks. Learn More >>

The LCR Catch-22 — To Disclose, Or Not To Disclose

There’s a Catch-22 inherent in the liquidity coverage ratio (LCR). For the LCR to accomplish its objective of enabling banks to meet liquidity needs, banks must use their high-quality liquid assets (HQLA) when under stress. While at the same time, for the LCR to accomplish its objective of maintaining counterparty confidence, banks are expected to hold on to HQLA to meet future needs. LCR disclosure requirements are subject to this same dilemma. Requiring banks to disclose their LCRs increases investor confidence that banks have the HQLA needed to meet future contingencies but discourages banks from being willing to use their HQLA to meet those contingencies as they arise.

In a new blog post titled “The LCR Catch-22 — to Disclose, or Not to Disclose,” BPI Chief Economist Bill Nelson and Senior Vice President and Senior Associate General Counsel Brett Waxman review the nature and purpose of LCR disclosure requirements, draw some parallels to disclosure requirements associated with discount window lending and argue that LCR disclosures should either be removed or subject to substantially delayed release similar to the discount window. Learn More >>

Congressional Probe Identifies Anonymous Shell Companies Used to Launder Money for Russian Oligarchs

The Senate Permanent Subcommittee on Investigations released a report on July 29 uncovering an international money-laundering scheme to evade U.S. sanctions by influential Russian energy tycoons Arkady and Boris Rotenberg, POLITICO reported. The report found that the Rotenbergs were operating through a U.S. citizen, whose role was to establish shell companies on their behalf to launder money through the U.S. financial system by buying and selling luxury artwork. The pair were sanctioned in March 2014 as part of the U.S. response to Russia’s invasion of Ukraine and annexation of Crimea.

In addition to an extensive account of the laundering scheme, the report makes several recommendations to put an end to these practices, including requiring the collection of beneficial ownership information when a company is formed. This recommendation has long been supported by BPI, and may soon become law as the House recently voted to include these requirements, in addition to provisions modernizing the anti-money laundering/countering the financing of terrorism framework, in the House version of the National Defense Authorization Act. Learn More >>

In Case You Missed It

FinTechs Scramble to Secure Financial Data and Weather Financial Challenges Amid Pandemic-Generated Uncertainty

It’s been a difficult week for FinTechs following news of a massive data breach affecting 7.5 million customers at Mark Cuban-backed FinTech startup Dave, mounting loan losses reported by U.K. digital bank Monzo and an announced merger between small-business lender OnDeck and Enova International following huge first-quarter losses by OnDeck that riled up activist investors against three members of OnDeck’s board.

Despite strong earnings from established companies like PayPal, a vast swath of the FinTech industry remains precarious, at least according to Jane Gladstone, President of Promontory Interfinancial Network. In a recent interview with the American Banker, Gladstone — who has worked in FinTech investment banking since 1993 — stated that “I think there will be hundreds of fintech failures precisely because too many companies got funded. You might say there’s been a bubble. There are hundreds of fintech companies that I expect will run out of money in the next year or so.” And consumers recognize the risk that FinTechs pose. According to a recent Morning Consult survey conducted on behalf of BPI, 73% of respondents say national banks are safe and can protect customers’ money and investments, whereas only 24% of respondents had the same confidence in FinTech companies’ ability to protect customers’ money and investments.

BPI President & CEO Greg Baer Participates in Brookings Panel on Payments

BPI President & CEO Greg Baer participated in a panel discussion at an event titled, “Fixing America’s payment system: The role of banks and fintech” hosted by the Brookings Institution on July 29. The panel was moderated by Brookings’ Aaron Klein and followed opening remarks by Acting Comptroller of the Currency Brian Brooks.

In his remarks, Baer challenged claims made by Brooks that unbundling was a positive direction for the payments system, arguing that there are particular reasons not to unbundle payments from other banking activities. “If you are a payments system operator, you are going to have a lot of idle cash lying around…and you are prone to runs and trouble,” stated Baer. “That’s why it’s a very good thing to have bundled payment operation with things like access to the discount window, insured deposits, Fed supervision…it’s not by accident. It’s a good idea to put those things together, not take them apart.”

Baer also rebutted claims that the payments networks — often referred to as payment rails — in the U.S. are outdated. He stated that an existing real-time payments system is already in place in the U.S. — operated by The Clearing House — and that this modern RTP system uses the same modern rails relied upon by Singapore, Australia and British payment systems. Baer highlighted that more than 50% of demand deposit accounts (DDA) are eligible for real-time payments, and an estimated 80% of DDAs will be eligible by the end of the year.

To watch a recording of the full event, please click here.

BPI Special Adviser Pat Parkinson Offers Remarks on Bank Intermediation in Financial Markets Under Stress

During March and early April of this year, the COVID-19 crisis caused U.S. financial markets to freeze up. Even the markets for U.S. Treasury securities, normally the most liquid financial markets in the world, were disrupted.

On July 29, BPI held a Zoom webinar on bank-intermediated markets under stress to discuss the causes of those disruptions and the implications for public policy. The panelists who made presentations at the webinar were distinguished academics, former regulators, bankers and market experts. Other participants included bankers, academics and public sector representatives. Pat Parkinson, a Special Adviser to BPI, provided remarks where he made several recommendations for changes to banking regulation and market structure that would enhance the liquidity of bank-intermediated markets under stress.

A copy of his remarks may be accessed by clicking here.

Powell Recommends Temporary Easing of Capital Rules to Help Boost Economy

Federal Reserve Chair Jerome Powell indicated at a Federal Open Market Committee news conference on Wednesday that easing leverage ratio requirements could help to free up banks’ balance sheets so that they can support the economy, reported Bloomberg. Powell referenced similar changes already enacted in Switzerland, Japan, Canada and the European Union. Such a change would require Congress to amend the Collins Amendment, which mandates that the banking agencies establish minimum risk-based capital requirements.

CFPB Plans to Issue ANPR to Seek Comments on Financial Data Sharing Under Section 1033

On July 24, the CFPB announced that an advanced notice of proposed rulemaking (ANPR) would soon be issued to solicit feedback from stakeholders on how the agency might establish a framework for safe and secure sharing of consumer financial data, as required under Section 1033 of the Dodd-Frank Act. The ANPR would also seek comments on the scope of data that should be made available, and whether regulatory uncertainty around Section 1033 is impacting the market due to conflict with the Fair Credit Reporting Act or other regulatory mandates.

The ANPR is the next step in an ongoing dialogue hosted by the agency. On February 26, the agency hosted a symposium to discuss the future application of data aggregation. At the event, panelists sparred over the wide-spread use of risky screen scraping among FinTech companies rather than more secure methods of authentication and authorization such as an application programming interface (API), whether tokenization of account numbers could be implemented in the near future, the level of oversight data aggregators should face and how much access FinTechs really need to serve consumers without putting the consumer at risk of fraud, unwanted solicitations or identity theft.

CFPB Director Kathy Kraninger appeared before both the House and Senate this week for the agency’s semi-annual report to Congress. She covered a range of importing topics, including the proposed ANPR, where she stated that while the agency has previously-issued consumer protection principles regarding data sharing, the ANPR would present a more formal consideration on whether to move forward with rulemaking. She also stated that while the “principle that consumers should control their own data is clear,” she emphasized that there are “cybersecurity . . . and privacy implications for some of that data, as well as proprietary issues that some of the financial services providers have with what data is accessed and . . . what data aggregators can do with that data when they access it.”

Bank of America, Citi Join Partnership to Measure Lending-Related Climate Risks

Bank of America and Citi announced plans to join the Partnership for Carbon Accounting Financials (PCAF), an industry-led partnership established to develop standards for measuring how certain lending activities contribute to climate risk. PCAF was launched in 2019 and is made up of over 70 banks from five continents. As part of its announcement, Citi also announced a new five-year 2025 Sustainable Progress Strategy, which includes a commitment to finance and facilitate $250 billion in low-carbon solutions, plans to source 100% renewable electricity to power facilities and a commitment to a 45% reduction in CO2 emissions by 2025.

World Economic Forum Report Lists CRI Profile’s Benefits to FinTechs

Ahead of a planned summit in January, the World Economic Forum (WEF) FinTech Cybersecurity Consortium — a consortium made up of the world’s most prominent technology companies, governments and international non-government organizations — published a report on July 23 identifying the Cyber Risk Institute (CRI) — launched in May 2020 by the Bank Policy institute — on a list of organizations contributing to improvements in cybersecurity and the resilience of the global financial system. Specifically, the report outlined the benefits of the Financial Services Cybersecurity Profile (the “Profile”), currently maintained by CRI. WEF’s report stated that the Profile’s streamlining allowed companies to be more client-focused. The report also noted the Profile is likely to “grow in relevance and applicability to FinTechs.”

BPI Comments on FinCEN Proposal to Renew Suspicious Activity Information Collection Requirements and Update Burden Assessment

On July 27, BPI submitted a comment letter to the Financial Crimes Enforcement Network (FinCEN) in response to the agency’s proposal to renew, without change, currently approved suspicious activity (SAR) information collection requirements and update an attending burden assessment, under the Paperwork Reduction Act (PRA). While BPI appreciates FinCEN’s efforts to enhance its SAR burden assessment, the letter stated that the proposal “still does not address the full range of activities engaged in by institutions in connection with satisfying SAR requirements.” Furthermore, the revised burden estimate is dramatically lower than financial institutions’ experience.

In the letter, BPI suggests that the agency should revise its burden assessment to include the full scope of resources devoted to SAR compliance and makes recommendations to enhance the utility of the SAR framework for law enforcement and national security efforts.

Upcoming Events

  • 08/06/2020 – ACFCS hosts “Innovation Nation – Perspectives on Harnessing Tech and Fostering Innovative Compliance Programs” panel discussion including BPI SVP Angelena Bradfield
  • 08/27/2020 – 08/28/2020 – Kansas City Fed 2020 Economic Policy Symposium “Navigating the Decade Ahead: Implications for Monetary Policy”
  • 10/16/2020 – 10th Annual FDIC Consumer Research Symposium