BPInsights: August 08, 2020

Top of the Agenda

BPI’s Lauren Anderson Testified before COVID-19 Congressional Oversight Commission on Status of MSLP

BPI Senior Vice President and Associate General Counsel Lauren Anderson testified before the Congressional Oversight Commission on Friday regarding the progress of the Main Street Lending Program (MSLP) since the program became operational on July 6. In her submitted written remarks, Anderson praised COVID-19 relief efforts enacted to date by Congress, Treasury and the Federal Reserve but indicated that despite participation by over 300 lenders, including many BPI member banks, the MSLP has only issued a limited number of loans due to several reasons, mainly:

1. Many mid-market companies that otherwise would be potential borrowers under the Main Street program already drew down on credit lines during March and April, which has led to reduced demand for credit; and
2. The program requires borrowers to not only meet eligibility criteria but also bank underwriting standards, and creditworthy borrowers can typically avail themselves of private market credit solutions by working directly with their bank.

As of August 06, the Federal Reserve had purchased $95 million in participations of Main Street Loans, though Anderson indicated that demand for the program may increase if the economic downtown worsens. Learn More >>

Stories Driving the Week

How to Design A Fed Credit Facility to Help Support LMI Communities

BPI member banks recognize the disproportionate impact COVID-19 has had on low- and moderate-income communities and are working to address these challenges through new investment strategies to support small business recovery, many of which allocate funding to Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs), which have proven to be an effective and efficient delivery system to help support underserved borrowers and borrowers living in minority communities.

In a new blog this week, BPI Chief Economist conceptualizes how the Fed might be able to support CDFIs and their community development goals through a new lending facility under its existing, non-emergency, lending authority. The program could be modeled on the seasonal credit program and narrowly designed to fund and subsidize lending to LMI areas and households. Such a program would be extremely safe because loans would be collateralized by the same assets that collateralize seasonal credits and other discount window loans and would establish a reliable and ongoing source of funding that CDFI-depository institutions could use to support their mission. Learn More >>

BPI Submits Recommendations to OCC on How Banks Can Better Serve Customers in Rapidly Changing Technological Marketplace

BPI filed two comment letters on August 4 in support to the Office of the Comptroller of the Currency’s (OCC) initiative to foster financial innovation following an OCC request for comments on two proposals that would update existing rules with the aim of establishing greater legal clarity for the operations and activities, including digital activities, of national banks and federal savings associations (FSAs). BPI has been a leader on the issue and one of the few to comment on how banks could better serve their customer’s needs in a rapidly changing technological marketplace.

The first letter responds to an advanced notice of proposed rulemaking issued by the agency regarding digital activities of national banks and FSAs. The letter recommends that any rule that the OCC may adopt relating to digital activities should serve as a flexible and “technology-neutral” framework that does not require a case-by-case review of future digital products; instead, the agency should rely on core principles and appropriate guardrails that are applicable to both banks and non-banks and can be tailored to an institution’s level of risk. It also recommends that any institution receiving an OCC charter should be subject to the same prudential requirements, including those related to capital and liquidity, Bank Secrecy Act/anti-money laundering, fraud prevention, third-party service provider risk management and other compliance requirements.

The second letter responds to a notice of proposed rulemaking regarding the OCC’s “part 7” governing permissible activities, corporate governance and operations of national banks and FSAs. The letter offers several suggestions to refine and clarify the OCC’s proposal to codify recent OCC interpretations and update or eliminate outdated regulatory requirements that no longer reflect the modern financial system. The letter emphasizes that clear rules around permissible bank activities and the opportunity to engage with OCC’s legal and policy leadership to resolve questions of legal permissibility are a critical prerequisite for banks to effectively and efficiently innovate and operate in a competitive marketplace and respond to customer needs. They also serve to ensure that questions of safety and soundness, as overseen by examiners, remain separate and distinct from questions of legal permissibility, as established by law and regulation.

Hedge Funds, Shadow Banks Could Be Too Big to Fail, Reports Bloomberg

Shadow banks, hedge funds and other non-bank lenders are growing quickly and may have reached a level of systemic importance that could pose real risks to the economy, according to a vivid portrayal published by Bloomberg on August 3. The article includes remarks made by former and current regulators and references a Bank of International Settlements report, which found that hedge funds were a “key driver” for the liquidity crisis witnessed in March that required central bank intervention. The article also cites a recent letter submitted to the G20 finance ministers by Federal Reserve Vice Chair for Supervision and Chairman of the Financial Stability Board Randal Quarles warning of “interconnectedness and instances of assets freezing up that investors assumed were akin to cash” as just some of the potential weaknesses that nonbank lenders could pose to the economy. Learn More >>

Fed’s Op Risk Projections Differ from Bank Estimates Posing Implications for Capital Planning, Reports Risk.net

According to a Risk.net article published on August 6, titled “Fed’s approach to stressing op risk frustrates banks,” banks’ submissions regarding their own projected losses under the 2020 Dodd-Frank Act Stress Tests (DFAST) turned out to be very different from those of the Fed, and this may be explained by the Fed’s calculation of operational risks in the stress tests and the lack of transparency around assumptions of these calculations. The article indicates that two frustrations arise as a result:

1. It can have major implications for banks’ capital planning. These projections are used by the Fed to calibrate a bank’s stress capital buffer; a bank that estimates a low amount of op risk losses may anticipate a smaller SCB than the one it eventually receives because of the Fed’s much larger projection, upending its capital plans.
2. These calculations of operational risk tend to be based on losses projected under historical models (e.g., large past legal settlements) that may have since been resolved at certain institutions, and the lack of transparency makes it more difficult to challenge these assumptions to help improve the accuracy of the models.

For more on op risk and stress testing, a post by Greg Baer earlier this year explained the issues with op risk in the Fed’s stress tests. Learn More >>

Upcoming Events

• 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