BPInsights
Top of the Agenda
The Truth About Bank Deposits, Interest Rates, and Benefits to Consumers
In a blog, BPI responds to Bloomberg Opinion columnist Stephan Gandel’s column on bank deposits and who is benefitting the most from higher interest rates. BPI agrees that deposit rates have risen by less than market rates over the past couple years, but also points out that all rates were scrunched up against the zero lower bound. “As short-term rates continue to move up, we expect the spread between the fed funds rate and the retail deposit rates to continue to widen and return to its historical long-run value,” according to BPI. Deposit rates have always been below market rates because depositors receive valuable payment services, services that are costly for the bank to provide. Moreover, “Some expect that deposit rates will ultimately rise closer to market rates [than historically] because Federal Reserve liquidity rules provide large banks strong incentives to fund themselves with operational deposits, including insured retail deposits,” the BPI authors add.
Of Note
Citing BPI, Article Highlights Capital Requirement Worries Surrounding CECL
A Financial Times article published Monday highlighted industry concerns about the consequences of the “current expected credit loss” (CECL) standard, citing BPI’s comment letter, signed by deputy general counsel David Wagner, urging federal regulators to consider how the new standard will affect bank capital requirements. The piece notes that BPI’s comment letter is emblematic of growing concern among banks and industry groups about the effect this accounting change will have, effectively raising capital requirements by lowing retained earnings. BPI wrote “that regulators should ensure CECL is ‘capital neutral.’” Unless the regulators do so, the article quoted BPI’s letter as stating that the new accounting standard would “represent a new and additional capital buffer requirement that will affect how banks do business and have ramifications for the broader economy.”
Banks Exploring Cryptocurrency Safe Deposit Boxes
Banks have largely stayed out of the business of buying and selling cryptocurrencies, but a few institutions are now looking to build businesses that serve those in the cryptocurrency world. With the theft of digital currencies a recurring problem, several banks – possibly including JPMorgan Chase, BNY Mellon, Goldman Sachs, and Northern Trust – are developing products that would hold cryptocurrencies in custody, according to an article in American Banker. While crypto-focused startups have more experience in the space than most banking institutions, banks hold some advantages. For instance, customers know that banks are heavily regulated – which would be a selling point against fintechs who are not subject to extensive banking regulations – and that banks will continue to be in business for a while, unlike some cryptocurrency companies which have disappeared overnight.
Major U.S. Companies and NFTC Call for Crack Down on Anonymous Shell Companies
In an op-ed in The Hill, the vice president for the National Foreign Trade Council (NFTC), Richard Sawaya endorsed cracking down on anonymous shell companies and money laundering in the U.S.’s efforts to sanction Russia for election interference. The NFTC argues that current and proposed sanctions against Russia do more to harm U.S. companies than the Kremlin: “Given Kremlin conduct, it’s no surprise that the DETER Act [Defending Elections from Threats by Establishing Redlines] is gaining traction in Congress. But if enacted and implemented, the sanctions it contains would damage the U.S. economy and the legitimate interests of U.S. allies, while leaving the Kremlin unscathed,” Sawaya writes. “Congress should focus on updating and enforcing these sanctions while incorporating new ideas … that would crack down on Russian money laundering and shell corporations, expose the financial crimes of Putin cronies, and prevent U.S. real estate from being a haven for kleptocrat money, all without measurably hurting the U.S. economy,” he adds.
States Readying for FinTech Oversight Fight With Treasury/OCC
Following last week’s release of Treasury’s report on FinTech and the OCC’s subsequent notice that it will begin accepting special purpose national bank charters, various states are pushing back over who will regulate financial technology startups. Arizona, which has already set up a “sandbox” initiative to encourage companies to work with state officials to test new Fintech products, is calling on federal regulators to work with states when it comes to FinTech oversight, according to an article in the Wall Street Journal. The Conference of State Bank Supervisors (CSBS) says the OCC doesn’t have the authority to override state banking laws and is currently considering mounting a new legal fight after the CSBS’s case challenging the OCC’s FinTech charter plan was dismissed by a judge in March. “An OCC fintech charter is a regulatory train wreck in the making,” said John Ryan, CSBS chief executive in the WSJ article.
Chairman Jelena McWilliams Signals FDIC Push for Regulatory Reevaluation
FDIC Chairman Jelena McWilliams is “turning her agency’s agenda in the direction of policies being proposed by other Trump-appointed officials, adding momentum to a push to revisit rules adopted after the 2008 financial crisis,” an August 6 Wall Street Journal article reports. The article explains that McWilliams’ “top priorities are examining the regulatory burden on small banks, speeding up her agency’s review of bank-charter applications, and helping banks introduce new financial products for underserved communities.” McWilliams’ comments this week echo those made at June’s TCH/SIFMA Prudential Regulation Conference, where, in her first public appearance as Chairman, she laid out an agenda to review old regulatory policies, including supervisory ratings.
FinCEN Extends Temporary Beneficial Ownership Requirements Relief
On August 8, FinCEN extended its May 2018 administrative ruling providing temporary exceptive relief to covered financial institutions from the CDD rule’s beneficial ownership requirements as they apply to products and services that rollover or renew (like CDs or loans) and were established before the rule’s May 11 compliance date. While the initial relief notice was set to expire on August 9, FinCEN has now extended the deadline to September 8. The relief is retroactive, beginning on May 11, and responds to industry concerns raised by FAQ 12 of FinCEN’s April 3 CDD guidance, which states that rollovers and renewals are considered a “new account,” and therefore trigger the CDD rule’s beneficial ownership collection requirement. In its extension notice, FinCEN stated that it will use the additional time “to further consider the issue.”
Former Enforcement Lawyer Allison Lee Considered for SEC Democratic Slot
Allison Lee, who has worked at the SEC for over a decade and who was recommended by Senate Minority Leader Chuck Schumer, is being vetted by the White House to fill the Democratic slot on the Securities and Exchange Commission. Kara Stein has served in the role since 2013, but must step down by the end of the year. Lee previously worked for Stein as a legal advisor from 2013-2015. After leaving Stein’s office, Lee had an enforcement roll in Denver focusing on complex financial products and financial schemes.
BPI Events
BPI & TCH Annual Conference 2018
Registration is now open for the 2018 BPI & TCH Annual Conference, the premier gathering for senior financial services executives, regulators, policymakers, and academics focused on the changing regulatory landscape and the future of payments. Register Today!
November 26-28, 2018, The Pierre, NYC
Industry News
Agency News
Fed Publishes SCCL Final Rule And Associated NPR on SCCL Reporting Template in Federal Register
The Federal Reserve has posted its final rule for single counterparty credit limits (SCCL), as well as its request for comment on the concurrent SCCL reporting template proposal, in the Federal Register. As we reported when it was approved by the Fed in June, the rule implements Section 165(e) of the Dodd-Frank Act, which requires the Federal Reserve to prescribe standards that limit “the risks that the failure of any individual company could pose” to a large bank holding company covered by the rule. Under the final rule–which will apply to bank holding companies and foreign bank organizations with $250 billion in total assets — the net credit exposure of a covered company to a counterparty cannot generally exceed 25% of the covered company’s tier 1 capital. Inter-G-SIB exposures are subject to a more stringent 15% limit. There are several noteworthy changes from the proposed versions of the SCCL – including a more straightforward consolidation standard for defining “counterparty” and a more risk-sensitive approach to securities financing transactions. The deadline for comments on the proposed reporting template has been set for October 5.
International Developments
UK’s FCA Collaborates with 11 other Financial Regulators to Create Global FinTech Startup “Sandbox”
The Financial Conduct Authority (FCA) has issued a consultation on how to set up a Global Financial Innovation Network (GFIN) along with 11 other financial regulators, with the goal of making it easier to launch financial technology startups in more than one country. According to the FCA, “The network will seek to provide a more efficient way for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas.” The three main functions of GFIN are to act as a network of regulators to collaborate and share experience of innovation in respective markets; provide a forum for joint policy work and discussions; and provide firms with an environment in which to trial cross-border solutions. The Bureau of Consumer Financial Protection in the United States is a GFIN member.
Capitol Hill
House Financial Services Committee Chairman Jeb Hensarling announced that the Committee plans to hold a hearing no later than Thursday, September 27, 2018 as a part of its ongoing investigations into various allegations of waste, fraud and abuse at the Federal Housing Finance Administration (FHFA) and the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac. Fannie Mae Chief Executive Officer Timothy Mayopoulos and FHFA Director Mel Watt will be invited to testify.
Next Week in Washington
- The House remains in recess until after the Labor Day holiday.
- The Senate will reconvene on August 14th. No hearings have been scheduled.
Research Rundown
FEDS Notes: Effects of Fixed Nominal Thresholds for Enhanced Supervision (Hou and Warusawitharana)
This research note assesses the impact of fixed nominal asset thresholds for supervision and regulation on bank activity. The authors find that banks curtail their natural growth as they approach regulatory thresholds and have increasingly concentrated below each threshold over the past three years. In order to limit this effect on bank activity, the authors suggest either replacing the thresholds with a multifactor approach or adjusting them for inflation.
Bank Holdings and Systemic Risk (Brunetti, Harris, Mankad)
The authors propose a method of estimating the portfolio composition of banks as a function of interbank trades and stock returns. The method provides more precise measurement of diversification and market susceptibility to propagating shocks. The authors found that systemic risk measures derived in this way are superior to other commonly used systemic risk indicators.
BoE Working Paper: Would Macroprudential Regulation Have Prevented the Last Crisis? (Akiman et al.)
This working paper assesses how current macroprudential regimes deal with two major factors that led to the global financial crisis: fragility in the financial sector and runaway debt in the household sector. They conclude that the U.S. FSOC would likely make little difference were the financial markets to experience a re-run of the factors that caused the last crisis, but that a macroprudential regulator modelled on the U.K.’s FPC stands a better chance.
CEPR Discussion Paper: Repo Market Functioning: The Role of Capital Regulation (Kotidis and van Horen)
In this paper, the authors use an exogenous intensification of the leverage ratio due to a regulatory change in the UK to demonstrate how the leverage ratio affects repo intermediation for both banks and non-financial institutions. Dealers subject to a more binding leverage ratio reduced liquidity in the repo market. The authors also observed a reduction in the frequency of transactions and a worsening of repo pricing.
Vox Eu Blog: Bank Resolution and the Structure of Global Banks (Bolton and Oehmke)
This blog post argues that the most successful way to dissolve a G-SIB in distress will depend on its risk profile, operational structure, and national regulatory regimes. The authors suggest that cross-border resolution of global banks may require resolution beyond the top holding company of the G-SIB due to asymmetries across jurisdictions or national regulatory agendas and either resolution framework will affect equity incentives within the G-SIB.
