Top of the Agenda
BPI Research Outlines a New Approach to Assess the Severity of Macroeconomic Stress Scenarios
In a blog posted today, BPI Research outlines a simple and transparent approach that the Federal Reserve could use to measure the severity of the annual stress test scenarios it employs under CCAR. The approach requires estimating the impact of a scenario on bank performance in the aggregate and calculating the probability that reality will turn out worse than the scenario. The Fed could use this or a similar approach, in combination with a publicly announced and debated standard for scenario severity, to increase bring greater transparency and accountability to its stress testing process and reduce unnecessary variability in capital requirements. The authors also emphasize the need for the Fed to establish clear severity standards against which scenarios could be judged, arguing “that the Federal Reserve should, prior to proposing its 2020 CCAR scenario, propose and finalize a rule specifying what that scenario is designed to achieve. … Even if the Federal Reserve were simply to propose and re-adopt that existing standard, in combination with a methodology such as the one proposed here to evaluate scenarios against that standard, transparency and accountability in stress testing would be materially enhanced.”
Senators Urge Fed Ensure Thresholds for Prudential Regulation Are Tailored Appropriately
On Friday, seven Senators sent Vice Chairman Quarles a letter on implementation of Section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. Section 401 shifts the threshold for the application of enhanced prudential standards to institutions with over $250 billion in assets, while also directing the Federal Reserve to tailor regulations for companies of all sizes. In the letter, the Senators note the Fed’s accumulated data demonstrates that companies under $250 billion in assets and regional banks over $250 billion in assets are not systemically risky, and encourages the Fed to tailor regulations accordingly. The letter also requests the Fed establish standards and treatments for international banks based on their U.S. asset size and risk profiles.
AI Is Fundamentally Changing the Foundation of Financial Services Companies, Says WEF Report
In a new report, the World Economic Forum asserts that Artificial Intelligence (AI) is fundamentally changing the foundation of financial services companies, creating new operating models and competitive dynamics. These shifting dynamics will reward companies that focus on the scale and sophistication of data more than the scale or complexity of capital. The report’s findings cover AI’s impact on customer experiences, market structure, ethical considerations and the role of data alliances and data regulation. According to the report, AI technologies will improve customers’ ability to compare product and services offerings, which will drive firms to market extremes, amplifying returns for large-scale players and creating new niche opportunities for innovators. The report also notes the growing importance of data regulation, specifically the privacy and portability of data, which will impact financial firms’ ability to deploy AI and thus have a profound impact on firms’ competitive positioning.
Fed Urged to Delay CECL Implementation and Conduct Quantitative Impact Study
A Risk.net article published on Wednesday highlights how banks are asking the Federal Reserve to delay implementation of the Current Expected Credit Loss (CECL) accounting standard until 2021 and to conduct a Quantitative Impact Study (QIS) to determine how CECL will interact with bank’s annual stress tests. BPI’s David Wagner is was quoted in the article, saying “CECL should not be incorporated into CCAR until at least 2021 for Securities and Exchange Commission reporting companies. We also think a QIS, in varying historical economic conditions and over time, is important, because no-one to our knowledge has performed a complete quantitative analysis of the impact of CECL on bank capital under stress.” Having an extra year “to digest the impact of CECL would instead give both banks and the Fed more time to assess the regime’s potential interactions with CCAR,” the article notes.
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
Call for Papers: Columbia/BPI 2019 Research Conference – Bank Regulation, Lending and Growth
The Bank Policy Institute and Columbia University’s School of International and Public Affairs invite the submission of papers for a conference on Bank Regulation, Lending and Growth. The purpose of the conference is to bring together academics, market participants, and policymakers to discuss the latest research on how regulation affects credit formation and economic activity. Paper submission deadline is November 1, 2018.
March 1, 2019, Columbia University, NYC
OCC Clarifies Policy for Determining Effect of Evidence of Discriminitory/Illegal Credit Practices for CRA Rating
On Wednesday, the OCC issued a revision to its Policies and Procedures Manual (PPM) to clarify its policy for determining the effect of evidence of discriminatory or other illegal credit practices on the Community Reinvestment Act rating of an institution. Of note is the replacement of a footnote in the prior version of the policy which stated that it was the OCC’s policy not to lower a bank’s CRA ratings by more than one rating level; instead, the revised policy states that the OCC’s general policy is to downgrade a CRA composite or component rating by only one rating level unless practices are found to be “particularly egregious,” thus allowing for double downgrades. The revised PPM also clarifies that the OCC’s policy is generally not to penalize a bank by lowering its CRA rating when examiners have determined that the bank has taken “appropriate remedial actions.”
OCC Clarifies 30-Day Comment Period for National Bank Merger Applications
The OCC recently issued an updated the Comptroller’s Licensing Manual on Business Combinations, OCC Bulletin 2018-22, to reflect clarifications particularly around the public comment period for national bank merger applications. Most importantly, the updated manual notes that the public comment period under the Bank Merger Act (BMA) is generally 30 days after newspaper publication. The BMA provides for a 30-day comment period, but the OCC’s trigger for the commencement of the 30-day period has varied over time. Under prior policy, the 30-day trigger was the later of events such as newspaper publication, publication in the OCC Reading Room, or publication in the OCC Weekly Bulletin (which generally would be the last of the triggering events). The updated manual effectively reflects a return to a policy to use newspaper publication as the definitive trigger for the comment period. Changed pages are identified on p.74 of the updated manual.
- The Senate returned to session this week to consider judicial nominations and began consideration of a Defense and Labor/HHS appropriations bill.
- The House remains in recess until after Labor Day.
Next Week in Washington
- The Senate Banking Committee will hold a hearing entitled, “Russia Sanctions: Current Effectiveness and Potential for Next Steps.” Tuesday, August 21 at 10:00 AM
- The Senate Banking Committee will vote on the nomination of Kathy Kraninger as head of the Bureau of Consumer Financial Protection, as well Elad Roisman as Securities and Exchange Commission member and Dr. Dino Falaschetti as Director of Treasury’s Office of Financial Research. The announcement comes after the postponement of Kraninger’s confirmation vote, originally scheduled for August 2, following a contentious confirmation process in which she faced criticism from Senate Democrats on her involvement in the Trump administration. Other nominations slated for votes next Thursday include Rae Oliver to be Inspector General of the Department of Housing and Human Development, and Michael Bright and Kimberly Reed to be presidents of the Government National Mortgage Association and Export-Import Bank, respectively. Thursday, August 23 at 9:30 AM
IMF: The Long-Term Impact of Brexit on the European Union (Chen et al.)
This blog explores the costs EU countries will incur when the UK withdraws from the EU. Reversing the capital flow linkages and migration flows will hurt income and employment in the EU regardless of what type of trade agreement is reached. The authors find that there will be different declines to output for different countries in the EU, with Ireland being hit the hardest (2.5 percent decline) over the long run.
Liberty Street Economics Blog: Just Released: Cleaning Up Collections (Haughwout et al.)
The Quarterly Report on Household Debt and Credit shows that collections became prevalent during 2008 and 2012 due to a rise in financial hardships, however between 2013 and the end of 2017, the percent of consumers with accounts in collections declined about 5 percentage points, reflecting slight increases in credit scores especially for those with the lowest scores. The blog post concludes that borrowers will benefit from this credit report cleanup in the long run facilitating more access to credit, jobs, and even rental housing.
First to “Read” the News: New Analytics and Algorithmic Trading (von Beschwitz, Keim, and Massa)
The authors observe that news analytics (“the algorithmic processing of news releases by computers”) allows a faster market response to news items and appears to increase market efficiency. Algorithmic traders seem to understand when news analytics is most accurate and learn dynamically about the informational content of the news with the result that temporary price distortions due to false information are corrected quickly.
NBER Working Paper: Banks, Insider Connections, and Industrialization in New England: Evidence from the Panic of 1873 (Hilt)
This working paper uses the Panic of 1873 to study whether firms with bank directors on their boards navigated the recession better. The author found evidence that having affiliations with banks helped resolve problems related to asymmetric information especially among young firms. Similarly, the author estimates that if these firms did not have ties to bank directors in 1872 their total assets would have been 35 percent lower during the recession that followed.