BPInsights

Top of the Agenda

BPI Gives Recommendations to FSB on Technical TLAC Implementation

This week, in conjunction with the Global Financial Markets Association (GFMA) and the Institute of International Finance (IIF), BPI submitted a response to the Financial Stability Board’s (FSB) request for information on the technical implementation of its “TLAC” standard on the adequacy of total loss-absorbing and recapitalization capacity for G-SIBs in resolution. The letter expressed BPI’s support for the consistent global implementation of a well-constructed TLAC standard and its belief that, together with other post-crisis resilience enhancements and actions taken by firms themselves, it will secure a durable end to “too big to fail.” The FSB should issue guidance encouraging regulators to administer the regulatory capital buffers that complement TLAC minimums in a manner consistent with the TLAC Term Sheet in order to promote harmonized implementation across jurisdictions, the letter argues, as well as encourages the BCBS to revise the TLAC holdings standard to adopt the like-for-like principle of the Basel III capital framework’s corresponding deduction approach.

Of Note

BPInsights Will Return After Labor Day

Due to the upcoming Labor Day holiday weekend, BPInsights will not publish next week on Friday, Aug. 31. The next edition of BPInsights will hit your inbox on Friday, Sept. 7. Enjoy the holiday weekend!

German Foreign Minister Pens Op-Ed Criticizing U.S. JCPOA Withdrawal, Calls for Independent Payments System

On Wednesday, German Foreign Minister Heiko Maas published an op-ed in Handelsblatt on US-EU relations discussing ways “to build a sovereign, strong Europe” that can, in part, balance the U.S. and its recent foreign policy actions. Within the op-ed, he criticizes the U.S. withdrawal from the Iran nuclear deal (JCPOA), saying that while the EU should make clear its intention to continue to work together – it should also show its strength. He goes on to suggest that one way to strengthen European autonomy in this regard is “by establishing payment channels independent of the U.S., a European monetary fund and an independent SWIFT [payments] system.” According to The Atlantic, his sentiments on U.S.-EU relations were echoed by German Chancellor Merkel. On the creation of an independent payments system, she stated that the present Iranian situation does create problems, but also that they “know that on questions of terrorist financing, for example, SWIFT is very important.” In response to these statements, Sen. Ted Cruz (R-TX) and 15 Senators sent a letter to Secretary Mnuchin on August 23 congratulating Treasury on its Iranian sanctions efforts and urging it to “to take all necessary steps to ensure the Society for Worldwide Interbank Financial Telecommunication (SWIFT) disconnects the Central Bank of Iran (CBI) and all other designated Iranian financial institutions.”

Four BPI Members Named to Fortune Magazine’s “Change the World” List

Fortune Magazine’s fourth annual Change the World list of companies that “are using the profit motive to help the planet and tackle social problems” includes four BPI member banks: Bank of America, JPMorgan Chase, Barclays, and Banco Santander. Bank of America (#3 on the list), which in 2007 raised $20 billion for low-carbon and sustainable business, has since added $125 billion to that commitment and deployed $96 billion in financing, including “everything from green skyscrapers in Manhattan to cleaner cookstoves in Kenya.” JPMorgan Chase (#18) has focused on getting financing to low-income communities and has launched the Entrepreneurs of Color Funds (EoCF) in Detroit, Chicago, the South Bronx, and Bay Area. JPMorgan Chase has committed a total of $13.6 million to the four EoCFs, and financing from other investors has boosted the size of fund in Detroit to over $18 million. Barclays (#42) is working to help younger job-seekers close the job skills gap in many areas. “The bank’s largely web- and app-based LifeSkills program helps people develop basic skills (think listening, problem solving, and interview tactics). Connect With Work, launched last year, goes a step further by matching job candidates with motivation but little or no experience to employers who’ll take a chance on them. Barclays says more than 2.1 million people used either LifeSkills or Connect With Work in 2017,” according to Fortune. Lastly, Banco Santander (#57) is the world’s largest corporate contributor to higher ed, according to the Varkey Foundation. “Through 2017, it has invested more than 1.6 billion euros ($1.83 billion) in universities and awarded more than 39,000 scholarships,” Fortune reported.

Karen Petrou Aims to Link Investors with Medical Researchers to Help Cure Blindness

Karen Petrou, founder of policy-analysis firm Federal Financial Analytics, is working to make sure medical researchers can access money from organizations that are looking to invest. Petrou, who is blind, has helped to introduce a bill in the House of Representatives that would give stamps of approval to labs and other research groups that have projects that are “deemed promising by the National Eye Institute, a designation that could help them line up loans,” a WSJ article reads. “Lenders would sell the loans to an Eye Bond Trust administered by financial institutions that would package and sell the loans to investors — she envisions 10-year bonds. Investors would be repaid both the principal and interest when the bonds mature, and if a lab’s project turned into a commercial success, the investors could get equity,” the article continues. Petrou hopes this model could be applied to other diseases in the future.

BPI News

BPI Research’s McGregory to Join FRBNY as Senior Financial Analyst

It is with mixed feelings that we announce that Myya McGregory is leaving BPI to join the Federal Reserve Bank of New York as a senior financial analyst. As part of her new role, McGregory will be working on the supervisory pre-provision net revenue models used in the U.S. stress tests. At BPI, she was involved in several important research projects such as the estimation of the implicit capital requirements in the U.S. stress tests and in the development and quarterly analysis of BPI’s bank conditions index. We wish her all the best in her new responsibilities. McGregory’s departure leaves BPI with an opening for a Research Analyst. More information on the position can be found here.

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

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

Industry News

Banking Agencies

Banking Agencies Issue Interim Final Rule Regarding the Treatment of Certain Municipal Securities as HQLA

On Wednesday, the U.S. Banking Agencies issued an interim final rule that amends the LCR and treats liquid and readily-marketable, investment grade municipal obligations as Level 2B HQLA. The rule is intended to meet the agencies requirements under the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA), and would add a definition for the term “municipal obligation” to the LCR rules that is consistent with EGRRCPA. The interim final rule will be effective upon publication in the Federal Register and will also be subject to a 30-day comment period.

The FOMC Has Been Discussing Several Issues BPI Has Been Tracking for Years

The minutes to the July/August FOMC meeting released on Wednesday were chock full of discussions of issues that BPI has been tracking closely for several years. First, the minutes recognized that the risk of hitting the zero lower bound for interest rates are heightened by an “increased demand for safe assets.” BPI first pointed to this risk as a cost that needed to be included when calibrating liquidity regulations in a research note in August 2016. Second, the minutes included two references to the possibility that liquidity regulations are constraining the ability of the Fed to reduce the size of its portfolio and its range of potential monetary policy implementation frameworks. BPI foretold this possibility in a research note in September 2016, discussed the possibility with market participants and regulators at a symposium in May of this year, and described the signs in financial markets that the constraint might be beginning to bind in blogs in June and July. Third, a “few” participants called for an increase in the countercyclical capital buffer (CCyB), an ongoing debate that BPI shined a light on in May and again in July. Such an increase appears unlikely at least for now, as the staff concluded that financial vulnerabilities were “moderate,” which we take to be below the Fed’s hurdle for raising the CCyB of “meaningfully above normal.” The overall assessment had been dropped without explanation from the Fed’s Monetary Policy Report to Congress last month.

Cybersecurity

Senators Examine the State of Cybersecurity

The Senate Judiciary Subcommittee on Crime and Terrorism held a hearing on Tuesday examining threats to the nation’s critical infrastructure (video). The hearing featured three different rounds of panelists who discussed the ongoing cyber threats to the nation and efforts to protect our critical infrastructure. One of the panelists, Associate Deputy Attorney General Sujit Raman, noted the vast majority of our critical infrastructure is owned by private entities and, thus, cybersecurity is a shared responsibility and requires extensive cooperation between the public and private sectors. James Lewis, from the Center for Strategic and International Studies, highlighted the cross-sector collaboration among the financial services, telecommunications, and energy sectors to protect critical infrastructure through public/private partnerships and coordinating councils. BITS|BPI an active industry co-leader when it comes to cross-sector collaboration. Also discussed was the cybersecurity framework developed by the National Institute of Standards and Technology, which is used by BITS|BPI as the basis of industry’s Financial Services Cybersecurity Sector Profile, and the possibility of allowing private entities to retaliate against cyber criminals, also known as “hack back.”

International Developments

Deutsche Bundesbank’s BIS Chairman Weidmann Addresses Monetary, Macroprudential Policy

In a speech on Monday to the Central Bank Research Association, Deutsche Bundesbank President and BIS Chairman Jens Weidmann addressed the relationship between monetary- and macroprudential policy. Specifically, in considering the connection between monetary policy and financial stability, he highlighted the utility to central banks of the information that financial conditions provide, and asserted that monetary policy “affects economic agents’ willingness to take on risk” while warning against the use of monetary policy to accomplish stability objectives. He also praised the establishment of a macroprudential approach to systemic risk reduction, but stressed the continued importance of traditional microprudential supervision and regulations like Basel III’s capital requirement reforms, urging an eye to financial stability (particularly with regard to too-big-to-fail) amid efforts to streamline regulation. “Between acknowledging financial stability as an explicit objective of monetary policy and disregarding it altogether,” Weidmann said, “there is an intriguing range of shades of grey.”

Capitol Hill

Senate Banking Committee Hearing: Implementation and Effectiveness of the Sanctions Program Currently in Place Against Russia

On Tuesday, the Senate Banking Committee held a hearing on the “implementation and effectiveness of the sanctions program currently in place against Russia.” Committee Chairman Mike Crapo (R-ID) stated that the Administration, exercising its authority under the Countering America’s Adversaries Through Sanctions Act of 2017 (CAATSA), has “imposed some of the toughest sanctions on Russia in years, particularly with regard to those imposed in April on Russia’s oligarchs and their business associations.” But he stressed that Congress is “positioned to do more” to deter Russia’s behavior.

Treasury Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker testified that Russia “continu[es] to engage in a wide range of malign activity,” and agreed that Russia’s conduct “demands a firm and vigorous response.” Mandelker highlighted Treasury’s efforts to identify and designate “a veritable ‘who’s who’ of Russia’s most prominent companies” that she said have become “radioactive” following the imposition of sanctions. Mandelker cautioned that influencing Russia’s behavior will require a “whole government approach” and stressed that “sanctions alone are not going to solve the problem.”

Senate to Vote on Richard Clarida Fed Vice Chairman Nomination in Coming Days

On Wednesday, Senate Majority Leader McConnell filed for cloture on the nomination of Richard Clarida to be vice chairman of the Federal Reserve for four years and a member of the Fed for 14 years. The vote on Clarida, who is a PIMCO managing director and a professor at Columbia University, could take place in the coming days. Two other nominees are awaiting confirmation as Fed governors, Michelle Bowman and Marvin Goodfriend.

Senate Banking Committee Approves Kraninger CFPB Nomination, Plus Roisman, Reed, Bright, Oliver, Falaschette Nominations

On Thursday the Senate Banking, Housing and Urban Affairs Committee approved the nominations of Kathy Kraninger to lead the Consumer Financial Protection Bureau; Elad Roisman to be a Commissioner on the Securities and Exchange Commission; Kimberly Reed to be president of the Export-Import Bank; Michael Bright to be president of the Government National Mortgage Association; Rae Oliver to be inspector general of the Department of Housing and Urban Development; and Dino Falaschetti to be director of the Office of Financial Research within the Department of the Treasury.

• The House remains in recess until after Labor Day.

Seminars, Conferences & Events

18th Annual Bank Research Conference

Sponsored by the FDIC’s Center for Financial Research and the Journal of Financial Services Research
September 6-7, 2018
L. William Seidman Center, Sheila C. Bair Auditorium
3501 Fairfax Drive
Arlington, VA 22226

Research Rundown

FEDS Notes: The Branch Puzzle: Why Are there Still Bank Branches? (Anenberg et al.)

Technological advancements have made online banking more prevalent, however the number of local bank branches declined only slightly in the post-crisis period. Despite competition from non-local lenders, depositors who are older, from higher wealth households, or are self-employed patronize their local branch the most. The data also showed that most small businesses still rely on bank branches but non-local lenders are gaining market share.

Bank Underground Blog: Gender Diversity on Bank Board of Directors and Performance (Owen and Temesvary)

This blog examines whether gender diversity on bank boards influences their performance. The authors conclude that more gender diversity has a positive impact on various performance measures with greater benefits at well capitalized banks. The authors also found evidence that banks with gender diverse boards received better oversight of management and may have received better strategic advice during the financial crisis. These results support the hypothesis that banks that are already under better management are better positioned to reap the full benefits of gender diversity.

Vox EU Blog: The Implications of Trust on the Lending Activities of Banks and Fintech Firms (Thakor and Merton)

In this blog, the authors model trust as a function of loan outcomes and reputation to determine whether banks or fintechs are viewed as more trusted lenders. They find that traditional banks appear more trustworthy than fintech lenders because regulatory supervision and their access to soft information about their borrowers compels them to make good loans. For fintech firms, a loss of trust can raise the cost of funding, thereby lowering the profits from good loans and make bad loans seem more attractive.

IMF Working Paper: Bank Competition, Risk Taking, and Their Consequences: Evidence from the U.S. Mortgage and Labor Markets (Feng)

This working paper uses mortgage data and local house volatility to gain insights into how bank competition influences risk taking. The author found that counties with a competitive mortgage market lowered lending standards by twice as much as those in concentrated markets between 2000 and 2005 in response to high expected house price volatility. This type of risk taking is associated with real economic outcomes during the financial crisis.