BPInsights: August 3, 2018

BPInsights: August 3, 2018


Top of the Agenda

BPI Hires Two Experienced Banking Veterans: Kate Childress, Public Affairs, and Dafina Stewart, Bank Regulatory Policy and Legal Affairs

On Thursday, BPI announced the addition of Kate Childress as Executive Vice President and Head of Public Affairs, overseeing government affairs, communications, and member engagement. She joins BPI from JPMorgan Chase, where she most recently served as Chairman and CEO Jamie Dimon’s point person for the firm’s work with the Business Roundtable. “I am delighted to have Kate joining us at BPI,” said BPI CEO Greg Baer. “With her experience, energy and judgment, she is uniquely positioned to help us build out the organization. She will be instrumental in taking our research and analysis, and leveraging the resources of our member banks, to make the case for the essential role banks play in driving economic growth.”

Also joining Childress at BPI this week is Dafina Stewart, whom BPI announced Monday has been hired as Senior Vice President and Associate General Council. In her new role, she will serve on BPI’s legal and regulatory affairs team, where she will assist in the development of bank regulatory policy, strategy, and advocacy. Stewart comes to BPI from the Board of Governors of the Federal Reserve System, where she was Senior Counsel in the Legal Division. “We are excited to add Dafina’s expertise and experience to the BPI team, as she will add to our ability to produce thoughtful analysis of post-crisis regulation,” said Greg Baer.

Of Note

Audacious Expansion Push Underway at Military Credit Union, Disconcerting Some

“The Pentagon Federal Credit Union has stepped up growth since a new CEO took over in 2014 … with a goal of more than quadrupling Pen Fed’s assets from about $18 billion to $75 billion in 2025,” the Wall Street Journal reports. From a credit union “exempted by Congress from federal income tax and some lending rules,” this “expansion for the sake of expansion” is being viewed by some as a threat to credit unions’ community-minded reputation, and the benefits it affords. “With an anything-goes approach to credit union membership,” the article quotes Idaho State University Federal Credit Union CEO Robert Taylor, “How can we possibly go to Washington and say, ‘We are the small credit union serving the small guy?’”

Employers Increasingly Look To Apps To Make Every Day Payday

“Employers looking to attract and retain hourly workers have to get creative as the labor market tightens,” and many of them are increasingly turning towards apps that allow employees immediate access to their wages, Bloomberg reports. Though unemployment is almost the lowest its been in nearly 50 years, “many Americans face income and job instability or are routinely cash-strapped,” as employers “focus on nonwage benefits rather than salary hikes.” By allowing their employees to withdraw as much as half of their prior day’s earnings for free using mobile apps like Instant Financial, the article explains, employers may be able to reduce turnover as they alleviate day-to-day financial stress for their workers.

FINRA Requests Comment on FinTech Innovation in Broker-Dealer Space

In advance of Tuesday’s long-awaited Treasury fintech report, FINRA on Monday issued a special notice requesting comment on how it “may support fintech innovation consistent with [its] mission of investor protection and market integrity.” The notice, responses to which are due October 12, seeks specific comment on data aggregation, artificial intelligence, and the development of a taxonomy-based machine-readable rulebook.

ICBA Calls on FDIC to Reject Nelnet Industrial Bank Charter

On Wednesday, ICBA called on the FDIC to impose a two-year moratorium on future loan charter applications and to deny Nelnet Bank’s deposit insurance application for its industrial bank charter application. ICBA contends that Nelnet’s application, which was submitted in June, “is designed to avoid the legal restrictions of the Bank Holding Company Act” and, more broadly, “The ILC loophole allows commercial interests to own full-service banks while avoiding the legal restrictions and regulatory supervision that apply to other bank holding companies – threatening the financial system and creating an uneven regulatory playing field.”


Treasury Issues FinTech Report

On Tuesday, the U.S. Treasury issued its report on FinTech entitled, “A Financial System that Creates Economic Opportunities – Nonbank Financials, FinTech, and Innovation.” Key highlights include:

  • Data aggregators – discusses the need to remove regulatory uncertainties that inhibit financial services companies and data aggregators from establishing data-sharing agreements.
  • Digital identity – recommends financial regulators enhance public-private partnerships to facilitate the adoption of digital legal identity products and services.
  • Cloud computing – recommends regulators modernize their guidance and requirements regarding cloud services, including formally recognizing independent U.S. audit and security standards that meet regulatory expectations, and eliminate outdated record keeping rules (e.g., SEC Rule 17a-4).
  • Artificial Intelligence/Machine Learning – cautions against regulations that would impose unnecessary burdens on the use of AI/ML and encourages greater regulatory clarity.
  • Regulatory alignment – discusses the need for greater coordination of regulations both at the federal and state level, including streamlining and coordinating exams.
  • Special purpose national bank charters – Recommends the OCC move forward with applications for special purpose national bank charters. In a separate notice the OCC indicated it will accept applications.
  • Partnerships – encourages banking regulators to “better tailor and clarify guidance regarding bank partnerships with nonbank financial firms.”
  • Regulatory Sandboxes – recommends federal and state regulators establish a “unified solution that coordinates and expedites regulatory relief under applicable laws and regulations to permit meaningful experimentation.”
  • FBIIC Technology Working Group – recommends that the FBIIC establish a technology working group to better understand the technologies upon which industry increasingly relies and to stay abreast of innovation taking place across the financial sector.

For additional BPI analysis on the regulatory implications of the Treasury’s FinTech report, see “Agency News” below.

DHS Hosts Cybersecurity Summit

On Tuesday, the Department of Homeland Security (DHS) hosted the first National Cybersecurity Summit in New York, which convened industry partners and government leaders with the goal of laying out a vision for a collective defense strategy to strengthen cybersecurity and protect our nation’s critical infrastructure. At the Summit DHS announced the creation of the National Risk Management Center, which will coordinate national efforts to protect the nation’s critical infrastructure. DHS also unveiled the formation of the Information and Communications Technology (ICT) Supply Chain Risk Management Task Force, which will be comprised of subject matter experts from industry and government. Ahead of the Summit a group of more than 20 CEOs from across the public sector and senior government officials convened to discuss cybersecurity and critical infrastructure risk management.

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

Treasury’s FinTech Report Makes Recommendations on Third-Party Risk Management, BHC Act “Control,” National FinTech Charters, and More

The Treasury’s 222-page FinTech report was released on Tuesday along with a 4-page fact sheet. Key highlights in the report include:

  • BHC Act “control” – To foster innovation, BHCs have sought to invest in FinTech firms, but the application of the BHC definition of “control” can discourage banks from such investments. Treasury’s report recommends that the Federal Reserve should consider how to reassess the definition of BHC control, among other recommendations.
  • National Bank FinTech Charters – The report provide plenty of the cover for the OCC to move ahead, as it did this week (see BITS coverage of the OCC announcement above), with its proposal to grant special purpose limited national bank charters to nonbank fintech firms. The OCC is now formally accepting applications from nonbank fintechs that want a special purpose national bank charter. The announcement came in the form of a 4-page policy statement issued by Comptroller Otting, as well as a new supplement to the Licensing Manual.
  • Third-party risk management – The report identifies several concerns including: costs of compliance, inconsistencies in banking agency guidance, lack of clarity around API agreements with a data aggregator, and lack of clarity about whether a third-party vendor’s sub-contractors, such as cloud-service providers (i.e., fourth party), must also meet due diligence requirements. The Treasury recommends Federal banking regulators should conduct a coordinated review of third-party guidance through a notice and comment process, and harmonize guidance, among other recommendations.
  • A statutory fix for Madden: national bank preemption – The Report addressed the legal issues raised by the Second Circuit’s 2015 decision in Madden v Midland Funding, LLC, recommending that Congress codify the “valid when made” doctrine, which provides that a loan contract that is valid when it is made cannot be invalidated by any subsequent transfer to a third party. The Report notes that action by Congress would “preserve the functioning of U.S. credit markets and the long-standing ability of banks and other financial institutions, including marketplace lenders, to buy and sell validly made loans without the risk of coming into conflict with state interest rate limits.”

For additional technology-focused converage of the Treasury’s FinTech report, see “BITS News” above.

Other Developments

ISDA Releases 2018 U.S. Resolution Stay Protocol

The International Swaps and Derivatives Association (ISDA) announced Tuesday that it has released its 2018 Protocol for entities subject to the U.S. Stay Regulations, which impose a temporary suspension of default rights for counterparties to GSIBs’ qualified financial contracts, or QFCs. The 2018 Protocol enables U.S. GSIBs, and the U.S. operations of their foreign counterparts, in accordance with the Stay Regulations, to “amend the terms of their covered agreements to ensure that, unless excluded or exempted, their QFCs (i) are subject to existing limits on the exercise of default rights by counterparties under the Orderly Liquidation Authority provisions of Title II of the Dodd-Frank Act and the Federal Deposit Insurance Act; and (ii) limit the ability of counterparties to exercise default rights related, directly or indirectly to an affiliate of covered entities entering into insolvency proceedings.”

Capitol Hill

  • Both the House and Senate remain in recess for the week of August 6.
  • This week, the Senate Banking Committee postponed a vote on the nomination of Kathy Kraninger as Director of the Consumer Financial Protection Bureau. It was not immediately clear when the vote will be rescheduled.
  • Congress extended the national flood insurance program for four months, through November 30. This is a clean extension with no reforms.

Next Week in Washington

  • The House is now in recess until after Labor Day and the Senate Banking Committee postponed hearings previously scheduled for next week.

Research Rundown

NBER Working Paper: Artificial Intelligence, Economics, and Industrial Organization (Varian)

This paper provides a short summary of how machine learning and artificial intelligence are altering the industrial organization of both the firms that provide artificial intelligence technology and those that adopt it.

“Modeling Your Stress Away” (Niepmann and Stebunovs)

This paper analyzes changes in the sensitivity of banks’ projected credit losses to macroeconomic shocks between the 2014 and 2016 European Banking Authority’s stress tests. The authors argue that their results suggest that banks smoothed the impact of changes in macroeconomic scenarios on projected credit losses by changing their own internal models. The effect was more pronounced for banks using the internal ratings-based approach and that experienced increases in losses due to an increased severity of the scenario.

NBER Working Paper: The Run on Repo and the Fed’s Response (Gorton, Laarits, and Metrick)

This paper examines the role of repo market runs during the financial crisis. Using data on collateral brought to the Fed’s emergency lending window, the authors found a correlation between the magnitude of repo discounts on certain types of collateral and the likelihood of that collateral being brought to the Fed’s window.

Liberty Street Economics Blog: The Premium for Money-Like Assets (Cipriani et al)

This blog estimates the premium investors are willing to pay to hold money-like assets. Using investors’ response to the recent money market mutual fund reform, the authors estimate the premium to range between 20 and 30 basis points.