BPInsights: April 10, 2021

Stories Driving the Week

What Would CBDC Mean for the U.S. Economy? BPI Working Paper Unpacks Costs, Benefits

Central bank digital currencies are under consideration at central banks around the world, and active technical development at some. Yet their profound policy implications have undergone little public debate, and little analysis outside the realm of the central banks themselves.  Such debate is overdue because a central bank digital currency is not simply paper currency in digital form: its adoption would have profound consequences for the financial system and economic growth. It could transform the place of the central bank, and the government more generally, in our society.

A new working paper by BPI President and CEO Gregory Baer presents a comprehensive analysis of the costs and benefits of a CBDC for the United States. Such an analysis must include a review of how a CBDC would function and how it would compare to existing payments systems. Importantly, this analysis reviews in detail how steps to mitigate some of the costs of CBDC issuance — in particular, efforts to mitigate significant risks to financial stability and economic growth — necessarily reduce some of its potential benefits, most notably financial inclusion.

Coverage can be found in Morning Consult, Protocol and POLITICO.

Treasury Releases Tax Plan Report As Senate Dems Unveil Tax Blueprint

The Treasury Department this week unveiled a report providing more details on the tax plan announced recently by President Joe Biden. The plan, intended to fund a broad infrastructure overhaul, would raise the corporate tax rate from 21 percent to 28 percent and impose a global minimum tax on American multinational firms. The White House tax plan’s provisions targeting overseas income would raise over $2 trillion in revenue over a decade, the report says. The Administration would replace the BEAT overseas minimum tax with a tax called SHIELD that targets U.S. multinationals’ deductions of payments to their overseas affiliates in lower-tax countries. The plan also aims to stop corporate inversions, where a U.S. multinational merges with a foreign company and puts its headquarters in the lower-tax jurisdiction.

Treasury Secretary Janet Yellen signaled a new diplomacy push on a global minimum tax in a speech April 5 and touted the tax plan in a Wall Street Journal op-ed April 8.

The Biden tax hike could face challenges in the Senate as Sen. Joe Manchin (D-WV) said he opposes raising the corporate tax above 25 percent. Democratic Sens. Ron Wyden (D-OR), Mark Warner (D-VA) and Sherrod Brown (D-OH) released their own tax proposal this week aimed at reducing incentives for companies to move operations overseas. It differs slightly from the Biden plan, according to POLITICO – for example, the lawmakers call for increasing the GILTI tax rate on multinationals’ income from intangible assets to match the U.S. corporate tax rate.

BPI Blog: Let Banks Have Room for the Future of Office Space Use Following the Pandemic

The OCC’s proposal to restrict how banks occupy their premises would bring unwelcome uncertainty and restrictions just as banks rethink how they use their office space, a new BPI blog says. Banks abide by longstanding limits on their real estate holdings – rules meant to prevent them from speculating on real estate. But a new, prescriptive approach that would require 50 percent or more occupancy of bank premises as well as other limitations on how banks use their office space would make it harder for banks to adapt to the post-pandemic reality. Now is not the time to impose new rules on premises.  The OCC should withdraw its proposal to ensure banks have the flexibility they need to adjust to the future of office space utilization.

6 Things Banks, Community Groups Want in Next Phase of CRA Reform

An American Banker article this week highlighted several features banks and community groups want regulators to include in an updated Community Reinvestment Act regulation. Those items include a joint interagency rulemaking and a framework allowing banks to receive CRA credit outside of their branch networks, points that BPI has advocated for in recent comment letters. A joint approach among banking regulators would provide clarity and consistency to banks, and allowing banks to receive credit outside their branch networks would avoid exacerbating CRA hotspots, encourage support in underserved areas and make evaluations more stable and predictable, according to the article, which cites a recent BPI comment letter.

Yellen Stresses Climate Focus in Speech to Finance Ministers

Treasury Secretary Yellen reiterated her focus on climate change in a speech this week to the Coalition of Finance Ministers for Climate Action. The Financial Stability Oversight Council, a group of regulators chaired by the Treasury Secretary, will prioritize climate risk as a factor in financial stability, she said. Secretary Yellen said Treasury would encourage financial institutions to align their portfolios with the Paris Agreement.

Yellen’s latest remarks on the subject come amid a Bloomberg report that President Biden is planning to direct the Administration to develop a government-wide strategy on climate-related risks for financial assets. The strategy would take the form of an executive order, according to the article, and would direct the OMB chief to identify drivers of federal government climate risk exposure and develop ways to measure climate risk for the president’s budget projections. The OMB and Council of Economic Advisers would also publish an assessment of the government’s climate risk exposure.

Waters, Warner Urge Treasury to Extend ECIP Deadline

House Financial Services Committee Chairwoman Maxine Waters (D-CA) and Senate Banking Committee member Mark Warner (D-VA) called on Treasury Secretary Yellen in a letter to extend the application deadline for the Emergency Capital Investment Program, an initiative to support Community Development Financial Institutions and Minority Depository Institutions. They urged Treasury to provide more guidance to clarify answers to those institutions’ questions, which they said are holding some banks back from applying. “[W]e understand that guidance that affects institutions’ eligibility, capital offerings, compliance, and reporting still needs to be published,” they wrote. “As a result, institutions that would otherwise participate are hesitant to do so and may be unable to apply by the current deadline of May 7, 2021.”

In Case You Missed It

Takeaways from Jamie Dimon’s Shareholder Letter

In his wide-ranging shareholder letter this week, JPMorgan Chase chief Jamie Dimon set the tone for a momentous economic recovery from the pandemic and laid out the challenges ahead for America and the banking industry. Here are some top highlights from the letter:

  • Big Tech and FinTech presence in banking is growing, and that trend deserves a level regulatory playing field. As Dimon put it, “Fintech and Big Tech are here … big time!” He contrasted bank regulations with the relative lack of oversight over FinTech and Big Tech firms offering similar services, calling for a fairer regulatory regime. “As our system changes, our government and regulators need to understand that maintaining the vibrancy, safety and soundness of this system is critical – and this includes maintaining a relatively fair and balanced playing field.” He also foreshadowed issues that could impede Big Tech firms’ growing financial footprint, such as data privacy, digital taxes and antitrust and competition.
  • When crisis came, banks were prepared not only to survive, but be part of the solution. Dimon emphasized the strength of the banking sector in weathering the COVID crisis and supporting American businesses and families through it, including through the PPP relief program. “[T]here is no question the banks were able to weather a terrible storm while reserving extensively for potential future loan losses,” he wrote.
  • Climate change calls for evolution and innovation, not an abrupt cutoff of capital. JPMorgan has pledged to align its portfolio in oil and gas, electric power and auto manufacturing with the Paris Agreement to reduce emissions. But Dimon called for a thoughtful approach to the transition to a lower-carbon economy. He said abandoning financing for carbon-intensive companies is “economically counterproductive.” Instead, banks should work with them to evolve their businesses.
  • Community investment is important. Dimon highlighted the bank’s community investment efforts, from supporting affordable housing to helping underbanked and unbanked Black and Latino households open bank accounts.
  • Liquidity and capital rules should be calibrated in a way that balances growth and financial stability. Overly stringent rules can bind banks too strictly and shift lending into the unregulated financial sector, he said. For example, the stigma of banks borrowing from the Fed’s discount window keeps liquidity locked up, where it never reaches the real economy.
  • Unintended regulatory consequences force the Fed to do what large banks once did – intermediate in market stress. Dimon said “the confluence of three main constraints (the LCR, the supplementary leverage ratio (SLR) rule and G-SIFI) created red lines that we cannot cross.” If large banks can’t intermediate in markets because of regulatory requirements, the Fed will need to play that role – and frequently.

Goldman Sachs Joins Coalition to Close Black Wealth Gap

Goldman Sachs joined a partnership of companies, universities and nonprofits aimed at closing the wealth gap between Black and white Americans. The group, named NinetyToZero in a reference to the 90 percent racial wealth gap, was announced this week. Members include the Robin Hood Foundation, the ACLU, McKinsey & Co., Starbucks and the Wharton School of the University of Pennsylvania. Goldman also recently announced research on Black women’s economic inequalities and a campaign aiming to enhance the lives of 1 million Black women over the next decade. The bank joins several BPI member banks, including JPMorgan Chase, Bank of America, PNC, Citigroup, U.S. Bank, Wells Fargo and others, in its initiatives to boost minority communities’ economic advancement.

Bank of America Sets $1.5T Sustainable Finance Goal by 2030

Bank of America set a goal to deploy $1 trillion in climate-related financing by 2030, a pledge that anchors a broader $1.5 trillion commitment to support environmental transition and social inclusive development, the bank announced April 8. The initiative will span business activities across the globe. The $1.5 trillion target is aligned with the United Nations Sustainable Development Goals (UN SDGs).

FDIC Launches Campaign Targeting Unbanked Americans

The Federal Deposit Insurance Corp. this week unveiled a #GetBanked campaign encouraging consumers without bank accounts to open a checking account, according to an agency press release. Bank accounts offer access to safer and lower-cost financial services than those provided by check cashers or payday lenders. The FDIC said it was aiming to reach Black and Hispanic consumers with the campaign, which is focused on Houston and Atlanta.

A recent BPI blog highlighted the need for regulatory clarity on how low-cost Bank On accounts, a way to increase financial inclusion in underserved communities, receive credit under the Community Reinvestment Act. A clarification would ease the path for more banks to offer such accounts.

Bloomberg: Bitcoin, Chinese CBDC No Threat to Dollar Dominance

Concerns that a Chinese digital yuan or Bitcoin would dent the U.S. dollar’s status as the world’s reserve currency rest on incorrect assumptions about why the dollar dominates the world economy, Bloomberg editor Joe Weisenthal wrote in an April 9 newsletter that cites recent comments from venture capitalist Peter Thiel warning that Bitcoin could become a “Chinese financial weapon.” The dollar’s reserve currency status isn’t what allows the U.S. to run large deficits while maintaining a stable government-bond market, as some people assume – after all, other countries like the UK whose currencies don’t have the dollar’s global reach can do the same, Weisenthal wrote. The real root of the dollar’s hegemony is its stability and the buying power and wealth of the American consumer, features that a Chinese digital currency or Bitcoin would not dislodge. Bitcoin, as a decentralized digital asset, is also more likely to pose a threat to a system with high surveillance and tight capital controls than to a free market, he wrote.

BPI, Joint Trades Ask CFPB Not to Delay Qualified Mortgage Rule Compliance Date

The CFPB qualified mortgage rule is based on rigorous analysis, and delaying its mandatory compliance date from July 1, 2021 to October 2022 is unnecessary, BPI and several other trades wrote in a letter to the CFPB’s Acting Director this week. The updated framework – with amended definitions of “qualified mortgage” and safe harbor — expands fair and equal access to credit, particularly for borrowers of color, maintains existing safe product features and provides an effective replacement for the GSE Patch, a measure that treats certain mortgages eligible for purchase or guarantee by Fannie Mae or Freddie Mac as qualified mortgages, the letter says. The qualified mortgage rule requires lenders to evaluate whether a borrower can repay their mortgage loan. Those mortgages have protection from liability under a safe harbor provision. The CFPB finalized changes to the qualified mortgage rule late last year.

BPI Blog: QE May Raise Deposits at Banks Immediately, But Not Permanently

The demand for bank deposits skyrocketed last spring, because elevated uncertainty about the economic outlook led investors worldwide to sell securities. They preferred the safety and liquidity of cash in a bank account. Over the last year, demand for bank deposits remained high, in part because precautionary savings remained elevated. In addition, the interest rates on alternatives to bank deposits such as Treasury bills and reverse repurchase agreements were near or below zero. At the same time, and in reaction to the same “dash for cash,” the Federal Reserve purchased massive volumes of Treasury securities and agency Mortgage-Backed Securities (MBS) in the spring to prevent investor sales from overwhelming the market, and then in an ongoing quantitative easing (QE) program to support the economy.

As a new BPI blog describes, while Fed asset purchases were coincident with the rise in bank deposits, and Fed purchases in many cases create bank deposits, QE does not leave bank deposits permanently elevated. Countless types of transactions create bank deposits, including when the Fed buys a security from a nonbank. But those deposits are not stuck in the banking system, because countless types of other transactions destroy deposits. Instead, the aggregate level of bank deposits is determined by the public’s demand for deposits and the banks’ willingness to supply them.

NIST Plans To Establish Forum For Increased Interaction With Zero Trust Project Stakeholders

The National Institute of Standards and Technology is deciding on organizations to participate in its latest zero trust architecture project, according to an Inside Cybersecurity article this week. It is also preparing to launch a forum for stakeholders to receive updates and provide feedback. The developments were announced by NIST official Scott Rose at an event this week. Zero trust architecture essentially treats all users in a system as potential threats and only allows users the minimum amount of access they need to perform their job. BITS, the technology policy division of BPI, launched a similarly focused initiative for its financial services members entitled “Adaptive Security” in March. 

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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.