BPInsights: April 17, 2021

Stories Driving the Week

Financial System Integrity Depends on Congressional Action on ILCs

BPI President and CEO Greg Baer submitted a formal statement for the record for the House Financial Services Committee Subcommittee on Consumer Protection and Financial Institutions hearing on April 15 examining trends in financial institution charters. The statement examines the evolution of industrial loan companies from their legal origins to their current form, and discusses the implications of the statutory loophole that allows FinTechs and Big Tech to offer banking products and services without having to meet all of the rules applied to banking organizations subject to comprehensive, consolidated supervision. The statement strongly supports Congressional efforts to close the ILC loophole, while recognizing the need both to establish appropriate grandfathering provisions and to exclude parents of ILCs that are already subject to consolidated supervision that do not pose additional risks.

“BPI’s members welcome competition with new entrants to the banking system provided that those new entrants are subject to the same prudential supervision framework and activity restrictions that Congress has established for the corporate owners of full-service insured banks,” the statement remarks. “BPI urges Congress to act soon to ensure that the financial system and America’s consumers are protected from heightened risks posed by the advance of large technology firms into the banking system.”

ILCs represent just one of the many blueprints being considered by FinTechs and Big Tech as they attempt to gain access to the banking system. The statement notes that allowing this loophole to remain could lead to the misuse of personal data, the introduction of discriminatory pricing and other possible risks to the banking system.

Federal Legislation Would Save ‘Tough Legacy’ Contracts from LIBOR Limbo

The London Interbank Offered Rate, or LIBOR, will soon end its tenure as an important reference rate underpinning hundreds of trillions of dollars in financial contracts around the world. Regulators have emphasized that it’s time for markets to move on. But some financial contracts – known as “tough legacy” contracts — tied to LIBOR that mature after its demise have no clear fallback language allowing them to replace it with a different rate. Congress must pass federal legislation that clears the path for these tough legacy contracts to transition to a world without LIBOR, a new BPI blog says. Trillions of dollars, and the threat of confusion and costly litigation, hang in the balance. Coverage of the blog can be found in Bloomberg.

The House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship and Capital Markets held a hearing April 15 to discuss LIBOR transition legislation. BPI, SIFMA, SFA and several other trades sent a joint letter to the panel in anticipation of the hearing that urged lawmakers to pass federal legislation smoothing the transition. Subcommittee Chairman Brad Sherman (D-CA), who spearheaded the current discussion draft bill, said he wants to pass legislation with enough time for the Federal Reserve to follow with a rulemaking, ideally by October 2022. The legislation is expected to draw bipartisan support. Sherman pointed out that a federal fix is necessary because even the small percentage of “tough legacy” contracts would amount to trillions of dollars — $10 trillion by the Fed’s estimate — and the transition should not be hampered by 51 separate state approaches that may differ. His draft bill is nearly identical to the recent legislation enacted in New York state, he said.

At the hearing, top regulatory officials such as Mark Van Der Weide, General Counsel at the Fed, and Brian Smith, Treasury Department Deputy Assistant Secretary for Federal Finance, generally expressed support for federal LIBOR legislation. John Coates, a leading SEC official, said his agency has not taken an official stance on legislation but supports efforts to keep markets stable.

‘Bank On’ Transaction Accounts: Making Traditional Banking More Inclusive

Efforts to increase financial inclusion through the national “Bank On” program have achieved remarkable success according to new BPI research published this week, which analyzed data obtained from the Federal Bank of St. Louis to determine whether these low-cost accounts were contributing to greater financial access among low-income and minority households. BPI’s analysis discovered that the take-up rate for Bank On certified accounts is greatest in communities with high concentrations of lower-income and minority communities. Given the program’s success and the vigorous expansion — with coordination by the Cities for Financial Empowerment Fund — policymakers should further publicize and encourage customer usage and greater bank adoption of Bank On certified accounts.
Some of the findings from the report include:

  • 60 percent of Bank On certified accounts opened in 2017 were for customers residing in areas with more than 50 percent minority population, whereas only 30 percent of the branches of banks participating in the study were in such areas; and
  • About 46 percent of accounts opened in 2017 were in ZIP codes with more than 50 percent low- to moderate-income populations, more than double the share of participating institutions’ branches within this category.

BPI Research Note: The Benefits and Costs of a Central Bank Digital Currency for Monetary Policy

A new BPI research note by Chief Economist Bill Nelson explores how an American central bank digital currency would affect U.S. monetary policy. A CBDC could benefit U.S. monetary policymakers in two ways.  First, if the CBDC could pay negative interest, it could eliminate the Federal Reserve’s zero-lower bound constraint – a conundrum where a central bank’s toolbox to stimulate a weak economy is limited after the central bank sets short-term nominal interest rates to zero. But to eliminate that constraint Americans would have to give up paper currency and accept a CBDC that could slowly vanish from digital wallets in some circumstances. A U.S. CBDC would also impose costs on monetary policy: for example, a CBDC would make it cheaper for investors to flee other asset classes when seeking safe-haven investments in market stress. The Fed would have to expand much more, even in normal times, to prepare for massive migrations to CBDC, which would then lead to further Fed intervention in the markets.

The note follows a working paper on U.S. CBDC implications recently published by BPI President and CEO Greg Baer. Coverage of Nelson’s research note can be found in The Wall Street Journal.

The Economist Highlights Government AML Shortcomings Worldwide, But Misses Major U.S. Milestone

A recent article in The Economist sheds light on global governments’ pitfalls in AML enforcement. “[C]loser examination suggests that the global anti-money laundering (AML) system has serious structural flaws, largely because governments have outsourced to the private sector much of the policing they should have been doing themselves,” the article says, citing a study that deems AML “the world’s least effective policy experiment.” However, the article appears to overlook the major AML overhaul signed into law in the U.S. early this year – legislation that BPI strongly supported. While the AML changes will only be as effective as the way officials choose to implement them, the U.S. has advanced the AML regime considerably with this comprehensive policy revamp.

JPM, Citi Unveil New Climate Actions

JPMorgan Chase set a goal to finance more than $2.5 trillion in sustainable investments, the bank announced this week. The commitment over the next decade will finance $1 trillion in projects that support cleaner energy sources. It will also support socioeconomic development in developing countries and economic inclusion priorities like affordable housing and healthcare. Citigroup also announced this week a $1 trillion commitment to sustainable finance by 2030, an effort that extends its environmental finance target from $250 billion by 2025 to $500 billion by 2030. Citi’s pledge aligns with the agenda of the United Nations’ Sustainable Development Goals. Bank of America made a similar commitment recently, and other BPI member banks have made pledges toward sustainability and environmental goals.

In Case You Missed It

Basel Committee Weighs Climate Risk Consideration in Financial Risk Framework

The Basel Committee on Banking Supervision released two reports this week concluding that climate-related risks “can be captured in traditional financial risk categories,” while cautioning that more work is needed to connect climate risk drivers to bank risk exposures and to estimate such risks reliably. Challenges to quantifying banks’ climate risk include data gaps and uncertainty associated with the long-term and unpredictable impacts of climate change, the Committee said in a press release. The panel will continue to investigate how climate-related risks can be addressed within the Basel Framework and consider modifications to its policies, it said.

Wells Fargo Expands MDI Initiative With New Equity Investments in More Black-Owned Banks

Wells Fargo this week announced it has expanded its efforts to support financial institutions in minority communities by investing in five Black-owned Minority Depository Institutions. The investment is a part of its pledge last year to invest up to $50 million in Black-owned banks. This week’s announcement included MDIs in Georgia, Michigan, Louisiana and Texas and brings the number of MDIs in its investment efforts to 11 total.

POLITICO: Biden Draft Executive Order Asks Government Agencies to Consider Climate Risk

A draft executive order from President Joe Biden would prompt federal agencies to examine their climate risk, POLITICO reported this week. The “pre-decisional draft” instructs the Financial Stability Oversight Council to assess climate risks to the financial system; the Labor Department to revise or scrap rules that limit pension fund managers’ ability to vote on shareholder proposals at annual meetings; and HUD and the Agriculture Department to consider integrating climate-related risk into their underwriting standards and loan conditions. The news coverage comes as the White House prepares to host a climate summit on April 22-23.

BPI and Coalition of Trades Express Support for Computer-Security Incident Notification Rulemaking Effort and Recommend Important Changes to Better Align the Proposal to the Intended Outcomes

A coalition of trade associations comprised of BPI, the American Bankers Association, the Institute of International Bankers and Securities Industry Financial Markets Association submitted recommendations in response to a notice of proposed rulemaking issued by the federal banking agencies to establish new computer-security incident notifications for banks and their service providers.

The organizations strongly support the agencies’ policy goals and recommend several changes to the proposal that would enhance the effectiveness of the outcomes, would enable financial institutions to achieve a 36-hour notification timeline, and that would apply equally to both banks and non-bank chartered financial technology companies. These changes would help to minimize time spent on reporting exercises for minor, low-risk incidents, and would free up institutions to dedicate their talent and resources to addressing incidents that affect core bank functions. Furthermore, the letter:

  • Encourages the agencies to recognize existing contractual requirements that require service providers to report computer-security incidents and to allow these existing provisions to satisfy the reporting requirements considered under the rule.
  • Encourages the agencies to include a determination of how the information will be used and secured once the rule goes into effect; and
  • Proposes modifying the title of the rule to more appropriately reflect its scope.

Coverage of the letter can be found in Cyber Scoop, Bank Info Security and Inside Cybersecurity.

Boston Fed Chief: Fed Should Consider Raising CCyB in Times of Strength

Federal Reserve Bank of Boston President Eric Rosengren said this week in a speech that the countercyclical capital buffer, or CCyB, is a solution to the risk that banks might constrict credit in an economic downturn, potentially exacerbating its effect. The tool has never been used in the U.S. so far.  Federal Reserve Board Vice Chair for Supervision Randal Quarles recently expressed skepticism that the buffer actually spurs banks to lend more, basing his comment on foreign jurisdictions who used such a buffer during the pandemic. Rosengren said, “Rather than disrupt bank capital planning and rely on temporary relief from capital regulations,” the CCyB provides a “shock absorber” that “if appropriately implemented, would allow borrower financing to continue without these temporary extraordinary and less predictable measures.” He also noted with respect to the capital distribution limits the Federal Reserve put in place during the pandemic: “Investors in banks, and bank management teams, would prefer to avoid the attendant uncertainty around capital planning, and bank regulators would prefer to not suspend bank regulations in economic downturns.” 

Treasury Launches New Office to Oversee Relief Program Rollout

The Treasury Department on April 14 announced the creation of a new office, the Office of Recovery Programs, to oversee Treasury’s implementation of pandemic economic relief and recovery programs. The office will be led by Treasury official Jacob Leibenluft, who will work closely with Gene Sperling, President Joe Biden’s stimulus plan coordinator.

Gensler Gains Senate Confirmation

Securities and Exchange Commission nominee Gary Gensler gained Senate confirmation on a slim yet bipartisan margin, succeeding on a 53-45 vote with three Republican votes (and not including another Republican who voted for him in committee but wasn’t present for the full confirmation vote). This approval only applies for the remainder of former Chairman Jay Clayton’s term, which expires in June, although Majority Leader Chuck Schumer this week filed for cloture a new nomination for Gensler for a full term lasting until June 2026 which is expected to be taken up by the Senate next week.

Gensler, a former Commodity Futures Trading Commission chief and Goldman Sachs partner, garnered scrutiny from Republicans such as Banking Committee Ranking Member Pat Toomey (R-PA) over plans to require public companies to disclose their climate risk exposure. Gensler was confirmed to a term lasting until June, but may continue to serve during the remainder of the current Congress, which ends next year.

U.S. Russia Sanctions Target Government Bonds, Tech Firms With Spy Ties

The Treasury Department announced new sanctions on Russia on April 15 that take aim at Russian sovereign debt and tech companies that enable Russian intelligence services’ cyberattack efforts. The sanctions take the form of an executive order “targeting aggressive and harmful activities by the Government of the Russian Federation.” Those activities include undermining U.S. elections; malicious cyber activities; corruption to influence foreign governments; targeting dissidents and journalists; undermining security in countries and regions important to U.S. national security; and violating principles of international law, according to the Treasury Department. In particular, Treasury issued a directive which effectively expands existing U.S. restrictions on Russian sovereign debt by generally prohibiting U.S. banks from buying bonds issued after June 14, 2021 by the Russian central bank, sovereign wealth fund or finance ministry or lending to those government entities.

POLITICO: ‘Dr. Doom’ Sounds Alarm on Outsize Fed Influence

Longtime Salomon Brothers financier Henry Kaufman, nicknamed “Dr. Doom” for his gloomy prognostications, warned against the outsize influence of central banks on the economy and financial markets in a new book, according to a POLITICO newsletter this week. Kaufman cautioned in an interview that a growing Federal Reserve grip on financial markets threatens to erode the power of the private sector and increase the power of the federal government, an imbalance that puts financial stability at risk.

Director of National Intelligence Releases Annual Threat Assessment

The Office of the Director of National Intelligence released its annual unclassified threat assessment of worldwide threats to U.S. national security on April 9.  The report discusses threats from China, Russia and Iran as well as transnational issues such as the COVID-19 pandemic, climate change, emerging technology and cybersecurity. The report notes that the effects of the pandemic will continue to fuel economic and humanitarian crises, political unrest, and geopolitical competition as China and Russia seek advantage through “vaccine diplomacy.”  It also highlights ecological degradation that will fuel disease outbreaks, threaten food and water security and exacerbate political instability, and notes that cyber capabilities are intertwined not only with threats to our infrastructure but also to foreign influence threats to our democracy. These themes are also covered in the most recent Global Trends 2040 report from the National Intelligence Council (NIC). The NIC report takes a longer view on threat trends and warns of a growing disequilibrium between existing and future challenges and the ability of existing institutions to respond and adapt. Chinese cyber-espionage activities have compromised telecommunications firms, providers of managed services and broadly used software, and other potential targets include those “rich in follow-on opportunities for intelligence collection, attack, or influence operations.”

Former NSA Officials Tapped for Top Cyber Role, Head of CISA

The Biden Administration intends to nominate two former National Security Agency officials to prominent cybersecurity posts, according to White House press releases this week. The White House tapped Chris Inglis as the first National Cyber Director and Jen Easterly to lead the Cybersecurity and Infrastructure Security Agency. Both positions will be crucial in increasing government engagement with the banking system as part of the nation’s critical infrastructure. Both Inglis and Easterly have experience in the financial sector. Inglis has served on the board of directors for Huntington since 2016 and was a member of the Cyberspace Solarium Commission, and Easterly has served in key positions at Morgan Stanley since 2017, most recently as Head of Firm Resilience and the Fusion Resilience Center.

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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.