BPInsights: April 2, 2022

Stories Driving the Week

The CFPB Gets Bank Fees Wrong

BPI responded this week to the CFPB’s review of fees charged by financial institutions. The Bureau is seeking information on fees related to deposit accounts, credit cards, remittances and payments, prepaid accounts, mortgages and other loans, but relies on four critical misconceptions as the basis for its review. BPI refutes these misconceptions in its response and highlights the many laws and regulations already in place to protect and inform consumers and foster competition.

What is BPI Saying: Greg Baer, BPI President and CEO, issued the following statement:

“Banks compete aggressively for consumers’ business, and any fees they charge are disclosed consistent with a regime mandated by Congress and administered by the CFPB. The Bureau’s RFI cites no data and provides no empirical analysis to support its overwrought assertions about ‘junk’ or ‘surprise’ bank fees, and remarkably fails to acknowledge that those fees are fully disclosed under a regime that the Bureau administers. Nor does the RFI seek meaningful input from commenters or suggestions on how to improve its regulations, preferring instead simply to solicit complaints.”

For details of what the CFPB got wrong, access BPI’s letter here.

Treasury Market Turmoil Threatens the Fed’s Inflation Fight. One Change Could Help Calm the Storm.

The U.S. Treasury market is under stress. The world’s most vital debt market has reached the lowest level of liquidity since the maelstrom of March 2020, according to the Financial Times. It’s bad timing, as the Fed is preparing to shrink its large balance sheet by selling Treasuries, a process known as quantitative tightening. Treasury market volatility could undermine the Fed’s ability to fight inflation at a time when action is critical – potentially forcing the central bank to buy up Treasuries to stabilize the market just as it’s attempting to reduce its massive holdings. Meanwhile, promised and necessary supplementary leverage ratio reform that would help ease the liquidity squeeze has yet to arrive. Learn more about why SLR reform matters for keeping the Treasury market liquid and stable in stressful times.

Not Enough Small-Dollar Lending by Banks? The GAO Explains Why.

For years, banks have been limited in their ability to offer small-dollar loans to low- and moderate-income people. A recent GAO report explains why: fear — arising from vague, inconsistent regulatory-agency guidance — that such lending will be punished, not rewarded.

Banks are concerned that a lending program praised by one regulator one year could end up being penalized later, even by the same agency. It also takes a long time for a loan product to progress from concept to the marketplace, so banks are hesitant to invest time and resources into developing products that could subsequently be disfavored.

Why it matters: The uncertainty of regulatory treatment of bank small-dollar lending discourages banks from offering such products. This leaves low- or moderate-income consumers with more limited, and more expensive, options when looking for a short-term, small-dollar loan.

The solution: Congress and the CFPB should enable banks to innovate and expand their small-dollar loan offerings. The CFPB should target any small-dollar lending practices it deems abusive or unfair but otherwise allow banks to offer such products. Learn more by reading BPI’s new blog post.

Should Big Banks’ Resilience Be Used to Prevent Bank Mergers?

Big bank failures tend to happen during severe recessions, but small bank failures can occur even in modest economic downturns, an economic research paper notes. Some researchers interpret this result as evidence that big-bank failures exacerbate economic downturns more than those of small banks. Others cite it as evidence that mergers creating banks over a certain size should be banned.

Here’s what’s happening: The basic observation in the paper rings true, but another explanation makes more sense — large banks are more resilient than small banks, so it takes a bigger downturn to cause them to fail. BPI breaks down how the results in the paper could be entirely explained by large banks’ higher resilience.

Why it matters: A misinterpretation of this data could be used to justify preventing mergers for the very banks that are most resilient to economic crisis. That’s the exact wrong conclusion to draw if the goal is to strengthen the U.S. economy.

Show Them the Money: Why the Fed Should Adopt CLFs

Bank liquidity is crucial to keeping the financial system stable and maintaining the flow of financing to the real economy. The definition of high-quality liquid assets – which banks must hold to meet their liquidity requirements — includes something called a committed liquidity facility, whereby a central bank promises to provide a commercial bank with funds on demand. CLFs have been adopted in some other countries, but the Federal Reserve has hesitated to follow suit. That’s a pity, because CLFs would benefit consumers, businesses and the banking system, in addition to solving important problems faced by the Fed. For more on CLFs and how they would benefit the U.S. economy, see a new Risk.net op-ed by BPI Chief Economist Bill Nelson.

BPI Recommends Changes to SAR Sharing Pilot Program to Encourage Participation

What’s Happening: BPI commented this week on the Financial Crimes Enforcement Network’s proposed pilot program that would temporarily allow U.S. financial institutions to share reports identifying possible illicit financial activities with foreign branches, subsidiaries and affiliates. Sharing this data will help banks operating transnationally to identify advanced criminal enterprises and better manage illicit finance risks.

Here’s What BPI is Saying: “FinCEN’s pilot program acknowledges that financial crime is borderless and seeks to eliminate existing barriers that prevent information sharing between U.S. banks and their overseas counterparts,” stated Angelena Bradfield, BPI senior vice president, AML/BSA, sanctions and privacy. “Allowing banks to share these reports would improve their ability to identify and prevent money laundering across the globe.”

For BPI’s recommendations, click here.

In Case You Missed It

Senate Tees Up Fed Nominee Cook for Floor Vote 

Federal Reserve Board nominee Lisa Cook progressed one step closer to confirmation after her nomination passed a procedural hurdle this week. The Senate took a 50-49 procedural vote on Tuesday to advance Cook’s nomination toward a floor vote, which would likely include President Biden’s other outstanding Fed nominees. With other outstanding legislative items as well as consideration of Ketanji Brown Jackson for the Supreme Court, it’s unclear whether the Senate will have enough time to process these nominees before its scheduled two-week April Easter recess.

FDIC Seeks Comment on Draft Climate Risk Principles 

The FDIC is seeking input on draft climate risk principles aimed at large banks. The principles would direct bank boards and senior management to develop frameworks to measure and guard against climate-related financial risk, Reuters reported, adding that the proposal mirrors a December measure by the OCC. The principles cover areas such as governance, risk management and data reporting.

OCC Shakes Up Small, Midsize Bank Supervision, Launching FinTech Oversight Role

The OCC plans to overhaul its supervision of community and midsize banks, according to a recent American Banker article. The changes include designating a new deputy comptroller to oversee “novel banks and technology service providers.” The entrance of FinTechs into the banking system through novel charters has been an important topic in bank supervision and regulation in recent years.

What’s New in Crypto

Here’s what’s new in cryptocurrency this week.

  • Bridge collapse: A $600 million hack from a blockchain network connected to the online game Axie Infinity was one of the largest crypto attacks to date. The attack targeted the Ronin “bridge” – software that lets users convert tokens into ones used on another network.
    Crypto’s favorite regulator: As the SEC angles for more oversight of cryptocurrency, a market Chairman Gary Gensler has called the “wild west,” the crypto industry favors another regulator – the Commodity Futures Trading Commission. The industry, particularly crypto exchange FTX, is vying for the CFTC to play a crucial role in crypto oversight, according to a recent Bloomberg piece.
  • Kraken gets routing number: Wyoming “crypto bank” Kraken has obtained an ABA routing number, bringing the firm one step closer to a Federal Reserve master account. The bank formerly known as Avanti also received a routing number recently.

Are Global Central Banks Diversifying Away from Dollars?

The war in Ukraine and subsequent curbs on Russian central bank reserves have brought to mind the future of the international monetary system and the dollar’s market share in it, economics and political science professor Barry Eichengreen wrote in a recent Financial Times op-ed. Central banks appear to be diversifying outside of the dollar, but not toward traditional haven currencies (the euro, sterling or yen): three-quarters of the shift has been into the currencies of smaller wealthy economies like Canada, Australia, Sweden, South Korea and Singapore. These currencies have benefited from lower transaction costs; central banks more actively chasing returns; and low-yielding bonds in major reserve-issuing countries intensifying the search for alternatives.

  • One key takeaway: Only a quarter of the change has been into China’s yuan, and it’s a risky destination for reserves given the prospect of secondary sanctions on China. Russia’s actions in Ukraine also serve as a cautionary tale about the reach of authoritarian regimes without checks and balances. “It is no coincidence that every leading reserve-currency issuer in history has had a republican or democratic form of government, with checks on executive power,” Eichengreen wrote.

Goldman Sachs Closes GreenSky Acquisition

Goldman Sachs finalized its acquisition of home improvement financing provider GreenSky, expanding the bank’s consumer banking capabilities, Goldman announced this week.

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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.