Stories Driving the Week
Fed Finalizes Supervisory Guidance Rule
The Federal Reserve on March 31 finalized a rule on the role of supervisory guidance. The action codifies the 2018 Interagency Statement Clarifying the Role of Supervisory Guidance, a measure from the federal banking regulators clarifying that guidance isn’t meant to enable disciplinary actions that can halt banks’ expansion or M&A. The rule is a culmination of a request from BPI and the American Bankers Association that the regulators clarify that guidance lacks the binding force of law.
The final rule, with no major changes from the initial proposal, differs from the FDIC’s final rule on the same topic in that it does not address supervisory criticisms related to reputation risk.
First Yellen-Led FSOC Meeting Signals Focus on Climate, Fund Liquidity
The Financial Stability Oversight Council, a group of financial regulatory officials led by the Treasury Secretary, will focus on liquidity at hedge funds and open-end mutual funds, the resilience of the Treasury market and the potential impacts of climate change on financial stability, according to remarks by Treasury Secretary Janet Yellen in her first appearance as FSOC Chair this week. The FSOC will restart its hedge fund working group as it weighs nonbank liquidity issues that surfaced in last year’s March market turmoil. Federal Reserve Chair Jay Powell, a member of the panel, said the central bank is examining climate change in its financial stability oversight, but reiterated that its climate risk analysis is in its early stages.
Quarles Says Views ‘Evolved’ on CCyB
Federal Reserve Vice Chair for Supervision Randal Quarles expressed skepticism about the effectiveness of the Countercyclical Capital Buffer (CCyB), a measure designed to prompt banks to lend more under stress, as demonstrated during the pandemic market turmoil, according to a POLITICO article summarizing a Q&A response to a question after a speech he gave on March 30 at the Peterson Institute for International Economics. The CCyB, a product of the Basel III reforms in the aftermath of the Global Financial Crisis, is a macroprudential tool designed to raise bank capital when financial vulnerabilities are meaningfully above normaland reduce it in a downturn to spur more lending and boost the economy. The CCyB supplements all the other minimum capital requirements and capital buffers.
The Fed has never raised its CCyB above the current level of 0 percent, but other countries have deployed this tool. Quarles has previously discussed making greater use of the CCyB and raised the question of whether through-the-cycle capital levels in the United States have been set so high, that our CCyB is effectively already “on.” However, onMarch 30, Quarles, who is also the Chair of the Financial Stability Board, questioned whether banks significantly increased lending during COVID in those jurisdictions that were able to turn down their CCyB. He said his “thinking has evolved” and that the Basel Committee on Banking Supervision and FSBare examining the use of capital buffers in periods of stress and whether the CCyB is an effective tool going forward.
Biden Unveils Infrastructure Plan
President Biden this week proposed a sweeping $2 trillion revamp of infrastructure, from roads and bridges to high-speed internet. The plan would be funded by an increase in the corporate tax rate from 21 percent to 28 percent, with a minimum 21 percent tax on American companies’ overseas earnings. The tax increase is unlikely to win GOP support in Congress. According to the proposal, the infrastructure and tax plan will be paired with a broader enforcement initiative that targets tax avoidance by corporations and high earners.
FinCEN Releases Beneficial Ownership Proposal
The Financial Crimes Enforcement Network this week unveiled its Advance Notice of Proposed Rulemaking for a new federal requirement that certain businesses provide information on their beneficial owners. The proposal is meant to be the first step in implementing the Corporate Transparency Act, which was included in the national defense authorization bill enacted in January and aims to prevent criminals from using anonymous shell companies to shield illicit cash from U.S. government scrutiny. BPI strongly supported the legislation, the first major overhaul of AML rules in several decades. The newly released FinCEN proposal seeks public comment on procedures and standards for companies submitting information to FinCEN about their owners. It also seeks input on FinCEN’s implementation of the related provisions of the Corporate Transparency Act that govern its maintenance and disclosure of beneficial ownership information. Comments are due May 5, 2021.
Treasury’s Adeyemo Meets with Racial, Economic Justice Leaders
Deputy Treasury Secretary Wally Adeyemo met with racial and economic justice leaders this week to discuss “equitable implementation of the American Rescue Plan and ways to leverage Treasury programs to address systemic inequality,” according to a departmental readout. The event marked Adeyemo’s first outreach meeting since being confirmed by the Senate last week. Adeyemo set out racial equity as a priority and committed to maintaining a dialogue with underserved communities. The groups participating in the meeting included the Black Economic Alliance, the Black Futures Lab, Color of Change and UnidosUS.
In Case You Missed It
Toomey Calls Fed’s Climate Research Political Mission Creep
Sen. Pat Toomey (R-PA), the top Republican on the Senate Banking Committee, said in a letter to the San Francisco Federal Reserve that its research on topics like climate change and racial justice is a “politically charged” divergence from the Reserve Bank’s core mission. Toomey asked for records on the bank’s climate economics seminar, racial justice research and research and community development expenses over the last decade.
PNC Gets Certification for Account Aimed at Underbanked Consumers
PNC earned Bank On certification for a low-fee account aimed at underbanked consumers, according to Bloomberg this week. The account, which has no overdraft or insufficient fund fees and costs $5 a month, is the bank’s second offering to get Bank On certification. PNC is the only lender to offer two certified accounts under the program, which is geared toward expanding financial services access to unbanked and underbanked Americans. A recent BPI blog post encouraged regulators to clarify how banks can receive Community Reinvestment Act credit for offering low-cost Bank On products, a change that would boost inclusion in the banking system.
BofA Expands Racial Justice Commitment, Targets Asian Community Outreach
Bank of America increased its $1 billion four-year commitment to advance racial equity to $1.25 billion. The additional funds will help support people of Asian descent, a pledge that follows recent violence against Asian Americans. Several BPI member banks have launched racial equity and community investment initiatives, including JPMorgan Chase, Wells Fargo, PNC, U.S. Bank and Truist.
Calls Intensify for Congress to Intervene on LIBOR
Federal officials and industry leaders are amplifying calls for Congress to pass legislation smoothing the transition away from the London Interbank Offered Rate, according to an American Banker article this week. The urgency to clarify the status of “legacy” LIBOR contracts on the federal level after the final death knell for some USD versions of the rate in mid-2023 has intensified after New York lawmakers passed a state bill that would codify backup plans for contracts governed by New York law. Treasury Secretary Yellen, Fed Chair Powell and Fed Vice Chair for Supervision Quarles have recently emphasized the need for legislation to smooth the process for those legacy contracts that lack clear fallback language.
The House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship and Capital Markets will hold a hearing on the end of LIBOR on April 15. Several financial regulatory officials are expected to testify.
Bank Regulators Seek More Info on Banks’ Use of AI, Machine Learning
The OCC, Federal Reserve, FDIC, CFPB and NCUA this week released a joint Request for Information on banks’ use of artificial intelligence, including machine learning. AI can reduce costs, enhance efficiency and benefit consumers, the agencies said. The regulators want to know how banks manage risks related to AI, what challenges banks face when using AI and how AI benefits banks and their customers.
FSB Report Highlights Post-Crisis Reform Success, Risks Among Nonbanks
Large systemically important global banks are resilient and post-crisis regulations have largely fulfilled their goals, the Financial Stability Board said in a final report on Too Big to Fail reforms released this week. The FSB report called for a handful of changes to the regulatory regime, however, such as reforms to minimize the need for governments to help wind down failing banks and improved public disclosures on resolution frameworks including more information about TLAC holdings. The FSB is also examining risks in credit intermediation that have migrated to nonbanks such as mutual funds and hedge funds, the report says. The March 2020 market turmoil indicated that banks are stable and resilient, but some nonbank financial intermediaries acted as propagators of the liquidity stress.
BPI Research Note: Reserve Balances, Noninterest Expenses, and Bank Performance in the Stress Tests
Growing reserve balances stemming from the Federal Reserve’s large scale asset purchases have led to an underestimation of net revenues in last December’s stress tests. This dynamic arises because supervisory models use bank size to transform the projections of noninterest expense and some subcomponents of noninterest income into dollar amounts, a new BPI research note says.
The research note estimates that the increase in reserve balances account for an additional 25 to 80 basis points decline in the common equity Tier 1 capital ratio of 7 of the 33 banks that participated in the December tests. To prevent the increase in reserve balances from overstating banks’ capital requirements, the note recommends adjusting the projections of the relevant pre-provision net revenue components in the June 2021 stress tests.
A more robust long-term solution would be to scale the different components of noninterest expense with operating income instead of bank size. This solution would do a better job capturing the behavior of banks’ efficiency ratios under stress, and it would neutralize the unrealistic increase in noninterest expense projections from the growth of reserve balances, a trend that is expected to continue.
BPI GC John Court Joins UVa Event on Banking Regulation During COVID
BPI General Counsel John Court outlined the banking industry’s response to the COVID pandemic and key recent regulatory developments in a University of Virginia Law and Business Review event on April 1. He gave a comprehensive overview of the Federal Reserve’s actions during the pandemic crisis and the banking industry’s resilience, including how banks’ strong balance sheets enabled them to help support the economy at that crucial moment. The presentation also covered topics ranging from Big Tech and FinTech in banking, vulnerabilities among mutual funds in last year’s market turmoil, regulatory tailoring, stress tests and the growing prominence of the Fed’s role in the banking system. The event, entitled “Banking Regulation During COVID-19 and the Biden Presidency,” also included UVa Prof. Pierre-Hugues Verdier, the University of Michigan’s Jeremy Kress and the Wharton School’s Christina Parajon Skinner.
Fed’s Quarles Expresses Caution on CBDC
Federal Reserve Vice Chair for Supervision Randal Quarles this week suggested a cautious approach to central bank digital currencies, saying he didn’t see an “urgent flaw” in the U.S. financial system that a CBDC would fix. Quarles made the comment in a Q&A session during a Peterson Institute for International Economics event. Adding that the Fed is mindful of potential knock-on effects of issuing a digital currency, Quarles echoed the cautious tone of Fed Chair Jay Powell, who said last week that a CBDC would need legislative and public backing to move forward. The Federal Reserve Bank of Boston will unveil the first stage of a digital currency research project some time in the third quarter, a senior Boston Fed official said in a Wall Street Journal interview this week.
