BPInsights: April 30, 2022

Stories Driving the Week

Should Big Tech Be Allowed to Buy a Bank With Limited Oversight? There’s a Solution

The ILC loophole enables giant nonbank companies, including Big Tech firms, to access the banking system without the full-fledged federal oversight that banks’ parent companies receive under the Bank Holding Company Act. A draft bill under consideration by Congress would close this loophole, while providing fair treatment of existing ILCs by allowing them to remain supervised by the FDIC. But the key to striking that delicate balance is a provision sparking contention – the “change in control” section of the bill, which specifies the circumstances under which a current ILC’s parent company could sell its ILC to another firm.

What it means: The section would generally ban other commercial companies, and other companies not subject to a Bank Holding Company Act-equivalent regulatory regime, from buying an existing ILC. Without the provision, a current parent company of an ILC could sell that ILC subsidiary to the highest bidder, including a Big Tech company.

Why it matters: Under the ILC framework, a Big Tech firm that owns an ILC could engage in risky crypto activities without being subject to the same comprehensive consolidated supervision as a bank holding company. Closing the ILC loophole is crucial as policymakers debate the appropriate way to regulate crypto and digital assets. Eliminating the change-in-control section of the balanced ILC legislation would create a new loophole that undermines that effort.

To learn more, click here.

Fees, Procedures, Big Tech: CFPB’s Chopra on the Hill

Here are some key takeaways from CFPB Director Rohit Chopra’s testimony at House and Senate hearings this week.

  • Fees: In response to lawmaker questions, Chopra emphasized the Bureau’s request for information on fees charged by financial firms, but he appeared to contradict the premise of that measure by pointing out the robust competition in banking service fees. “One of the things we’re seeing in the market today is that institutions are starting to compete more aggressively,” he said.
  • Procedural issues: Senate Banking Committee Ranking Member Pat Toomey (R-PA) and Sen. Thom Tillis (R-NC) pressed Chopra on legal and procedural issues where he has demonstrated lack of accountability, including his role in the FDIC board dispute late last year and the CFPB’s expansion of “disparate impact” liability without legislative authority or an adequate public comment process.
  • Tech: Chopra said he wants to avoid the U.S. moving toward a payments system dominated by Big Tech giants like the system in China. The CFPB has sought information from Big Tech companies such as Apple and Amazon on their payments operations.
  • Small business data: Several lawmakers pressed Chopra on a provision of the CFPB’s Section 1071 measure, which aims to collect data on small business lending including race and ethnicity data, that could effectively force lenders to guess their clients’ race in order to provide the data. Chopra said he is hearing concerns on that provision “loud and clear” and the Bureau will take public comments into account.
  • CARD Act: Chopra said the Bureau is considering a review of the regulations implementing the CARD Act, which sets rules on credit card fees, to determine if changes should be made.

CFPB Invokes ‘Dormant Authority’ to Police FinTechs

The CFPB this week announced it invoked a little-used, “dormant” authority that will enable the CFPB to conduct supervisory examinations of nonbanks, including FinTechs, that the Bureau has reasonable cause to determine pose risks to consumers.

Bank of England Official Floats ‘Radically Usable’ Buffer for Bank Capital

Prudential Regulatory Authority chief Sam Woods suggested making the U.K.’s bank capital framework simpler and more flexible. In a speech this week, Woods said regulators should make capital buffers more usable – in other words, entice banks to dip into them to lend during stressful times. The suggested framework, which Woods compared to a concept car and dubbed the “Basel Bufferati,” would be “radically simpler, radically usable, and a million miles away from the current debate but which might prove instructive over the longer term.” It centers on “a single, releasable buffer of common equity, sitting above a low minimum requirement.” It would also replace automatic thresholds with a “ladder of intervention” and feature a mix of risk-weighted and leverage-based requirements. The buffer would be determined using the results of the stress tests that would sit on top of standardized risk weights, which is a concept similar to the current U.S. regime. Therefore, “a lot of the sophistication which currently resides in modelling risk-weights would move into stress testing.”

Crypto Corner

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

  • Binance and Russian intelligence: Reuters recently published an article detailing how crypto exchange Binance built a relationship with a Russian FSB-linked financial intelligence unit. Reuters reports that Binance agreed to share client data with the agency. The request came as the agency was trying to track bitcoin raised by Russian opposition leader Alexei Navalny, according to the article. “The encounter, which has not been previously reported, was part of behind-the-scenes efforts by Binance to build ties with Russian government agencies as it sought to boost its growing business in the country,” the article said.
  • ‘In the Ponzi business’: Bloomberg opinion writer Matt Levine interviewed FTX founder Sam Bankman-Fried in a recent podcast and described Bankman-Fried’s explanation of “yield farming” in crypto this way: “You’re just like, well, I’m in the Ponzi business and it’s pretty good.” Bankman-Fried said “there’s like a sort of depressing amount of validity” to Levine and podcast host Joe Weisenthal’s framing of the issue.
  • Hsu’s take: Another podcast guest this week on crypto was Acting Comptroller Michael Hsu, who appeared on Jo Ann Barefoot’s Barefoot Innovations podcast. Hsu questioned the financial inclusion potential of crypto given its high transaction costs. He also noted “a lot of scams” and fraud in the crypto universe. And he laid out different options to ensuring stablecoins stay stable: a prudential bank approach and a money-fund-like disclosure approach. Hsu said the bank approach leads to “more stable outcomes.”
  • Former regulator roundtable: A trio of former bank regulators — Jelena McWilliams, Randal Quarles and Brian Brooks – participated in a roundtable discussion hosted by the Conference on Consumer Finance Law and the Financial Technology and Cybersecurity Center this week. Quarles warned of the consequences of displacing banks as crucial intermediaries, cautioned against the run risks of stablecoins, and predicted the U.S. would probably not issue a CBDC. He also said it’s possible to create a stablecoin structure that addresses risks, and that an intermediated CBDC would not improve financial inclusion. McWilliams urged regulators not to “kill” digital asset innovation and said stablecoin issuance shouldn’t be limited to insured depository institutions.
  • McHenry: Digital assets are neither securities nor commodities so they are not suited to be regulated by the SEC and CFTC, House Financial Services Committee Ranking Member Patrick McHenry (R-NC) said at an event this week.

Brainard Confirmed as Fed Vice Chair

HThe Senate this week voted to confirm Lael Brainard as vice chair of the Federal Reserve. COVID cases among Vice President Kamala Harris and multiple Senate Democrats will likely delay a vote on the other Fed nominees, including Chair Jerome Powell, who has been serving in a pro-tempore status, as Senate Banking Chairman Sherrod Brown has insisted that all the other Fed nominees receive a vote together. 

In Case You Missed It

What’s New in Sanctions

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

  • DOJ: The Department of Justice has elevated sanctions evasion as a key priority of its white-collar enforcement program, senior official Lisa Monaco said this week. Sanctions are “the new FCPA,” she said, referring to the Foreign Corrupt Practices Act, a U.S. law barring company payments to foreign officials that has long been a primary focus of DOJ prosecutors targeting multinational corporations.
  • Asset seizure: DOJ is backing new legislation to make it easier to seize Russian oligarch assets and channel the sales proceeds into aid for Ukraine, according to Bloomberg.

When Will Banks Start Raising Deposit Rates? Here’s What History Shows

As the Fed raises the fed funds rate, deposit rates will follow. But the link between the two is complex, and some factors suggest it may change from the way it looked in the past, a new blog post by BPI’s Bill Nelson and Gonzalo Fernandez Dionis says.

  • When? Not right away because deposit rates are normally below the fed funds rate, and both rates have all been squeezed together at zero. BPI research suggests deposit rates won’t start rising materially until the fed funds rate exceeds 1 1/3 percent.
  • What’s changed? Since the last time the funds rate was well above zero in a lasting way, several factors have changed.
    • Liquidity regulations have made deposits more valuable to banks as a stable funding source.
    • Digital banking makes it easy for customers to comparison-shop for the best rates on their savings.
    • Automatic payments make deposit relationships “stickier.”
  • Uncertain outlook: The picture on deposit rate movements may not become clear until the Fed’s tightening cycle advances further.

BPI: Cyber Framework Should Adapt to ‘Respond to Evolving Challenges’

The NIST cybersecurity framework should remain agile and evolve to adapt to emerging threats, such as supply-chain and third-party risks, BPI EVP and President of BITS Christopher Feeney wrote in a comment letter to NIST this week. The letter was covered in an Inside Cybersecurity article this week. NIST is considering a CSF 2.0 update to its cybersecurity framework. “Both the day-to-day and strategic cybersecurity landscape of 2022 are vastly more complex” than when the CSF was first published in 2014, Feeney wrote. “As a result of this more active and intense operating environment, it is imperative that the CSF continues to revise to meet these new challenges and remain a tool for users to identify, respond to, and if needed recover from threats.”

Fifth Third Featured in Forbes’ ‘Best Employers for Diversity’ 2022

Fifth Third was included in Forbes’ list of Best Employers for Diversity for this year. This is the bank’s third year receiving the honor.

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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.