BPInsights: Aug 2, 2024

UK Basel Rollout Timeline Slows Down

The Bank of England will likely publish its rule to implement Basel Endgame after the summer, according to Reuters this week. An announcement had previously been expected before the summer break to give banks a year to prepare for the changes. “We are now in the last stages of completing our work on the Basel 3.1 package and expect to publish near-final rules shortly after the summer break,” a PRA spokesperson said in the Reuters article.

• Stepping back: An unspecified, but significant, factor in the decision is the slower timeline in the U.S., where the highly contested proposed version of the rule will undergo “broad and material changes,” according to Fed Chair Jerome Powell. The European Union has decided to delay the implementation of the Basel market-risk provision to 2026, citing concerns about unfair competition stemming from delays in the U.S. rollout.
• Looking closer: The PRA Annual report for 2023/2024 (published on July 30) notes that the PRA intends to publish the near-final policy statement on the remaining aspects of the Basel 3.1 package “in due course”. Their previous public statement pointed to a timeline of “Q2 2024” which, based on the Reuters article and summer period, seems increasingly unlikely.

Five Key Things

1. ILCs, Resolution, Brokered Deposits: What Happened at the FDIC Meeting

The FDIC held an open meeting this week, where the agency voted on several measures. Here are some key takeaways.

• Parental controls: At the meeting, the FDIC issued a proposal that would enhance scrutiny of parent companies of industrial loan companies. In a 2020 letter on the topic, BPI noted that, while ILCs pose unique risks to the banking system, banks subject to consolidated federal supervision – some of which may be the parent companies of ILCs — do not pose such risks. The FDIC’s proposal would broaden the definition of what parent companies it oversees; subject ILCs with narrow customer bases or “captive” structures to close examination; and emphasize the FDIC’s authority over ILCs and parent companies.
• Living wills: The FDIC also finalized revised resolution guidance for certain large U.S. and foreign banks (a group known as “triennial full filers” – generally above $250 billion in assets but not GSIBs). The revised guidance centers on the banks’ living wills, which lay out banks’ strategy for orderly resolution in a failure. The agency also extended the submission date for these banks to Oct. 1, 2025 instead of March 31 of that year. The guidance was developed jointly with the Federal Reserve.
• Brokered deposits: The agency also adopted a measure on brokered deposits, proposing to reverse certain changes to the FDIC’s rules that were recently adopted in 2020. Among other changes, it would: broaden the “deposit broker” definition; eliminate an exemption from brokered status for “exclusive” arrangements, where outside deposits are placed only at one bank; end a carveout for deposits being placed interest-free at a bank to enable customer payments; and lower a 25% carveout threshold to 10% for deposits under that threshold. The revisions are meant to crack down on so-called “hot money” deposits that can run quickly, but they attracted criticism from FDIC directors Jonathan McKernan and Travis Hill. “This proposal does a good job of marshalling evidence of the risks posed by brokered deposits,” said McKernan at the meeting. “The proposal does not, however, offer any evidence that some of the deposits that this proposal would re-classify as brokered deposits actually present the same or similar risks.”
• Asset managers: The FDIC proposed to amend its regulations under the Change in Bank Control Act, or CBCA. The proposal would change the review process for “controlling” investments made by investors in bank holding companies with an FDIC-supervised subsidiary. The proposal would require both Fed and FDIC review of these transactions; in practice, this change would apply to many 10-25% stakes in bank holding companies with a state-nonmember bank subsidiary. The FDIC indicated it is committed to working with the OCC and Fed on an interagency approach to these regulations. Acting Comptroller Hsu’s vote in favor of the proposal suggests that the OCC could take a similar position with respect to national bank subsidiaries of bank holding companies. The FDIC proposes to remove one of the exemptions from providing prior notice to the FDIC under the CBCA, related to the acquisition of voting securities of a depository holding company for which the Fed reviews a notice pursuant to the CBCA. According to Director Chopra, this move is necessary to allow the FDIC to object to indirect changes of control of FDIC-supervised IDIs. In his statement, Chair Gruenberg noted that the increasing concentration of ownership of banks (by fund complexes) lends support to this proposal. According to the NPR, “. . . [A]s fund complexes continue to purchase more shares of banking organizations across the market to match the growth of investments in index funds, there is the potential to create a concentration of ownership that may result in such investors having excessive influence or control over the banking industry as a whole.” The questions posed for public comment address a wide range of topics beyond the proposed removal of an exemption from the FDIC’s CBCA regulations, such as the CBCA review process, passivity commitments and fund complex investments in banks more generally. At the FDIC meeting, Jonathan McKernan separately proposed but subsequently withdrew a different but related resolution that would have required certain large funds by Oct. 31, 2024 to be subject to new FDIC scrutiny – for example, stronger monitoring of commitments to remain “passive” investors in a bank.

2. What Are the Procedural Issues with the CFPB’s Buy-Now-Pay-Later Regulation?

The Bank Policy Institute and the Consumer Bankers Association called on the CFPB to abide by the Administrative Procedure Act in seeking to regulate buy-now-pay-later providers in a letter sent this week to the Bureau. The associations argue that the CFPB’s recently issued “interpretive rule” violates the Administrative Procedure Act due to its substantive nature. While the associations support much of the substance of the interpretation, the CFPB should rescind the interpretation, adhere to the law and submit a formal rule through the rulemaking process, with the opportunity for the public to provide comments. 

“If the CFPB is responsible for enforcing the law, it should also be responsible for following it,” the associations stated upon filing the letter. “We share the same goal as the CFPB: consumers who elect to use BNPL must be protected. A rulemaking process will help lead to a more informed rule that will ultimately help the CFPB best protect consumers.”  

As the CFPB reconsiders a rulemaking in compliance with the APA, it should do so with the following recommendations in mind: 

1. Hold all BNPL issuers to the same standards. 
2. Help better define and differentiate BNPL products and users from other credit products already covered by consumer protection laws. 
3. Supervise the activities of nonbank BNPL providers under the CFPB’s larger participant rulemaking authority. 

The CFPB announced its interpretive rule on May 22, 2024 as a continuation of efforts that the Bureau initiated in 2021. The interpretive rule establishes new requirements for BNPL issuers based on requirements under the Truth in Lending Act. These include what to do when a customer requests a refund, how to investigate transaction disputes and how consumers can access their billing statements, among others. 

To access a copy of the letter, please click here. 

3. BoE Eyes International Banks Post-SVB, Establishes Cost-Benefit Analysis Panel

The Bank of England this week released a consultation paper (for comment by October 2024) signaling closer supervisory scrutiny of international banks in the wake of the Silicon Valley Bank failure. The proposal would introduce new criteria that the Bank’s Prudential Regulation Authority would consider when determining whether an international bank should operate in the UK as a branch rather than a subsidiary. It would also clarify expectations on banks’ booking arrangements for trading activities. In addition, it would enhance big-picture data gathering on a whole bank’s liquidity and amend aspects of the existing reporting approach to gather information needed, among other things.

• Context: The section on whether a bank should become a UK branch or a subsidiary comes in response to last year’s SVB failure. The PRA determines, on a case-by-case basis whether an international bank should operate in the UK as a subsidiary rather than as a branch. The failure and resolution of SVB UK demonstrated the benefits of it being a subsidiary from a resolution perspective, but also raised questions about local deposit insurance coverage and concentration risks in such an arrangement. The PRA is aiming to take into account several factors, including the level of smaller demand deposits that can be held in a branch; the level of demand deposits from relevant corporates above the small-company threshold; and how a branch resolution would work. Based on available information about the activities of international banks currently operating as branches in the UK, the PRA does not expect that any of these firms would be expected to become subsidiaries as a result of its proposals.
• Implications moving forward: The ruling raises questions about the SEC’s approach to cybersecurity disclosure in its recent rule, which BPI has warned would imperil security by forcing public companies to disclose cyber incidents prematurely.

The Bank this week also established a cost-benefit analysis panel, convening a group of banking experts to advise on cost-benefit assessments for new regulatory proposals or changes. This panel may recommend improvements to the Bank and PRA’s overall methodology and approach to cost-benefit analysis. Such a step is a welcome development and a stark contrast to the U.S. agencies’ recent approach, as reflected in a recent Government Accountability Office report flagging insufficient analysis among the U.S. prudential regulators.

4. Brown Aims for September to Vote on FDIC Nominee

Senate Banking Committee Chair Sherrod Brown (D-OH) is targeting a committee vote in September on FDIC chair nominee Christy Goldsmith Romero, according to POLITICO this week. “There’s a lot of absences,” Brown said. Banking Committee member Sen. John Fetterman (D-PA) recently tested positive for COVID-19, and fellow panel member Sen. Bob Menendez (D-NJ) was convicted in a bribery case and will resign later in August. On support for Goldsmith Romero’s nomination, Brown said he is “very hopeful it’s bipartisan.” Thus far, no Senate Republican on the Banking Committee has publicly indicated they would support Goldsmith Romero.

5. BPI Launches New Advertising Campaign to Deter ‘Chain Store Charity’

BPI this week launched a major new advertising campaign called “Chain Store Charity”. The advertising campaign exposes how giant retail chain stores — not consumers — are profiting from Regulation II, which caps the amount banks can charge for debit card interchange fees. The campaign targets Washington, D.C. and select national media markets, and features an educational website examining the harms caused by price fixing of debit card transactions.

“In 2011, giant chain stores like Walmart successfully lobbied policymakers to lower debit card transaction fees by promising to pass the savings on to customers. However, these mega-retailers failed to uphold their promise, and 98 percent of surveyed merchants either maintained or increased existing prices,” stated BPI President and CEO Greg Baer. “Instead of saving consumers money, the cap under Regulation II increased mega-retailer profits, reduced access to free checking accounts, undermined investments in new fraud prevention technology and threatened the viability of struggling community banks. Our ad campaign unmasks mega-retailers’ false promises to help consumers and demonstrates how Regulation II is bad policy that amounts to nothing more than a handout to giant chain stores.” 

Banks facilitated $4.2 trillion in debit transactions in 2021, according to the most recent Federal Reserve data. Despite benefiting significantly from debit card services through higher sales, more expansive customer reach, faster checkouts, enhanced security, easier recordkeeping and happier customers, giant chain stores want to further reduce the costs they pay for these benefits, potentially leading to diminished services. After Regulation II was enacted in 2011:

• 75 percent of merchants retained their prices and 23 percent increased prices, according to a merchant study by the Federal Reserve Bank of Richmond and Javelin Strategy and Research. Only 2 percent of surveyed retailers decreased prices.  
• Merchants swiped $42 billion in profits over the first five years, according to estimates by the Electronic Payments Coalition.
• Access to free checking accounts declined from being offered by 60 percent of banks to less than 20 percent.
• Banks subject to the new regulations doubled their checking account fees from less than $4 to $7.
• Minimum balance requirements for interest-bearing checking accounts increased by 55 percent.
• Small community banks exempt from the new regulation saw a 16 percent decline in revenue for debit transactions routed over single-message networks.

The website examines the implications of Regulation II, offers background information on how debit cards work and offers visitors the opportunity to commiserate with retail giants for their plight of having to pay for debit card processing — from which they derive significant benefits — by sending a sympathy card to the National Retail Federation and the Retail Industry Leaders Association.

Just say ‘NO’ to Chain Store Charity and learn more by visiting chainstorecharity.com

In Case You Missed It

The Crypto Ledger

Here’s what’s new in crypto.

Banks’ willingness to use the Fed’s discount window depends on how they expect examiners to react. A few anecdotes paint a grim picture of their expectations. “When asked recently about borrowing from the Federal Reserve’s discount window, a regional bank treasurer who grew up in Bulgaria said the window reminded her of government agencies from her youth – inefficient and unwelcoming,” BPI Chief Economist Bill Nelson wrote in a recent Risk op-ed. Betsy Duke, former Fed governor, said borrowing from the discount window was like borrowing from your parents – you’ll do it if you have to, but nobody likes doing it. Thankfully, the Fed may be rethinking the discount window’s image.

• Russia: Russian lawmakers are opening the door to legalized cryptocurrency – from regulating crypto mining to cross-border payments – as they face limited access to the international payments system amid sanctions from the U.S. and allies.
• ‘Diamondhands’ arrested: The U.S. Department of Justice and the SEC have filed multiple civil and criminal charges against crypto platform founder Nader Al-Naji. Al-Naji, the founder of crypto trading and social media platform BitClout who went by the nickname “Diamondhands”, could face a prison sentence of up to 20 years if convicted.
• Crypto on the campaign trail: Crypto and digital currency have arisen as relevant issues for both former President Donald Trump and Vice President Kamala Harris on the campaign trail, with Trump reversing crypto skepticism to court bitcoin supporters and Harris reportedly approaching top crypto firms for a “reset.”

Member News

BofA’s Merrill, IMG Academy Announce Partnership for Student-Athlete Financial Education

This week, Bank of America’s Merrill Wealth Management and IMG Academy announced a three-year partnership to offer financial education resources to student-athletes and their families. The program aims to support student-athletes with actionable financial education and awareness resources that benefit them both throughout their athletic journey and life in general.

Upcoming Events

• 8/8/2024: National Association for Business Economics event with Richmond Fed’s Tom Barkin