BPInsights: August 21, 2021

Stories Driving the Week

It’s a Myth That Regulators Rubber-Stamp Bank M&A 

Drivers slow down near schools with speed cameras and posted speed limits. Most would call that outcome a success, but some may conclude the government’s goal is to write tickets, rather than to make traffic safer. Critics of bank merger policy deploy similar flawed logic to denounce the Federal Reserve and other banking regulators for “rubber stamping” merger reviews, BPI CEO Greg Baer wrote this week in an American Banker op-ed. Bank mergers are nearly always approved, but that’s because banks know the rules of the road and don’t apply for merger approval if they expect it to be denied. Regulators also warn banks to withdraw problematic applications if they apply anyway. Basically the opposite of a rubber stamp.

In addition to the publication of today’s American Banker op-ed, BPI published a research note providing a detailed analysis of the approval orders from some of the most prominent bank mergers of the last 15 years. While these critics have seized on the opportunity to pitch false narratives and talking points about lax oversight, this report presents a thorough and fact-based explanation of how mergers are considered. It explains the various stages of the approval process and illustrates the scrutiny applications receive from both the DoJ and various banking regulators. This includes a competitive analysis by the DoJ — using more restrictive concentration thresholds than apply to any other industry as well as appropriate remedies for any competitive-related concerns — and the regulators scrutinizing a combination of factors such as the applicant’s financial resources, effectiveness in combatting money laundering, financial stability and managerial resources.

PPP Red Flags Concentrated Among FinTechs, Study Says

FinTech firms were nearly five times more likely than traditional lenders to be involved with suspicious Paycheck Protection Program loans, according to a new study reported by Bloomberg this week. Nine of the 10 lenders with the highest rates of potentially fraudulent loans were FinTech firms, the University of Texas at Austin study found. The tenth was a nonbank financial firm. The analysis reveals the risks of FinTechs’ slimmed-down business models, which often sacrifice robust AML, cybersecurity and anti-fraud safeguards in favor of convenience. The study found that nearly 1.8 million of the program’s 11.8 million loans — more than 15 percent — totaling $76 billion had at least one indication of potential fraud.

FinCEN, CFTC Impose $100 Million Penalty on Crypto Derivatives Exchange

Cryptocurrency exchange BitMEX will pay $100 million to settle a CFTC and FinCEN enforcement action over its failure to register as a futures commission merchant and to establish a BSA/AML compliance program, according to a recent announcement. BitMEX has engaged in remedial measures to address AML concerns and has certified to the CFTC that it is not maintaining business operations in the U.S., with limited exceptions, and is blocking U.S. persons from its platform. BitMEX, which offers users the ability to trade crypto swaps, futures and options, has touted itself as one of the world’s largest crypto derivatives exchanges, according to a CFTC press release. In addition to the enforcement action, the three BitMEX cofounders were charged last year with one count of violating the BSA and one count of conspiracy, according to that release.

Bloomberg: Treasury Seeks to Quell Fears Crypto Tax Rules Are Overly Broad

The Treasury Department is planning to clarify that only cryptocurrency firms acting as “brokers” will be subject to proposed IRS reporting requirements included in the Senate-passed infrastructure bill, according to Bloomberg this week. Treasury will issue guidance clarifying that firms on the periphery of the crypto market, such as “miners” and software providers, would not be encompassed by the requirements as long as they do not also serve as brokers. Lawmakers debated the scope of the crypto provision, meant to raise $28 billion, before the Senate passed the $550 billion package. The legislation still needs to pass the House. The crypto industry complained that the original crypto tax-reporting provision, which was ultimately included in the Senate bill, was too broad.

Minutes to July FOMC Meeting Describe Committee’s Quarterly Discussion of Financial Stability

At the July FOMC meeting, the staff downgraded its assessment of financial stability conditions, describing financial vulnerabilities as “notable,” because of elevated equity and home prices, narrow junk bond spreads and structural vulnerabilities at prime money funds and “new financial arrangements such as stablecoins.”  Offsetting those risks, the staff continued to highlight the robust capital and liquidity situations of banks. Board members and Reserve Bank Presidents that commented on financial stability echoed the concerns raised by the staff including the “fragility and the general lack of transparency associated with stablecoins.” FOMC participants noted the need to develop a regulatory framework for stablecoins, a project currently underway among the President’s Working Group on Financial Markets, a group of financial regulators.

In Case You Missed It

When It Comes to Climate, the SEC Should Quit Pretending to Be the EPA

The SEC should avoid usurping the mandate of the Environmental Protection Agency, which has the authority to oversee climate risks, attorney and former White House Counsel C. Boyden Gray wrote in a Washington Post op-ed this week. The SEC’s climate risk disclosure proposal reaches into EPA territory, he writes; only Congress can decide to grant the SEC authority to regulate environmental risks.

Most FOMC Participants See Taper Possibly Starting This Year 

FOMC members have not yet reached agreement on when to start tapering asset purchases, but most agree that it’s likely to start before 2022, according to the Fed minutes released this week. “Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year,” the minutes said. Despite the delta variant of the coronavirus injecting new uncertainty into the economic recovery, the economy has achieved the Fed’s goal of “substantial further progress” in price stability and is nearing that threshold in employment, according to the minutes. However, members still diverge on exact timing, composition and pace of pulling back on asset purchases. The central bank has been buying $80 billion of Treasury securities and $40 billion of agency mortgage-backed securities per month.

Will CFPB Take Cues From Canada In Writing Data-Sharing Rules?

The CFPB will have recent precedent from Canada as it finalizes a data-sharing rule, according to American Banker. Canada issued an advisory report earlier this month laying the groundwork for a new financial data-sharing framework to be launched by January 2023. The country’s approach could have implications for banks with operations in both countries. The Canadian report suggests including checking, insurance and brokerage accounts in the new framework and emphasizes the risks of “screen-scraping,” a less secure data-sharing practice that the U.S. financial industry is largely trying to transition away from for consumer-permissioned data sharing. The report also proposes that liability for third-party breaches should move with the consumer data, and that FinTechs accessing such data could be on the hook for breaches. The CFPB rule is set to be in place in April 2022. It’s unclear how similar it will be to the Canadian approach.

‘Massive Wake-up Call’: Crypto Firms Face Growing Legal Crackdown

Federal and state governments are increasingly targeting crypto firms with enforcement actions and penalties, according to a POLITICO Pro article this week. The CFTC, SEC and several states have recently taken actions cracking down on the industry, which SEC Chair Gary Gensler sees as a “Wild West” rife with investor protection risks.

PNC Pledges $20 Billion for Environmental Finance 

PNC is committing $20 billion over five years to support environmental finance, the bank announced this week. The effort will include loans to “green buildings,” renewable energy financing, clean transportation financing and sustainability-linked loans and bonds.

Goldman Buys Dutch Money Manager

Goldman Sachs has entered an agreement to buy Netherlands-based NN Investment Partners for 1.6 billion euro, the bank announced this week. The European asset management firm has a focus on ESG investment products.

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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.