BPInsights: August 27, 2022

Stories Driving the Week

FDIC’s Proposed Deposit Insurance Assessment Hike: A Threat to Small Businesses and the Economy, Based on Stale Data

The FDIC’s proposed increase of deposit insurance assessment rates rests on incomplete, outdated economic analysis, BPI, the American Bankers Association, the Consumer Bankers Association, the Independent Community Bankers of America, the National Bankers Association and the Mid-Size Bank Coalition of America wrote in a recent comment letter. The increase would harm businesses and households that depend on bank credit, particularly small businesses without access to capital markets.

What’s happening: The FDIC proposed a dramatic increase of more than 50 percent above the current weighted-average assessment rate that banks pay for deposit insurance, and would maintain these higher rates until the Deposit Insurance Fund achieves a Designated Reserve Ratio of 2 percent of insured deposits. This increase would impose major costs, particularly for the smallest banks: had the increase been in place in 2021, many community banks’ pretax income would have fallen by more than 5 percent, and several would have fallen by more than 25 percent. The FDIC says that this significant increase is needed to meet its statutory requirements, but that assertion is based on outdated economic analysis that does not account for major recent changes in the levels of and the outlook for deposits or interest rates. Correcting the FDIC’s projections to reflect these changes shows that an increase is unnecessary.

What they’re saying: “The overall statutory framework Congress devised with respect to assessment rates demonstrates that the proposed dramatic increase is inconsistent with legislative intent, unnecessarily punitive to banks and could harm the economy,” the trades wrote in the letter. “The timing of the currently proposed increase … is increasingly likely to coincide with the beginning of a recession. The proposal therefore risks causing exactly the type of procyclical increase that Congress sought to avoid, and is therefore entirely contrary to Congressional intent.”

Our ask: The FDIC should not increase assessment rates at this time; rather, it should reassess the situation in six months and take into account the latest economic data. To move forward with an increase now would be highly irresponsible in light of the negative consequences for credit availability as we enter a period of economic uncertainty and a potential recession.

To learn more, click here.

OCC’s Tech-Neutral Approach to Traditional Banking Activities Allows Consumers to Safely Benefit from Modernized Technologies

The Bank Policy Institute and the American Bankers Association this week urged Acting Comptroller Michael Hsu to reject a recent Congressional request to withdraw the OCC’s Interpretive Letters concluding that certain activities using modernized technologies are within the scope of permissible traditional banking activities for national banks. In a letter to the agency, the trade groups said the OCC’s technology-neutral approach to permissible banking activities enables banks to meet customer demand for modernized services within the robust supervisory and regulatory framework in which banks operate.

Context: In 2020 and 2021, the OCC issued several Interpretive Letters clarifying that the following activities are merely modernized versions of permissible traditional banking activities: providing certain cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency; holding deposits that serve as reserves for stablecoins that are backed on a 1:1 basis by a single fiat currency and held in hosted wallets; and using distributed ledgers and buying, selling, and issuing stablecoins to engage in and facilitate payment activities.

Recently, a letter from four senators requested that the OCC withdraw its letters, stating that “in light of recent turmoil in the crypto market…the OCC’s actions on crypto may have exposed the banking system to unnecessary risk.” 

What we’re saying: “No bank was involved in crypto trading underlying the recent volatility in the crypto market…The rescission of the Interpretive Letters would not mitigate the risks presented by nonbank crypto firms; those risks should be addressed by a comprehensive regulatory and supervisory framework applicable to those entities.”

BPI and ABA in a joint letter

The reality:

  • Rescinding those letters would serve only to undermine banks’ ability to leverage modernized technologies to bring traditional banking products and services to customers in more reliable, safer and more efficient ways. The appropriate way to address the crypto market risks highlighted in the Congressional letter is through comprehensive regulation of nonbank crypto firms, products and exchanges that are currently largely unregulated.
  • Banks are subject to comprehensive and robust risk management, supervision and examination processes, and have substantial experience with incorporating new technologies into the business of banking. Both the public and the broader financial system benefit from banks’ involvement in the activities described in the Interpretive Letters.

Worth noting: The use of distributed ledger technology is unrelated to cryptoassets in many cases and presents none of their typical volatility, fraud or cybersecurity risks – for example, tokenized or blockchain-based deposits on a permissioned ledger or use of DLT technology for recordkeeping purposes.

Next steps: A consistent approach among federal banking regulators regarding permissible digital asset activities for banks and related risk management expectations would benefit institutions and their customers but withdrawing the letters would not advance that goal. Instead, the agencies should continue working to provide clarity on digital asset activity permissibility and risk management expectations around those activities.

Banks Challenge CFPB Authority to Regulate Customer Service and Object to Unfair Characterization of Banks’ Commitment to Serve Customers

The American Bankers Association, Bank Policy Institute and Consumer Bankers Association jointly responded this week to the Consumer Financial Protection Bureau’s (CFPB) request for information about customer service practices at large financial institutions. The letter challenges the legal basis for the CFPB’s inquiry and objects to the Bureau’s assertion that banks are providing subpar customer service by investing in digital services to meet the diverse needs of their customers.

“Banks of all sizes take very seriously the important role they play in the financial lives of consumers, families, businesses, communities and the nation’s economy. Banks provide products and services that help consumers meet their financial needs, and they are continuously innovating to better serve customers in this highly competitive marketplace,” the letter states. “The CFPB’s statements in the RFI unfairly characterize the quality of customer service provided by banks and appear to reflect the CFPB’s pre-determined conclusions that banks do not provide high-quality customer service.”

The letter was covered in POLITICOBloombergLaw360 and a Cowen analyst note. To learn more, click here.

Fed Finalizes Master Account Guidelines 

The Federal Reserve earlier this month released its final guidelines for master account access.

Why it matters: Over the past two years, a number of “novel charters” – entities without deposit insurance or a federal supervisor – have sought Fed master accounts. A Fed master account would give these entities – which include fintechs and crypto banks — access to the central bank’s payment system, enabling them to send and receive money cheaply and seamlessly. BPI opposes granting master account access to firms without consolidated federal supervision and in its comment letter urged the Fed to clarify which institutions are eligible for master accounts.

Takeaways from the final guidelines:

  • The Fed does not define what institutions are eligible to seek accounts and declined to exclude all novel charter from access to accounts and services.
  • The guidelines maintain a tiered review framework that was proposed in an earlier version, sorting financial firms that apply for master accounts into three buckets for review. Firms without deposit insurance that are not subject to federal prudential supervision would receive the highest level of scrutiny. The tiers are designed to provide transparency into the expected review process, the Fed said in the guidelines — although the final guidelines clarify that even within tiers, reviews will be done on a “case-by-case, risk-focused basis.”

Next steps: The Fed and the Reserve Banks will develop an implementation plan for the guidelines, which would likely not be subject to public comment. Governor Michelle Bowman issued a statement that publishing the guidelines is “only the first step in providing a transparent process,” noting that “more work remains to be completed” and that “there is a risk that this publication could set the expectation that reviews will now be completed on an accelerated timeline.”

Custodia lawsuit: Wyoming crypto bank Custodia, formerly known as Avanti, sued the Kansas City Fed and the Board of Governors in June over delays in adjudicating its master account application. The Board of Governors and the FRBKC each recently filed a motion to dismiss the suit. The outcome of the lawsuit could sway the fate of other crypto firms seeking master accounts.

To learn more, access BPI resources here.

High Crypto Uptake, Trust in Its Safety Put Black Investors at Outsize Risk

Crypto is touted as a key to building wealth for black investors, but a 2022 study conducted by Ariel Investments and Charles Schwab shows that black investors may be disproportionately vulnerable to its risks. Black investors are less likely than white investors to think crypto is a risky investment, according to the study. They are also more likely than white investors to believe crypto investments are safe and regulated.

“The confluence of low stock market participation, appetite for risky investment options, and alarming lack of knowledge about fundamental investing principles is a red flag about the critical need for greater investor education,” said Mellody Hobson, co-CEO and president of Ariel Investments. “Many new and younger investors have never experienced market volatility like we’ve seen in the last couple years, and we have a responsibility to educate these new investors about the value of long-term investing to build wealth and achieve financial security.”

The Crypto Ledger

U.S. authorities arrested three Miami men this week over an alleged $4 million crypto scam. The men allegedly bought more than $4 million in cryptocurrency by opening accounts with a crypto exchange using fake identities. They linked the crypto accounts to bank accounts. After purchasing the crypto, they moved it to wallets outside the exchange, then falsely claimed the purchases were unauthorized, prompting the banks to reimburse them. Here’s what happened in crypto this month.

  • Caught in a Tornado: Stablecoin issuer Tether is defying U.S. sanctions on crypto mixer Tornado Cash, according to the Washington Post. Tether is not blacklisting accounts associated with the mixer, suggesting a potential violation of U.S. sanctions. Tether’s home base outside the U.S. complicates the matter.  
  • FDIC eyes crypto marketing: The FDIC demanded that the U.S. arm of crypto firm FTX, along with several other crypto firms, stop making misleading statements to customers about FDIC insurance. The move follows similar action against Voyager Digital.
  • Sales pitch falls flat: Despite the crypto industry’s flashy marketing push, the number of people investing in crypto has not increased since last September before the efforts began, according to the Washington Post, which cited a recent Pew study.

In Case You Missed It

Jeremy Newell Returns to BPI as Senior Fellow

This week the Bank Policy Institute announced that Jeremy Newell will return to the organization as a senior fellow beginning on Sept. 1. In his new role at BPI, Jeremy will provide strategic input on regulatory reform, payments and administrative law issues.  Jeremy comes to BPI from Covington & Burling LLP where he was a partner in the firm’s financial services practice.

“Jeremy is one of the nation’s foremost legal thinkers on financial regulation, and draws on a wealth of experience in both the public and private sectors,” said Greg Baer, president and CEO of BPI.  “Jeremy was instrumental in helping stand up BPI when we formed four years ago, and we are excited to welcome him back home.  We will benefit both from his ideas and his collaborative approach.”

Financed Emissions Requirement in California Legislation Would Cloud the Picture of Climate Data

The inclusion of financed emissions in California’s Climate Corporate Accountability Act, which would require U.S. companies doing business in the state to disclose greenhouse gas emissions, would undermine the measure’s goal of providing clear, consistent, understandable and actionable emissions data to the public, BPI and a group of trades wrote in a joint letter this month. “Banks are uniquely positioned as intermediaries in our economy – financing everything from the corner store, to the city government, and to the multi-national corporation,” the trades wrote. “Consequently, requiring banks to calculate and report their ‘financed emissions’ could sweep in a tremendous amount of duplicative information.” The legislation would also likely conflict with the Securities and Exchange Commission’s pending climate disclosure proposal.

FDIC Insurance Assessment Scorecard Rewrite Risks Penalizing Banks for Working with Customers Through Loan Modifications

Large FDIC-insured banks are assigned an individual assessment rate that they pay to support the Deposit Insurance Fund.  The rate is based on so-called “scorecards” that combine several measures, including the volume of so-called troubled debt restructurings (TDRs), intended to reflect riskiness and/or potential losses to the FDIC in the event of a bank’s failure.  BPI and the American Bankers Association expressed concern in a recent joint comment letter with the FDIC’s proposal to revamp how it takes into account debt restructurings for purposes of determining banks’ “scorecards.” In particular, the proposal would replace TDRs, which are being phased out for accounting purposes, with a new loan modification accounting designation – one called “modifications to borrowers experiencing financial difficulty” (MBEFD).  However, there are key distinctions between TDRs, on the one hand, and MBEFDs on the other.  Accordingly, the FDIC should instead remove TDRs without a replacement at a minimum on an interim basis, the trades wrote.

  • Troubling consequences: Replacing TDRs with MBEFDs would likely lead to higher assessments on banks that actively work with customers through loan modifications. This consequence would penalize banks for taking proactive, prudent steps to help creditworthy customers navigate difficult times.
  • Purpose of MBEFD disclosures:  MBEFDs, unlike TDRs, are an activity and volume measure over a set period of time, not a measure of credit quality.
  • Big picture: Banks would likely initiate more modifications during economic downturns, so the proposed change in the scorecards would make large banks’ assessments more procyclical (exacerbating stress in the economic cycle).

Cleveland Fed Study: Small Businesses Seeking Financing at Online Lenders Found Unfavorable Terms, High Rates

Small businesses applying for loans with online lenders reported less satisfaction with their experience compared to bank applicants, according to a recent Cleveland Fed study. Among applicant firms that were at least partially approved for loans, 76% of small bank applicants were satisfied with their lenders, compared to 39% of online lender applicants. Firms applying to online lenders often reported issues with high interest rates and unfavorable repayment terms, according to the Cleveland Fed. The study has important implications for black- and Hispanic-owned businesses, newer businesses and smaller-revenue businesses, which disproportionately seek financing with online lenders compared to white- and Asian-owned firms.

A Path to Regulate Stablecoins — No Legislation Needed?

A recent Brookings Institution paper proposes a federal stablecoin regulatory framework that would not require any new legislation. Under the proposal by former CFTC Chair Timothy Massad, Cornell law professor Dan Awrey and Harvard law professor Howell Jackson, the OCC could authorize a national trust bank charter, organized as an operating subsidiary of an insured depository institution, to create stablecoins through the use of a dedicated trust vehicle. The OCC would then adopt standards limiting stablecoin reserves to high-quality liquid assets and address redemptions, operational resilience and other matters.

Kansas City Fed Note on Data Aggregators Lays Out Benefits, Risks 

A recent Kansas City Fed briefing note explored the role of data aggregators in “open banking.” While these third-party providers provide some benefits to consumers, such as supporting financial planning and budgeting by linking different financial apps together, they also pose risks related to data security, data privacy and low competition among aggregators, the briefing noted. “Although regulatory actions are underway in data privacy, regulators may need to monitor the market closely regarding data security and competition,” the authors wrote. The briefing also notes the enhanced security of APIs compared to screen scraping. The CFPB is currently working on a rulemaking on consumer-permissioned financial data sharing.

Bank of America Unveils More Than $1.2M in Grants to Atlanta Nonprofits

Bank of America last week announced more than $1.2 million in grants to 53 Atlanta nonprofit organizations to support workforce development, education and other pathways to economic opportunity for vulnerable individuals and families.

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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.