BPInsights: December 10, 2022

House Passes NDAA, Creates Opportunity for Easier Second-Chance Hiring

The U.S. House of Representatives voted earlier this week to pass the National Defense Authorization Act, annual legislation that establishes defense funding. The bill included a key provision, the Fair Hiring in Banking Act (H.R. 5911), that would make it easier for banks to hire more rehabilitated people with minor criminal records.

Background: BPI has long supported this legislation, which would amend Section 19 of the Federal Deposit Insurance Act to clear certain barriers to hiring rehabilitated candidates. It would expand the process for automatic waivers from the law’s limits on such hiring at banks. For example, a job candidate who committed an offense seven or more years ago would be subject to certain exemptions. The FDIC in 2020 helpfully expanded eligibility for that process, but the legislation goes further by amending the underlying statute. Without these changes, banks face obstacles to hiring people with records due to the long regulatory approval process for such candidates.

Why it matters: The bill will enhance economic advancement opportunities for job seekers with minor records and give banks the flexibility they need to hire more rehabilitated candidates.

Also in the bill: In addition to improvements to second-chance hiring rules, the NDAA included several other banking provisions. These include:

  • The creation of a public database to allow greater transparency on who has applied for a Federal Reserve master account and the status of the application; and
  • A new requirement for Treasury to submit an annual report to the Hill disclosing any licenses issued by the Secretary of the Treasury authorizing U.S. financial institutions to provide services to sanctioned parties. These licenses are often necessary to pay for food, medical supplies or other humanitarian aid to conflict zones. These licenses may also be required for authorizing payments for services like legal fees or payroll.

Here’s what is not in the bill: Lawmakers chose not to proceed with a provision to create a new critical infrastructure designation, “systemically important entities.” That provision would have duplicated existing requirements and amplified risk to financial institutions by forcing them to reveal information that could provide a roadmap for hackers.

The bill also excluded legislative text that is intended to make it easier for banks to do business with cannabis companies in states where marijuana is legal, known as the the Secure and Fair Enforcement (SAFE) Banking Act.

Look deeper: To learn more, click here.

New Bill Targets Big Tech’s Backdoor to Bank Ownership

This week, a broad coalition of financial services and consumer organizations expressed support for new legislation to close the industrial loan company (ILC) charter loophole, the “Close the Shadow Banking Loophole Act.” The legislation, introduced by Senate Banking Committee Chairman Sherrod Brown (D-OH), Sen. Bob Casey (D-PA) and Sen. Chris Van Hollen (D-MD), prohibits shadow banks and nonbank commercial entities from taking advantage of legal loopholes. These loopholes allow these companies to control a full-service FDIC-insured depository institution without being subject to the comprehensive set of rules designed to keep the financial system safe.

The coalition stated the following in a letter: “The time is now for Congress to close the ILC loophole before it is further exploited by firms seeking to gain all of the advantages of an FDIC-insured bank charter without the concomitant supervision and regulation that Congress has established for the corporate owners of full-service insured banks. As financial services trades and consumer advocates, we come together to fully support this legislation and look forward to working with the committee to advance this legislation in the future.”

Why this matters: Congress sought to preserve a competitive economy by establishing a strict separation between banking and commerce. The ILC loophole allows commercial entities to undermine the intent of Congress and ignore the protections designed to maintain that separation.

This loophole:

  • Creates a riskier financial system and less competitive economy;
  • Gives major commercial firms – including Big Tech companies – access to sensitive balance and transaction data, adding to their trove of personal and behavioral data; and
  • Exempts these nonbanks from many consumer data and privacy protections.

The Senate legislation would eliminate the loophole and strengthen protections for consumers, taxpayers and the financial system.

How the SLR Shapes Banks’ Behavior

The balance-sheet constraints of the supplementary leverage ratio incentivize banks to push deposits to money market funds (MMFs), leading to an increase in MMFs’ investment in the Fed’s overnight reverse repurchase agreement facility (ON RRP), according to a recent New York Fed staff report.

  • Backing up: The SLR is a requirement that treats all assets the same regardless of risk level. It discourages large banks from making markets in Treasuries – a crucial function in maintaining Treasury market liquidity – because of the excessive amount of capital those banks must hold to meet the SLR requirement.
  • Experiment: It’s hard to demonstrate how changes in capital requirements affect banks’ behavior, but the March 2021 end of pandemic exceptions to the SLR marks a turning point where the effects of SLR constraints on bank behavior can be identified.
  • What happened: Assets under management of bank-affiliated money market funds rose more relative to other MMFs because banks were constrained by the SLR. As a result, SLR-constrained banks shed deposits and other short-term liabilities to their affiliated funds. The increase in AUM of MMFs led to a rapid surge in take-up at the ON RRP facility.
  • Consequences: The increase in the ON RRP facility could derail the Fed’s plans to normalize its balance sheet because it can affect the speed of the decline of reserve balances and interfere with the Fed’s ability to control interest rates.

To learn more, see our research here and here.

Senate Banking Chair Brown Unveils 2023 Agenda

Senate Banking Committee Chair Sherrod Brown (D-OH), who will continue to lead the panel in light of the Senate retaining its Democratic majority, released a media memo covered in POLITICO this week outlining his agenda for the coming year. In addition to highlighting upcoming goals, the document mentions Brown’s efforts to revise bank merger policy and to urge for higher capital requirements. Here are some key notes on his priorities.

  • Crypto: The FTX collapse has sparked new motivation throughout Congress to scrutinize – and regulate – the crypto industry. Brown is no exception: the memo says he will work with regulators and fellow lawmakers to “design a comprehensive regulatory framework for crypto that protects our national security and puts consumers – not the crypto industry – first.” The Banking Committee will hold an FTX hearing on Dec. 14.
  • Climate: The climate aspects of Brown’s Banking agenda emphasize the “Housing and Urban Affairs” part of the panel’s jurisdiction. The Banking Committee under Brown will aim to make the nation’s housing supply more resilient to climate risk, he said. The Committee will also “work to improve disclosure requirements” to address climate risk. The panel also will work to reauthorize the National Flood Insurance Program and to promote lower-emission forms of transportation.
  • Consumer issues: The agenda says Brown will look to “defend the CFPB” and engage in oversight of consumer financial firms.
  • ILC bill: The memo flags the bill introduced this week to ensure Big Tech firms cannot enter the banking system through the ILC loophole.
  • Sanctions: “The Committee will continue to play a pivotal role in protecting our national security through economic sanctions, export controls, illicit finance protections, and investment security policy,” the memo notes.

The Crypto Ledger

Congress this week ratcheted up its scrutiny on FTX after the crypto firm’s dramatic meltdown. The Senate Banking Committee scheduled an FTX hearing for Dec. 14 and the House Financial Services Committee will hold one on Dec. 13. But the panels are still seeking their star witness. House Financial Services Committee Chairwoman Maxine Waters (D-CA) said she may subpoena former FTX chief Sam Bankman-Fried to testify before the Committee. The leaders of the Senate Banking Committee said in a joint statement that they have requested Bankman-Fried to testify at their hearing on Dec. 14 and will “consider further action” if he does not comply.

  • Manipulation: Bankman-Fried faces pressure from all corners of Congress, law enforcement and the regulatory system. Federal prosecutors in New York are probing possible market manipulation by the former CEO. An investigation in its early stages is examining whether Bankman-Fried steered the prices of TerraUSD and Luna to benefit entities he controlled, according to the New York Times.
  • SEC on crypto: Some are calling for the SEC to pursue more crypto exchange enforcement actions in the wake of the FTX collapse, according to a Wall Street Journal article. SEC Chairman Gary Gensler has repeatedly said that most crypto tokens are securities and should be under the agency’s purview.
  • Rules: A recent Bloomberg piece contemplates what existing regulations might have prevented the FTX collapse. Among the rules mentioned: disclosure requirements, and a ban on brokerages commingling customer assets, which the SEC applies to securities firms.

Fed Seeks Input on Principles for Large Bank Climate Risk Management

The Federal Reserve late last week invited comment on high-level principles for financial institutions’ climate risk management. The proposed principles would apply to financial institutions supervised by the Fed with more than $100 billion in total assets and would involve both physical risks, such as floods and wildfires, and transition risks such as carbon pricing. The principles would cover governance, policies, procedures and limits, strategic planning, risk management, data, risk measurement and reporting and scenario analysis. They align closely with proposals by the OCC and FDIC, according to the Fed.

  • Worth noting: Governor Christopher Waller issued a statement opposing the issuance of the guidance. “Climate change is real, but I disagree with the premise that it poses a serious risk to the safety and soundness of large banks and the financial stability of the United States,” Waller said. “The Federal Reserve conducts regular stress tests on large banks that impose extremely severe macroeconomic shocks and they show that the banks are resilient.” Governor Michelle (Miki) Bowman supported seeking public comment but said in a statement that “it is critical that any final principles complement the existing supervisory framework supporting the safety and soundness of financial institutions, and that the Board consider the costs and benefits of any new expectations.” She said that “[w]hile I support seeking public comment, this vote does not indicate my support for the finalization of this guidance. I will evaluate any future recommendation to finalize this guidance on its merits.”

    In Case You Missed It

    Bank CEOs on Crypto: Don’t Miss the Big Picture of Blockchain Technology

    While the crypto crash has raised doubts about crypto assets, the underlying blockchain technology still holds great promise, Goldman Sachs CEO David Solomon wrote in a recent Wall Street Journal op-ed. “Cryptocurrencies are only one of blockchain’s many applications, so we shouldn’t miss the forest for the trees,” Solomon wrote. “Used correctly, blockchain can support responsible innovation across the financial industry.” Blockchain in the hands of a regulated firm could make the financial markets more accessible to smaller investors, increase transparency and make trading faster and more efficient.

    In a separate op-ed in the Financial Times late last week, BNY Mellon CEO Robin Vince called on policymakers to “accelerate a smart regulatory framework that unites the traditional and digital asset systems, rooted in two fundamental principles.” Regulation should enable the financial industry to “prudently embrace innovation,” and it should “maintain the basic tenets of client protection, orderly markets and clear regulatory guidelines — regardless of the new technology, asset class or type of entity servicing it.” Vince also pointed to the potential benefits of distributed ledger technology and emphasized the importance of trust in the bank regulatory perimeter. “While conferring both privileges and obligations, this perimeter breathes what is arguably the most important currency into the global financial system: trust.”

    Senate Banking Committee Tees Up Monday Vote on FDIC Nominees

    The Senate Banking Committee scheduled a vote on three FDIC nominees for Monday, Dec. 12. All three nominees are expected to garner enough support to advance to the full Senate where it is expected they will be confirmed before the end of the year. The nominees are Acting Chairman Martin Gruenberg (for another term as Chairman) and two Republican nominees, Travis Hill (for Vice Chairman and a Board seat) and Jonathan McKernan (for a Board seat).

    Crypto ‘Pet Rocks’, Energy Security and Strong Banks: Jamie Dimon on CNBC

    JPMorgan Chase CEO Jamie Dimon appeared on CNBC for an interview this week. Dimon discussed a wide range of topics, from global energy to the health of the banking system. “The American banking system is unbelievably sound in a million different ways,” Dimon said. “Our capital cup runneth over.” Dimon also weighed in on the FTX collapse and the state of crypto. “Crypto is a complete sideshow,” he said. “Crypto tokens are like pet rocks, and people are hyping this stuff up. That doesn’t mean blockchain is not real.” To see the full interview, click here.

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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.