BPInsights: December 11, 2021

Stories Driving the Week

FDIC Rift Emerges on Bank M&A Policy

The FDIC experienced an “unprecedented clash” this week over bank merger policy, Brendan Pedersen wrote in American Banker. Democratic board members Martin Gruenberg and Rohit Chopra, also the CFPB director, called for a review of FDIC bank merger policy, according to Bloomberg. But Republican Chair Jelena McWilliams said the measure had not been approved by the FDIC board or gone through the proper channels. “The FDIC has a proud 88-year history of Board members working together in a collegial manner.  This history has spanned many Presidential administrations, and countless philosophical differences on substantive issues among Board members over the years,” McWilliams said. “Notwithstanding the actions taken today, the FDIC expects this time-honored tradition of collegiality and comity to continue.”

• Our take: BPI CEO Greg Baer released a statement on this unprecedented move, saying the Gruenberg-Chopra action “seeks to establish serious and perhaps insurmountable obstacles to consolidation in an industry where market forces and good public policy are demanding it.” It “charts a course where banks would be denied the opportunity to compete with FinTechs that are in many cases much larger and hold higher market share, and which enjoy reduced operating costs given their immunity from the examination process and liquidity and capital regimes visited on banks.”

Penthouses and Shell Companies: Dirty-Money Crackdown Takes Shape

The Biden Administration’s focus on anti-money laundering and anti-corruption moved forward with major steps this week.

• Beneficial owners: FinCEN this week sought feedback on a proposal to require certain businesses to identify their beneficial owners and provide identifying information, as required by the National Defense Authorization Act of FY 2021. The announcement advances the U.S. government’s efforts to target anonymous shell companies.
  
  “With this proposed rule the U.S. regulatory regime is one step closer to closing the anonymous shell company loophole that criminals have exploited to launder money – through the purchase of luxury New York penthouses and other creative schemes – in support of drug trafficking, human trafficking and arms smuggling,” BPI’s Angelena Bradfield said in a statement. “We are encouraged to see this proposal take shape and value the opportunity to continue to work with regulators to achieve a final rule that brings greater transparency and helps to crack down on malicious actors.”
• Real estate: FinCEN is also considering new requirements aimed at money laundering in the U.S. real estate market. They may include nationwide recordkeeping and reporting requirements for certain cash purchases of U.S. real estate. “The systemic money laundering vulnerabilities presented by the U.S. real estate sector, and consequently, the ability of illicit actors to launder criminal proceeds through the purchase of real estate, threatens U.S. national security and the integrity of the U.S. financial system,” FinCEN Acting Director Himamauli Das said as part of FinCEN’s release.
• Corruption crackdown: Both these policy efforts take aim at corruption, according to a Washington Post op-ed by Treasury Secretary Janet Yellen and USAID Administrator Samantha Power and the Administration’s Strategy on Countering Corruption. The Biden Administration hosted a Summit for Democracy this week centered on countering global authoritarianism and corruption and issued several sanctions designations in line with this focus. Yellen and Power also mentioned crypto in their op-ed as a tool for money laundering.

Enhancing the nation’s anti-money laundering framework is a longtime priority for BPI. For more of our work on the issue, see here.

BPI Welcomes CFPB Resolve to Verify Big Tech Consumer and Data Safeguards

The CFPB’s series of orders probing Big Tech firms offering payments services on their use and protection of consumer financial data wisely recognizes that these firms’ practices could threaten consumers, financial stability, and a competitive marketplace, BPI said in a comment letter to the CFPB this week. 

“Consumers and the broader economy benefit when market participants innovate to improve payments and other financial activities, provided that this innovation is conducted responsibly with consistent consumer protections in place,” BPI Senior Vice President and Associate General Counsel Paige Pidano Paridon said in a statement. “When a consumer opens their favorite app or looks at their account balance, regardless of whether a technology company is involved in offering that product, there should be zero question about whether robust consumer protections are in place or whether their financial data is protected.”
 
The letter offers the CFPB some key principles to consider:

• Subject tech companies to consistent regulation and oversight to ensure compliance with the full range of consumer protection laws and regulations.
• Mandate that tech companies implement strong security and consent protections for consumer data, just as banks do. 
• Establish regular, direct supervision of tech companies offering financial products or services.
• Preserve consumer and merchant choice.

Crypto Meets Capitol Hill

Crypto industry executives testified this week at a House Financial Services Committee hearing on digital assets. Here are the highlights.

• Where does crypto fit? The crypto executives argued that their nascent industry doesn’t fit neatly into the current regulatory framework and called for new legislation to fill the void. Coinbase has argued for a single agency to supervise crypto. But for all the discussion of newness, the hearing reflected the longstanding tension in regulatory policy between some policymakers calling for tougher oversight and others warning about stifling innovation.
• Transaction costs: Rep. Brad Sherman (D-CA) questioned Coinbase CFO Alesia Haas over high Bitcoin transaction fees. The exchange drew attention to the high costs of trading certain crypto assets; crypto proponents often tout the technology’s potential to lower the costs of moving money.
• Our take: The lack of regulatory oversight for digital assets could lead to risks building up, BPI CEO Greg Baer said in a statement ahead of the hearing. “Today, the largest players in the digital assets space operate largely outside the existing U.S. regulatory framework, with resulting risk for consumers and financial stability,” he said. “Meanwhile, regulated banks continue to await clear rules from regulators about their authority to engage in digital asset-related activities, leaving the banking industry largely on the sidelines even though banks are best positioned to be the most responsible and trustworthy players in this market.”

Stablecoins’ ‘Reserve-Backed’ Label Is No Safety Guarantee

Some stablecoin issuers say their coins are safe because they’re backed 100 percent by “reserves.” But their use of the word appears to just mean “assets,” and those assets vary in their risk level, liquidity and value, BPI’s Bill Nelson and Paige Pidano Paridon wrote in an American Banker op-ed this week. When banks say “reserves,” on the other hand, they mean completely safe and liquid assets with known value. Under this concept of reserves, stablecoins Tether and USDC actually have low levels of reserves compared to banks.

Life After LIBOR: House Bill, Regulatory Guidance

Regulators and Congress took new steps this week to prepare for the end of LIBOR.

• House bill: The House this week passed a bipartisan bill to provide clarity for “tough legacy” LIBOR-based contracts – those that outlast the rate’s end date and lack clear “fallback language” providing an easy switch to another rate. BPI welcomed the House passage in a statement. “Businesses and households will benefit from legislation that removes the frictions of a costly, complicated LIBOR transition from these contracts,” CEO Greg Baer said. “We look forward to working with the Senate to advance the legislation and ensure it will provide adequate certainty for these contracts to continue after LIBOR.”
• CFPB, SEC: The CFPB issued a final rule this week giving guidance to entities like credit card issuers and HELOC creditors on how to transition away from the rate. The SEC separately made recommendations to investment professionals on the transition, meant to “remind investment professionals of their obligations when recommending LIBOR-linked securities and to remind companies and issuers of asset-backed securities of their disclosure obligations related to the LIBOR transition.”
• The bigger picture: Regulators have told banks not to create any new contracts based on LIBOR after the end of this year. The rate will officially stop being published in mid-2023 for some U.S. dollar tenors; other versions of the rate will end earlier. The LIBOR transition has raised complicated questions for banks, investors and borrowers about what type of benchmark rates will come next and what happens to tough legacy LIBOR-based contracts.

In Case You Missed It

Omarova Withdraws Nomination

OCC nominee Saule Omarova withdrew her nomination this week, according to POLITICO. The Cornell law professor’s policy views garnered objections from senators in both parties.

Cyber Proposal Dropped from NDAA

Bipartisan cyber incident reporting legislation was left out of the must-pass NDAA bill, according to The Hill. There was an objection to the scope of the reporting measure, which would have required critical infrastructure firms like banks and pipeline operators to report cyber breaches to the government. BPI supported the effort to include the measure in the NDAA and will continue to advocate for any new incident reporting language to be streamlined with existing requirements. 

OCC Eyes Ransomware, Crypto Risk

The OCC warned against the rising risk of ransomware attacks for banks in its semiannual risk report released this week. Other risks it highlighted:

• Cyber: The OCC highlighted other cybersecurity risks, such as vulnerabilities in third-party vendors.
• Crypto: Crypto assets such as stablecoins can pose risks to banks and their customers, the OCC said. The report restated that the OCC and other banking agencies will provide greater clarity on banks’ use of crypto assets in 2022. “The OCC is approaching crypto-related activities in the federal banking system very carefully with a high degree of caution and expects its supervised institutions to the do the same,” the report said. “OCC-supervised institutions should reach out to the appropriate OCC supervisory office before engaging in crypto-related activity.”
• Debt, CRE: Banks should be vigilant about high levels of corporate debt and stress in the commercial real estate sector, the report said.
• Low interest rates: Banks remain stable and resilient, but should be prepared for low interest rates to persist, the OCC said. Consistently low interest rates force banks to focus more on non-interest income. The report also warned banks of the risks of inflation and rising rates.
• Climate: The OCC reiterated that it will hone its oversight of climate risk among banks in 2022.

United Bank Completes Acquisition of Community Bankers Trust

United Bankshares Inc. completed its acquisition of Community Bankers Trust Corporation, the parent company of Essex Bank, United Bank announced this week. The acquisition enables United to expand its presence in Maryland and Virginia.