BPInsights: December 12, 2020

Stories Driving the Week

BPI Sanctions Report: Modern Sanctions Threats Deserve Modern Detection Methods

The Treasury Department and U.S. bank regulators should modernize their approach to bank sanctions compliance in order to more effectively target activities in the financial system that truly threaten U.S. national security and foreign policy interests, a Dec. 9 BPI report says. Inefficiency in the current sanctions compliance framework – such as a patchwork of sanctions intelligence that differs between banks, or low- to no-yield transactions screening expectations against OFAC lists – could expose the U.S. financial system to terrorists, human traffickers or other foreign adversaries. Sanctions evaders use innovative techniques like blockchain technology to infiltrate the financial system, so sanctions enforcers and banks should use equally innovative methods to stop them, the report argues.

The Treasury Department’s Office of Foreign Assets Control should officially endorse a risk-based approach to sanctions compliance, rather than one that compels banks to increasingly devote resources to efforts to improbable detection scenarios, BPI recommends in the report. A re-alignment of expectations would encourage banks to devote more resources to the risks that pose the highest threats and use innovative methods, like artificial intelligence, to improve detection efforts. Bank regulators should acknowledge this direction, so that examiners don’t contradict Treasury’s expectations, the report recommends.

BPI also recommends that the government enact a law banning anonymous shell companies; that the bank regulators clarify that a 2011 piece of guidance does not apply to sanctions screening models; that the Treasury Department refine and update its list of sanctioned people and companies; and, notably, that the government and banks share useful information with each other about sanction-thwarting tactics. Read More >>

Senate Passes Anti-Money Laundering Bill to End Anonymous Shell Companies 

The Senate voted Dec. 11 to pass anti-money laundering legislation to end anonymous shell companies in the U.S., marking the measure’s final passage. The legislation, included in the National Defense Authorization Act, requires companies to disclose their true owners when they incorporate. The measure will prevent global criminals from using anonymous shell companies to stash illicit cash in the U.S. financial system. The bill now awaits presidential approval.

BPI’s support for the bill’s passage was covered by Reuters, American Banker and POLITICOLearn More >>

BPI and Joint Trades: Figure Uninsured Bank Charter Would Violate Federal Banking Law 

BPI joined several financial trades in a Dec. 7 commentletter opposing FinTech company Figure’s application for an OCC national bank charter. Figure plans to take deposits without FDIC deposit insurance, an unprecedented model that would violate federal banking law, the letter said. Figure’s proposed structure would allow it to shirk federal oversight applied to ordinary banking organizations as well as Community Reinvestment Act requirements. The OCC should also give the public more information about Figure’s unprecedented charter bid, the letter said, noting the public application made no mention of deposit-taking and that one had to dive into webinars featuring Figure execs to learn about that critical feature of the application.

Republicans Urge Caution on Fed Climate Plans

House Republicans discouraged the Federal Reserve from imposing climate change stress tests on banks, a step that its U.K. counterpart is taking next year, POLITICO reported Dec. 10. The group of 47 GOP lawmakers, led by Rep. Andy Barr and including many House Financial Services Committee members, urged Fed Chair Jay Powell and top Fed supervision official Randal Quarles in a letter to weigh the limitations of climate stress testing before echoing European regulators’ approach to testing banks for climate risk exposure.

BPI recently analyzed some of the challenges of climate stress testing, such as overly long time horizons that limit their predictive power and assumptions that banks would not adapt or hedge their portfolios as climate risks emerge.

FT Editorial: OCC ‘Fair Access’ Proposal Could Force Banks to Make Bad Decisions 

Banks are entitled to lend — or choose not to lend — to whatever businesses they want, as long as those businesses are legal, said a Financial Times editorial on Dec. 7 that critiques the Acting Comptroller of the Currency’s Fair Access proposal. The piece cites BPI’s opposition to the proposed policy. “Mandating banks to invest, rather than keep their powder dry, flies in the face of sensible prudential risk management,” the editorial says. “Banks should not be forced to make bad decisions.”

Quarles Compares U.S. Bank Dividend, Buyback Curbs to EU, UK; Suggests Simpler Ratings System

Randal Quarles, the Federal Reserve’s Vice Chair for Supervision, drew comparisons between the U.S. pandemic restrictions on bank shareholder payouts and the EU and U.K. bank dividend ban. Quarles said the central bank set different restrictions than its counterparts across the Atlantic because European and British banks pay out capital differently to shareholders, but the regulators shared the same general policies applied to different systems.

“Obviously, I would like to claim that we have led the way boldly to a better outcome, but I actually think there’s less difference between the capital preservation actions that we have taken at the Federal Reserve and those that have been taken in other jurisdictions,” Quarles said in a Q&A at a Dec. 11 Fed conference on bank supervision co-hosted by Harvard Law School and the Wharton School of the University of Pennsylvania.

Banks today have more capital than they did at the outset of COVID-19 “in material part because of the restrictions that we have put on them,” he said.

BPI earlier this year argued that a governmental ban on bank dividends would not spur additional lending and would damage the banking industry permanently by driving its already low market values still lower, constraining its ability to support economic growth.

Quarles signaled in a speech at the conference that the Fed will remove the restrictions imposed on large banks’ shareholder payouts “after we emerge from the COVID event,” and move to the stress capital buffer established earlier this year. He cautioned that the Fed may want to conduct a limited review of banks’ capital plans to pick up insights the stress tests may not detect.

In the Q&A portion of the event, Quarles also said that the Fed has “now an excellent basis of analysis to make additional decisions about what the next step should be for capital preservation in the face of the risks that we see out of the COVID event,” referring to upcoming stress tests results expected next Friday.

Quarles also suggested a simpler, clearer approach to the bank supervisory ratings process in a speech at the conference. Poor supervisory ratings can preclude banks from expanding or making acquisitions.

Quarles called for more consistency and predictability in how different examiners evaluate banks. Steps to make supervisory ratings more predictable – such as the Fed explaining how different variables are weighted when generating the ratings – would “promote a more efficient banking system,” Quarles said in the speech.

Under the current ratings framework, a bank with a flaw in its risk management process may well face the same supervisory consequences as another bank with inadequate capital, even though the one with the capital shortfall is objectively weaker – a discrepancy that suggests changes should be considered, Quarles said.

The Fed could consider simplifying the supervisory rating system that applies to less complex bank holding companies and the CAMELS rating system that applies to depository institutions, as it did with the LFI rating framework that governs systemically important banks, Quarles said – though he added that he was not making an official proposal.

BPI has long advocated for modernizing the CAMELS rating system.

Bank of England Eases COVID-19 Dividend Curbs

The Bank of England’s regulatory arm, the Prudential Regulation Authority, said it will ease the restrictions on bank dividends and stock buybacks that it imposed amid the pandemic and allow some limited shareholder payouts to resume. “Consistent with the PRA’s view that distributions are an important and necessary part of the functioning of the banking system, the PRA judges that an extension of the exceptional and precautionary action taken in March is not necessary and that there is scope for banks to recommence some distributions should their boards choose to do so, within an appropriately prudent framework,” the PRA said in a Dec. 10 statement. The central bank explained that banks are well-capitalized and resilient even amid the pandemic-related economic distress.

BPI Files Comment Letter on Supervisory Guidance Proposal

BPI filed a comment letter Dec. 5 with the federal banking agencies, Consumer Financial Protection Bureau and National Credit Union Administration expressing support for the core elements of a proposal to codify that supervisory guidance is nonbinding and cannot give rise to a Matter Requiring Attention (MRA) in the examination process. However, BPI requested that the regulators close carveouts in the proposal for “interpretive rules” that lack the force and effect of law, and that they clarify that an MRA cannot be based on vague notions of reputational risk without pointing to a specific practice or legal violation underpinning that risk. The proposal, which arose from BPI and the American Bankers Association’s 2018 petition for rulemaking under the Administrative Procedure Act, would codify the agencies’ 2018 Interagency Statement Clarifying the Role of Supervisory Guidance. 

In Case You Missed It

Bloomberg: Citi Helps Black-Owned Banks Finance Affordable Housing

Citigroup is supporting Black-owned banks not only by making equity investments in the institutions, but by helping small Black-owned banks underwrite loans they wouldn’t otherwise be able to make. The bank is helping Houston-based Unity National Bank underwrite a $13.95 million loan for 93 affordable housing units, according to a Dec. 10 Bloomberg piece. The move follows a September promise to help minority depository institutions finance as much as $50 million in affordable multifamily rental housing.

American Banker: Fifth Third Pledges $2.8 Billion to Help Underserved Communities

Fifth Third Bancorp committed $2.8 billion to programs aimed at advancing racial equity in the U.S., according to a Dec. 9 American Banker article. The bank says it will award the funds to at least five communities of color. Underserved communities can apply over a three-year period for long-term investments from the Cincinnati-based bank.

Fed to Unveil Stress Test Results Dec. 18

The Federal Reserve will release the results of its second round of stress tests in 2020 on Dec. 18 at 4:30 p.m., the central bank announced. Stress tests weigh large banks’ balance sheets to ensure they can withstand sudden shocks. The central bank’s first round of stress tests earlier this year found that large banks hold plenty of capital to weather distress, as demonstrated in the economic fallout of the pandemic. The results of the latest stress tests are expected to determine whether the Fed will lift the restrictions on shareholder payouts enacted in the third quarter of 2020.

POLITICO: Bank of America Blocks Billions in California Unemployment Fraud

Bank of America collaborated with a California state agency to uncover about $2 billion in fraudulent unemployment activity, Brian Putler, the bank’s director of California government relations, told California lawmakers, according to a Dec. 7 POLITICO piece. Bank of America identified more than 640,000 accounts for further evaluation, finding that 76,000 unemployment benefits cards were sent to states not bordering California; that hundreds of multiple cards were sent to the same address; and that some benefits were issued to infants or children.

BPI Blog: GSIB Scores Rise Again in Third Quarter

The largest and most complex global banks saw an overall increase in the Global Systemically Important Bank (GSIB) scores tallied by the Federal Reserve in the third quarter of 2020, according to a BPI blog post by Gonzalo Fernandez Dionis and Robert Lindgren published Dec. 11. The GSIB score is used to calculate the GSIB surcharge, an extra layer of capital that the GSIB banks must hold. BPI’s quarterly analysis found that increases in the short-term wholesale funding and size inputs in the score this quarter were partly offset by decreases in the interconnectedness and complexity elements. The component of the score measuring cross-border activity was largely unchanged. The Fed’s expanding balance sheet in response to the pandemic continues to put upward pressure on systemic scores of domestic GSIBs and consequently on their capital requirements.

POLITICO: Crypto Firms Seek OCC National Trust Bank Charter

Crypto companies Paxos and BitPay have applied for national trust bank charters, part of the Acting Comptroller of the Currency’s plan to allow cryptocurrency firms to become part of the national banking system, POLITICO reported Dec. 10. The firms join Anchorage, a cryptocurrency firm seeking to convert its existing state trust charter to a national trust charter, in seeking OCC approval.

POLITICO Q&A: San Francisco Fed President Mary Daly

Mary Daly, president of the Federal Reserve Bank of San Francisco, gave an interview to POLITICO Pro published Dec. 8. The regional Fed chief called for fiscal stimulus for unemployed Americans and expressed concern about hidden woes in the labor market and the potential for economic inequality as the nation recovers from the pandemic.

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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.