BPInsights: December 18, 2021

Stories Driving the Week

A Costly Misunderstanding About CBDC

One major concern about CBDCs which BPI and others have raised is the potential loss of bank funding and resulting costs for lending and economic activity.  That concern rests on a premise that a dollar transferred from a deposit to a CBDC would no longer be available to fund lending, but some have rejected that premise.  In a new blog post, BPI CEO Greg Baer and Chief Economist Bill Nelson explain the mechanics of a CBDC and how a CBDC may drain money from lending. 

The note does not include a full-scale discussion of the merits of a CBDC, but rather establishes a core fact that must inform any such discussion.

Fed Begins to Clear Bank M&A Approval Pipeline

Federal Reserve Chair Jerome Powell and Governor Lael Brainard will answer questions from the Senate Banking On Friday, the Federal Reserve Board started to clear a backlog of merger and acquisition applications by approving three deals.  In three separate press releases the Board announced it unanimously approved First Citizens BancShares, Inc. to acquire CIT Group, Inc., Webster Financial Corporation to acquire Sterling Bancorp and WSFS Financial Corporation to acquire Bryn Mawr Bank Corporation. There are still other applications awaiting a Board vote, including U.S. Bank to acquire Union Bank and M&T to acquire People’s United. 

FDIC Bank Merger Clash Escalates

The FDIC dispute over bank M&A continued this week after Democrats on the board proposed a review of bank merger policy through an unprecedented procedural move the FDIC chair condemned as a breach of protocol. Here’s what’s happened since then.

  • McWilliams speaks out: Chairman Jelena McWilliams accused the board members of a politically motivated “hostile takeover” in a Wall Street Journal op-ed this week. “The board members’ letter was an attempt to seize control of the FDIC’s staff while its chairman was on a nine-hour flight to Europe for official meetings,” she wrote, saying the actions undermined the agency’s independence and long tradition of collegiality.
  • FDIC meeting: The agency’s open board meeting Tuesday was largely sedate. Rohit Chopra, the CFPB director and one of the Democratic members leading the M&A effort, requested during the meeting that a vote on the M&A item be added to the minutes. McWilliams declined, saying the agency’s top lawyer had determined the vote invalid, The New York Times reported.
  • After the meeting: Chopra released a statement  denouncing the FDIC general counsel’s conclusion as “an attack on the rule of law,” and Politico scooped a memo Chopra sent the FDIC which argued that a “vote of a majority of the FDIC Board of Directors clearly constitutes an official decision of the Corporation.” Michael Hsu, acting comptroller and another Democrat on the FDIC board, also released a statement after the meeting saying he agrees with fellow Democrats that the Bank Merger Act guidelines should be reviewed and that he voted for the request for information on the topic. “However, I am concerned that legal or procedural quicksand may ultimately limit our ability to act on this issue in a timely manner,” he said. 
  • Meanwhile, in Congress: House Financial Services Committee Chair Maxine Waters (D-CA) joined other progressives in calling for a moratorium on bank mergers that would result in a bank with assets over $100 billion.  Such a moratorium appears to conflict with federal laws requiring the Federal Reserve and other regulators to act on applications within prescribed times, and deeming those applications approved if they fail to act; however, no legislation to amend those laws has been proposed.  Also, as noted in an editorial in the Wall Street Journal, Congress spoke on this issue when it adopted limits on the percentage of deposits or assets that any bank or financial institution could hold, and regional banks that would be captured by the proposed moratorium are nowhere near those thresholds.   On the Republican side, Politico reported that Senate Banking Committee Republicans sent a letter to President Biden on Friday requesting that he rebuke Directors Chopra and Gruenberg for their attempt to politicize the FDIC and replace Director Gruenberg whose term expired 3 years ago.  And House Republican lawmakers opposed the FDIC Democrats’ efforts, with Rep. Blaine Luetkemeyer (R-MO) introducing a bill to strip the CFPB director of voting powers on the FDIC board and Financial Services Committee Ranking Member Patrick McHenry (R-NC) launching an investigation into the “power grab.”

Stablecoins on the Hill

The Senate Banking Committee this week held a hearing on stablecoins featuring testimony from Circle executive Dante Disparte, the Open Markets Institute’s Alexis Goldstein, law professor Hilary J. Allen and Davis Polk attorney Jai Massari. BPI issued a statement welcoming policymakers’ examination of stablecoin risks. Here are some key takeaways:

  • Payments system: Alexis Goldstein and Hilary Allen pointed to some weaknesses of stablecoins as a payment settlement option. Goldstein said stablecoins fail to meet key criteria for a more efficient payments system: low fees, predictability, ability to exchange for goods and services and consistent high speed. Allen noted issues with distributed ledger technology and questioned the lack of a consumer support system. Senate Banking Committee Ranking Member Pat Toomey said stablecoin platforms are emerging as alternative payments settlements mechanisms among some financial firms.
  • Regulation: Toomey questioned the President’s Working Group stablecoin report, which recommended that stablecoin issuers be insured depository institutions. Dante Disparte said regulation should be adjusted for activity and risk. The current regulatory environment includes state money transmission rules and examination by money transmitter supervisors, according to Disparte. Toomey has suggested stablecoin issuers have the ability to choose from three different regulatory models, including operating under a bank charter, according to Bloomberg.
  • Stablecoin costs: Participants at the hearing discussed the cost of stablecoin transactions. Goldstein said Western Union transactions are cheaper than stablecoins and that the costs depend on whether a user keeps the transaction within a closed crypto ecosystem or cashes out to government-issued currency. Disparte touted the potential for cheaper stablecoin payments.

BPI Releases Statement on CAP/Sierra Club Climate Report

BPI issued a statement on a report released this week by the Center for American Progress and the Sierra Club on climate risk and the U.S. financial sector. “Today’s report by the Center for American Progress and Sierra Club notes the important role that the financial sector will play in supporting a U.S. energy transition,” BPI’s Lauren Anderson said in the statement. “However, the recommendations would be a very blunt tool that would only serve to limit legitimate transition financing and push financing out of regulated banks and into the unregulated sector.”

Buy Now, Regulate Soon? CFPB Eyes ‘Buy Now, Pay Later’

The CFPB this week requested information on “buy now, pay later” products from major players in the industry such as Affirm, Afterpay, PayPal and Klarna. The bureau said it is concerned about consumers accumulating debt, regulatory arbitrage and data harvesting. The move follows a similar request to Big Tech companies with payment platforms.

  • On the Hill: Separately, six Democrats on the Senate Banking Committee, led by Sen. Jack Reed (D-RI), called on the CFPB in a letter this week to examine the risks of short-term, small-dollar BNPL products. This type of BNPL product, essentially loans at the point of sale, allows consumers to make small purchases in installments. BNPL providers are paid interest and fees directly by the merchant, and consumers typically pay no interest but are charged fees for late payments. Gaps in regulation of BNPL firms could pose risks for consumers, the senators wrote. Consumers may have misleading impressions about possible fees; they may not have the ability to repay such loans; and late payments or defaults could be reported to credit bureaus while on-time payments are not, they wrote.

OCC Clears Path to New, Joint CRA Rule

The OCC this week issued a final rule to rescind its 2020 Community Reinvestment Act rule. The step clears the way for a joint rulemaking effort by all the federal banking agencies. BPI has advocated for consistent, clear CRA rules across the agencies to help ensure that the CRA continues to be an effective force for strengthening our members’ entire communities, including low- and moderate-income individuals and neighborhoods, small businesses, and communities in need of financial services to sustain economic development.

In Case You Missed It

DOJ Requests Additional Comments on M&A Guidelines

The Department of Justice announced it will reopen its comment period on its bank M&A guidelines.  The review of the M&A guidelines was first initiated in 2020, and BPI provided comments that called on the Justice Department to bring its merger enforcement policy for the banking industry in line with every other industry and modernize its assessment of competition in financial products. Current Justice Department guidelines ignore competition from fintechs and a broad universe of non-bank competitors. 

Congress Passes Bill to Raise Debt Ceiling

Congress this week passed legislation to raise the debt ceiling by $2.5 trillion, ending the latest round of partisan debate over the borrowing limit. The action will stave off the prospect of a U.S. default until at least early 2023, according to The New York Times.

OCC Releases Draft Principles for Climate Risk Management for Large Banks, Solicits Feedback

On Thursday, the Office of the Comptroller of the Currency issued draft principles for climate-related financial risk management for large banks.  The draft principles seek to provide a high-level framework for risk management practices related to both physical risks and transitions risks associated with climate change.  The principles are aimed at banks with consolidated assets of more than $100 billion, and the OCC is requesting public feedback on the principles by February 14, 2022.

BofA Launches Zelle ‘Widget’ to Enhance Security, Convenience

Bank of America is the first bank to launch a Zelle widget, a separate shortcut on a smartphone that will enhance privacy, security and convenience for customers. The widget cuts down on steps users must take to send or request money through the payments service on their phones.

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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.