BPInsights: December 4, 2021

Stories Driving the Week

Banks Can Weather Floods, Other Disasters

Weather disasters pose minimal risk to banks, a recent New York Fed staff report finds. Extreme weather incidents like hurricanes and wildfires had negligible effects on U.S. banks’ performance over the last 25 years, the study says.

• Local knowledge: Such resilience appears to stem from factors like banks avoiding mortgage lending in flood-prone parts of their local markets.
• Rebuilding requires banking: Banks provide critical financing to help families and business owners repair or homes and buildings damaged by extreme weather.

The broader context: The study — which focuses on literal, “physical risks” of climate change rather than “transition risks” such as an abruptly imposed high carbon tax — comes as global and U.S. financial authorities are incorporating climate risk into bank supervision and regulation. It shows that climate risk does not threaten bank stability as some regulators may assume, says a recent Wall Street Journal editorial. The editorial suggests that it is sudden moves by regulators during the low-carbon transition – such as policy changes that could bankrupt fossil-fuel companies — that pose a risk to banks.

Tapering, Stablecoins, Empty Seats: Powell and Yellen on Capitol Hill

Fed Chair Jerome Powell and Treasury Secretary Janet Yellen testified before House and Senate panels this week. Here are some takeaways from their testimony.

• Taper: Powell said the central bank will consider tapering its asset purchases more quickly, ending the purchases “perhaps a few months sooner” than planned in light of inflation pressures.
• Stablecoins: Yellen defended the PWG’s recommendation that all stablecoins be issued by insured depository institutions.  She noted that all stablecoins could be used as a means of payment regardless of how they’re used at the outset. Their promise to maintain a stable value relative to government-issued currency is “really what depository institutions guarantee,” she said. The remarks came in response to a question about the President’s Working Group on Financial Markets’ recent stablecoin report.
• CBDC: Powell said the Fed will publish its discussion paper on central bank digital currency very soon, “certainly in the coming weeks.”
• Vice Chair for Supervision: The current Fed vacancies were on some lawmakers’ minds at the hearings, including the empty Vice Chair for Supervision post. When asked if he would allow a regulatory proposal suggested by a new Vice Chair for Supervision to come before the Federal Reserve Board if he disagreed with it, Powell said at the Senate hearing that he didn’t see himself stopping such a proposal from reaching the full board. But he said any Vice Chair for Supervision would be expected to pursue other board members’ support for a given proposal rather than acting unilaterally.
• Climate: At the House hearing, Powell said the Fed does not currently incorporate climate risk into monetary policy like the ECB recently announced it would do, but said he expects it might do so in the future. Yellen said the FSOC does not have the authority to tell banks they must align lending policies to the Paris climate agreement, but noted that many banks at the recent COP26 conference have voluntarily made such pledges. Both Powell and Yellen emphasized that their missions, as Fed chair and FSOC chair respectively, are focused on financial stability rather than on climate policy specifically.
• Debt ceiling: Yellen urged Congress to reach agreement on extending the debt ceiling, a political fight that looms over December. A U.S. default would imperil the economic recovery, she said.

Quarles’ Parting Advice: Adjust SLR, GSIB Surcharge

Departing Federal Reserve Governor Randal Quarles, the central bank’s former Vice Chair for Supervision, recommended adjustments to the regulatory framework in a final speech this week.

• SLR: The Fed should “develop a longer-term solution to the perverse implications of the current calibration of the SLR,” Quarles said. The supplementary leverage ratio was not conceived in an environment of extremely high reserves like the current reality, and banks constrained by the ratio are disincentivized to hold safe assets like Treasuries. Ultimately, this dynamic could lead to instability in the Treasury market or drive deposits out of the regulated banking system. He recommended “recalibrating the fixed 2-percent eSLR buffer requirement to equal 50 percent of the applicable G-SIB capital surcharge, with corresponding recalibration at the bank level.” 
• GSIB surcharge: Quarles recommended the GSIB surcharge be adjusted for growth of the economy as intended, particularly once the final elements of the Basel regulatory framework are implemented. The surcharge is an additional capital requirement layered onto the largest, most interconnected global banks.
• Stress tests: Quarles suggested that the Fed average the results of the current year bank stress tests with the results from the previous two years, as a way to prevent large swings in banks’ capital requirements as a result of stress test variability (but not actual changes in risk at the banks).
• Stablecoins: Quarles expressed concern that some aspects of the PWG report on stablecoins, such as limiting wallet providers’ affiliations with commercial firms, could limit innovation.
• Emergency lending: Quarles expressed concern about the inherently political aspects of lending to nonbanks to address credit needs rather than liquidity problems. He suggested that the Fed only do so in a crisis when Congress intends to create a program that would expeditiously replace Fed lending.

Axios: Five Dems Tell White House They Won’t Support Omarova

Five Senate Democrats have told the White House they will not support OCC nominee Saule Omarova, Axios reported. The lawmakers are Sens. Jon Tester (D-MT), Mark Warner (D-VA), Kyrsten Sinema (D-AZ), John Hickenlooper (D-CO) and Mark Kelly (D-AZ). The opposition would effectively end Omarova’s prospects of confirmation.

WSJ: Cordray in the Running for Fed Supervision Spot

Former CFPB Director Richard Cordray is being considered for the Federal Reserve’s Vice Chair for Supervision position, according to the Wall Street Journal this week. Cordray currently oversees the federal student loan program at the Department of Education. The White House is expected to announce nominees for the outstanding Fed vacancies in December. Other candidates reported in the media include former Treasury official Sarah Bloom Raskin and Atlanta Fed President Raphael Bostic.

What’s New in Stablecoins, Crypto

Here’s what’s new in stablecoins and crypto policy developments.

• Sprint results: The OCC-led “crypto sprint” has concluded, with the banking agencies recently issuing a joint statement on their goals going forward. The agencies previewed next year as the time when they will clarify the permissibility of banks’ crypto activities and communicate safety and soundness expectations.
• Ask first: The OCC recently clarified that banks must check with examiners before engaging in cryptocurrency-related activities. Under former Acting Comptroller Brian Brooks, banks could hold crypto in custody for clients, hold reserves that back stablecoins and process payments on a blockchain, according to POLITICO. Now the OCC will need to confirm that a bank can do such activities safely before the bank can proceed.
• Meanwhile, at FDIC: The FDIC is examining whether stablecoins should get deposit insurance, according to Chair Jelena McWilliams’ remarks at a recent press conference.

In Case You Missed It

BPI/TCH Event: Future of Consumer Financial Data Access

Here are some highlights of BPI and The Clearing House’s Future of Consumer Financial Data Access event this week.

• Screen scraping to something stronger: The move from “screen scraping” to more secure APIs may encounter resistance to change, but the government should push where market incentives don’t align, one panelist said. Community banks, which outsource much of their technological infrastructure, are just recently prioritizing the “open banking” initiative, another participant said.
• Competition is high: The CFPB should appreciate how intensely competitive the financial services market is as it considers its Section 1033 rulemaking, one panelist said.
• Data should be secure, wherever it is: Whether it’s held by a FinTech app or a bank, data should be secure, another panelist said.
• Who’s liable? Panelists discussed where liability lies in the event of a data breach. One panelist likened the situation to someone writing a check to a dry cleaner, then having it stolen from the dry cleaner and used to commit identity theft – the bank would not be considered liable in that situation. The panelist said the question of whether the same liability standards would apply in the physical world versus the digital one can be tricky for examiners.
• How to break it off: Consumers may not understand how to sever ties with a FinTech app that has access to their data, a panelist noted. Deleting the app doesn’t stop the flow of data, he said – even breaking a phone in half wouldn’t suffice.
• What’s going on worldwide? The U.K., E.U. and other foreign jurisdictions are building out their own regulatory regimes on financial data access and sharing while the U.S. CFPB is implementing Section 1033 of the Dodd-Frank Act, the relevant federal law. Panelists noted the different approaches that such entities are taking. For example, the U.K. has recently adjusted its requirement for certain financial firms to confirm with consumers every 90 days that they want to continue to share their data.
• Don’t just check the box: Consumer consent should go beyond lengthy terms and conditions that people don’t read, one panelist said. Consumers want to know what specific information they’re giving consent to share, another participant said. The participant highlighted seven key elements that consumers want to see when they’re deciding whether to share financial data; those points include who holds the data and how long the data will be used for.

BPI Supports Bill to Prevent Direct SBA Lending

BPI expressed support in a letter this week for legislation that would ban the Small Business Administration from making loans directly through its 7(a) lending program. “[T]he SBA partnership with banks has been strong, effective, and successful,” the letter said. “A program that substitutes private sector expertise, technology investments and customer service capabilities with government inefficiency would result in a worse experience for small business customers and greater costs for taxpayers.”

Bloomberg: A Mexican Crypto Startup Wants to Make Cash Remittances Cheaper

Companies using crypto for cross-border remittances should be cautious about policymakers looking over their shoulders, BPI General Counsel John Court said in a recent Bloomberg Businessweek piece. “The regulations have not caught up, and it’s a total blind spot,” he said. The article centers on a Mexican startup that aims to use crypto to facilitate people sending money overseas, including remittances from the U.S. to Mexico and Latin American countries.

CBDC Roundup: China, Indonesia, NY Fed Blog

Here’s what’s new in central bank digital currency this week.

• NY Fed: The Federal Reserve Bank of New York published a blog post this week exploring the notion of a CBDC. The authors noted the goals of cheaper payments, financial inclusion, consumer privacy and innovation, and the various ways central banks could help achieve those goals – adjusting the regulatory framework to enable private-sector solutions; implementing the FedNow payment system; or issuing a retail CBDC. (BPI has noted that many of the purported benefits of a CBDC are mutually exclusive, and suggested that the retail or “direct” CBDC model is unworkable in the U.S.)
• Philly Fed: The Federal Reserve Bank of Philadelphia issued a working paper recently called “Should Central Banks Issue Digital Currency?” The paper examines how CBDC affects interest rates, economic activity levels and welfare in an environment where both central bank money and private bank deposits are used in exchange.
• China: The Wall Street Journal published an article this week on the challenge of convincing Chinese consumers that they actually need a digital yuan.
• Indonesia: The South Asian country’s central bank is considering issuing a digital currency in order to “fight” crypto, Bloomberg reported. “CBDC would be part of an effort to address the use of crypto in financial transactions,” senior central bank official Juda Agung said.

What Book to Buy Your Favorite Banker for Christmas

BPI CEO Greg Baer offers a holiday book recommendation for the banker or capitalist in your family. “The Verge: Reformation, Renaissance and Forty Years that Shook the World, 1490-1530,” by Patrick Wyman is a fascinating look at the major developments and individuals that changed the course of European and therefore world history in the 16th century, and the role that capitalism and finance played in all those changes. Today, at a time when the world is retreating from globalism, banking and finance are perceived by many as innately wrong and unproductive endeavors, and Europe is bemoaning its dearth of capital markets, The Verge also reads as a cautionary tale.

UBS Hires Sarah Youngwood as New CFO

UBS tapped former JPMorgan Chase executive Sarah Youngwood as its incoming chief financial officer, according to Reuters this week. Youngwood will succeed Kirt Gardner as he steps down in May 2022.