BPInsights: February 12, 2022

Stories Driving the Week

Banks Thrive at Scale. So Do Consumers.

This week, BPI commented on the Department of Justice’s request for public input on bank merger analysis. Bank M&A today takes place in a thriving, competitive marketplace and already undergoes rigorous antitrust review under a long-standing analytical framework that leaders from both political parties have stood behind for decades.

  • What BPI is saying: “M&A allows banks to achieve the scale necessary to provide seamless digital banking, robust cybersecurity and innovative products and services,” BPI President and CEO Greg Baer said in a statement. “Any objective review of the U.S. banking industry reveals an intensely competitive marketplace.”

For more on how scale benefits consumers, click here.

District Court Affirms OCC and FDIC ‘Madden Fix’ Rules 

A federal district court this week upheld both the 2020 OCC and FDIC rules clarifying that an interest rate on a bank loan that is permissible at origination is still valid after the loan is sold to another party. The rules had aimed to clarify uncertainty resulting from the Second Circuit’s 2015 decision in Madden v. Midland Funding.  In 2021, BPI and its trade association partners filed amici briefs in the cases supporting the validity of the rules against legal challenge under the Administrative Procedure Act.

  • Background: Federal law allows banks to apply the interest-rate limit of their home state to the loans that they originate, effectively allowing them to “export” that home-state interest rate to where borrowers live.   The interest rate on such loans remains valid even after they are sold to a third party. The Madden case ruling broke longstanding precedent by holding that usury laws of the state of the borrower could apply to national banks’ loans after they are transferred to a nonbank third party (i.e., even if the rate was permissible under the law of the bank’s home-state). The 2020 OCC and FDIC rules clarified that to the extent interest rates on loans from national and state-chartered banks are “valid when made” under their home state’s interest rate cap, they cannot be deemed usurious (over the legal interest-rate limit) upon transfer to a third party.
  • What’s new: In two separate decisions, the U.S. District Court for the Northern District of California this week ruled in favor of the OCC and FDIC rules in lawsuits brought by state attorneys general. The Court rejected the plaintiffs’ argument that the OCC rule amounted to an invalid preemption determination and instead deferred to the OCC’s interpretation of Federal law as the Court found that it met all applicable procedural and substantive standards under the APA.  The Court’s reasoning in support of the FDIC decision was very similar to its analysis of the OCC rule.  The decisions should provide additional legal certainty for participants in secondary markets for bank credit.     
  • What they’re saying: Acting Comptroller Michael Hsu said the legal certainty from this week’s ruling should be “used to the benefit of consumers.”

What’s New in Crypto, Stablecoins

Congress held multiple hearings this week about digital assets, including a House Financial Services Committee hearing. Here’s what’s new.

  • Just banks? Stablecoin issuance should be limited to banks, senior Treasury official Nellie Liang told the House Financial Services Committee at a stablecoin hearing this week. She outlined the “urgent” need for Congress to pass stablecoin legislation. Ranking Member Patrick McHenry (R-NC) said policymakers should explore potential benefits of the digital assets and should foster innovation. Chairwoman Maxine Waters (D-CA) said the panel “recognized that explosive growth of digital assets presents a variety of risks and opportunities for our economy and communities, especially communities of color that have been left behind by our financial system. Their voices must be heard in the decision-making and regulatory process.”
  • Reserves: Lawmakers from both parties and Liang raised concerns about stablecoin “reserves” lacking transparency, which presents run risk.
  • CBDC competition: In response to Rep. Andy Barr (R-KY)’s concerns about a U.S. CBDC shutting out competition from private-sector stablecoins, Liang said a U.S. CBDC could be years away, while stablecoins have already emerged.
  • BPI’s take: “Congress is justified in its examination of stablecoin risks and should take swift measures in coordination with U.S. regulators to establish clear rules on how financial institutions can engage in digital asset activities,” BPI’s Paige Pidano Paridon said in a statement. “Digital asset innovation is well past proof-of-concept stages, gaining steam and has thus far been happening outside of the regulated banking sector while banks await guidance.”
  • FSB: The Financial Stability Board may have its first global crypto rules framework within months, according to Reuters this week.
  • CFTC: CFTC Chairman Rostin Behnam wants his agency to have a bigger role in U.S. crypto oversight.
  • Bankman-Fried: FTX founder Sam Bankman-Fried testified before Congress this week as he aims to build the crypto industry’s clout in Washington. Bankman-Fried wants to expand the CFTC’s jurisdiction over the crypto market and argued for regulatory clarity to attract more crypto trading volume into the U.S., saying that 95% of crypto trading volume occurs offshore.
  • Bitcoin couple arrested: Heather Morgan and husband Ilya Liechtenstein were detained this week on federal charges of conspiring to launder Bitcoin worth about $4.5 billion, according to a Bloomberg article posted Feb. 8. The digital currency came from the 2016 hack of crypto exchange Bitfinex.

Fed Releases Stress Test Scenarios

The Federal Reserve on Thursday released the stress scenarios for the upcoming round of bank stress tests. The 2022 scenario will involve a severe global recession with heightened stress in commercial real estate and corporate debt markets. The unemployment rate in the scenario will rise 5.75 percentage points to a peak of 10 percent over two years, with a 40 percent drop in commercial real estate prices, widening corporate bond spreads and a 55 percent decline in equity prices. Larger banks will face the global market shock component that stresses their trading positions, and banks with major trading or custody businesses will be tested on a hypothetical default of their largest counterparty.

BPI’s own forthcoming analysis projects loan losses to be modestly higher in the 2022 stress tests compared to DFAST 2021. In addition, we expect aggregate provisions to increase even more due to the overall decline in banks’ allowances for credit losses during 2021. Offsetting the increase in projected provisions, pre-provision net revenue (PPNR) is expected to increase mainly because of stronger noninterest income. However, some of the GMS risk factors (Treasury rates, S&P 500, and MBS spreads) are slightly more severe relative to DFAST 2021, and those are not factored in BPI’s preliminary analysis. Assuming flat trading and counterparty losses, declines in aggregate capital ratios are projected to be roughly in line with last year’s stress test.

CRA, Crypto, Mergers: FDIC Acting Chief Sets Out Priorities

FDIC Acting Chairman Marty Gruenberg took the helm after Jelena McWilliams’ recent departure. He set out his key priorities for the year this week.

  • CRA: A joint rulemaking on CRA with other banking agencies will be the FDIC’s top priority under Gruenberg.
  • M&A: Gruenberg called for an interagency review of the bank merger process. This topic set off the unprecedented December clash between former Chairman McWilliams and Gruenberg, who was joined by fellow board members Rohit Chopra and Michael Hsu.
  • Crypto: Gruenberg said banking agencies must consider the risks of crypto assets. The agencies have promised guidance in 2022 on supervisory expectations for banks engaging in crypto and digital asset activities.
  • Climate: The FDIC’s climate efforts will include seeking comment on guidance to help banks manage climate risk, as well as joining the Network of Central Banks and Supervisors for Greening the Financial System, Gruenberg said.
  • Capital: The FDIC will prioritize implementing the final modifications to the Basel III capital framework, he said.

Avanti Edges Toward Fed Account

Wyoming crypto bank Avanti may be one step closer to obtaining a Federal Reserve master account, the ultimate goal of many FinTechs. Avanti now has a routing number issued by the American Bankers Association, which is a key milestone in the Fed account access process, although it does not mean that the granting of an account is assured.

In Case You Missed It

BPI Supports FinCEN Effort to Stem Shell-Company-Enabled Money Laundering

BPI filed a comment letter this week on a Financial Crimes Enforcement Network (FinCEN) proposal intended to stem the illicit cash flow from terrorists, sex traffickers, kleptocrats and other bad actors.

  • What is BPI saying: “Congress’s success in overcoming legislative hurdles and passing AML/BSA reform will go a long way toward disrupting the illicit financial system relied upon by terrorists, sex traffickers and other bad actors. BPI supports FinCEN’s ongoing efforts to implement these laws and continues to believe that the beneficial ownership registry must serve as a centralized source of information that law enforcement and banks can utilize to detect and deter criminal activity.” — Angelena Bradfield, Senior Vice President, AML/BSA, Sanctions & Privacy
  • Why does it matter: For too long U.S. law provided terrorists, sex traffickers, kleptocrats and other bad actors with a loophole to exploit our financial system. FinCEN is working to implement the Corporate Transparency Act and the Anti-Money Laundering Act, which will help close these loopholes that created safe havens for criminals.

BPI has long advocated for congressional and regulatory efforts to modernize the U.S. AML/CFT regime and is committed to working with FinCEN as it develops a more effective and efficient beneficial ownership framework.

U.K., EU Warn Banks on Russia Cyber Risk Amid Ukraine Tensions

Banking authorities in the U.K. and Europe warned banks about the risk of potential cyberattacks from Russia. The caution from the U.K.’s Financial Conduct Authority and the European Central Bank came as the U.S. and its European allies prepare sanctions against Russia in the event of a Ukraine invasion. The New York Department of Financial Services also issued an alert to banks late last month on potential retaliatory cyberattacks from Russia.

CBDC Global Roundup

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

  • Olympic e-yuan debut: China’s digital yuan’s debut at the Beijing Winter Olympics was a somewhat quiet unveiling, with spectators and international visitors limited at the Games due to COVID-zero protocols. The e-yuan has sparked security concerns from policymakers such as Senate Banking Committee Ranking Member Pat Toomey (R-PA).
  • IMF: IMF chief Kristalina Georgieva said this week there is no universal use case for CBDC, and tradeoffs should be considered. “On both fronts, a CBDC also requires prudent planning to satisfy policy targets like financial inclusion, and avoid undesirable spillovers such as sudden capital outflows that could undermine financial stability,” she said. The remarks came alongside an IMF report offering lessons learned from several CBDC projects around the world.
  • CRS: The Congressional Research Service also released a CBDC report this week exploring various policy implications. “Introduction of a CBDC would be unlikely to leave the current financial landscape unchanged,” the CRS report says, noting that it could crowd out cash, private digital currencies like Bitcoin or existing payments or banking systems. One note from the report: If a CBDC accelerates the demise of cash, it could hurt financial inclusion.
  • Zambia: The African nation’s central bank is exploring the prospect of a digital currency while warning of the risks of cryptocurrency.
  • Malaysia: The Malaysian central bank governor said the country is considering a CBDC, but it would need to deliver “tangible benefits” to the nation’s economy.

Collins Named as Boston Fed’s New President

University of Michigan economist and senior official Susan M. Collins will lead the Federal Reserve Bank of Boston as its new president. Collins, who starts the job July 1, will succeed Eric Rosengren, who retired last year.

Senate Panel Introduces Combo Cyber Bill

The Senate Committee on Homeland Security and Governmental Affairs this week introduced cyber legislation that combines three bills advanced by the panel on a bipartisan basis:

  • The Cyber Incident Reporting Act
  • The Federal Information Security Modernization Act, and
  • The Federal Secure Cloud Improvement and Jobs Act.

The combined legislation, the Strengthening American Cybersecurity Act, aims to bolster U.S. cybersecurity, the Committee’s leaders said. It would require critical infrastructure firms and civilian federal agencies to report substantial cyberattacks to CISA.

FDIC Unveils Senior Staff Changes

The FDIC under Acting Chairman Marty Gruenberg announced several new staff changes this week. Kymberly Copa will serve as Gruenberg’s deputy and chief of staff, Daniel Bendler will be the acting chairman’s deputy and chief operating officer, and Harrel Pettway will serve as general counsel.

BPI’s Angelena Bradfield Joins Amex ‘Privacy Day’ Event

Angelena Bradfield, Senior Vice President, AML/BSA, Sanctions & Privacy at BPI, recently participated in an American Express panel to commemorate Data Privacy Day. The panel, which aimed to promote global awareness of privacy best practices, included Amex Chief Privacy Officer Anneke Covell and Erez Liebermann of the law firm Linklaters. Participants emphasized the importance of data transparency, maintaining trust in the customer experience and building protection around new products.

Wells Fargo Donates $20M to Boost L.A. Small Businesses

Wells Fargo announced a $20 million donation this week to help Los Angeles small business owners invest in more of their assets and equipment. The donation, part of the bank’s Open for Business Fund, will focus on historically underserved, diverse-led small businesses. 

Amex Debuts Digital Checking Account

American Express this week launched a new checking account feature, which allows customers to earn reward points for each $2 spent.

TD Bank Expands Wellness Benefits 

TD Bank is bolstering its wellness offerings to employees in a bid to retain talent. The Canadian bank will add childcare and elder care as eligible expenses for wellness accounts and add new support for fertility treatments, surrogacy and adoption costs, among other benefits.

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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.