BPInsights: February 20, 2021

Stories Driving the Week

BPI Asks Fed to Spur Fresh Unified CRA Approach

BPI called on the Federal Reserve in a comment letter on Feb. 16 to invite the OCC and FDIC to restart joint efforts to draft Community Reinvestment Act rules that are consistent across banking agencies. In the letter responding to the Fed’s advance notice of proposed rulemaking that sought comments on the modernization of its CRA framework, BPI outlined a set of principles and recommendations that should guide its CRA approach.

“Banks are committed to investing in underserved communities,” said Dafina Stewart, Senior Vice President and Associate General Counsel at BPI. “Consistent regulatory standards for the Community Reinvestment Act across banking agencies would help them achieve that vital goal.”

The Fed proposal is a welcome addition to the conversation on modernizing the CRA regulatory framework. BPI continues to believe that applying different CRA standards to banks regulated by different federal agencies would harm the ability of the banking industry to work together with the communities it serves to identify and act upon meaningful community reinvestment opportunities. As such, the comment letter encourages the Federal Reserve to invite the FDIC and the OCC to restart an interagency process to craft a common set of CRA rules that applies to all banks.

In addition, BPI’s recommendations include:

  • The Federal Reserve should leverage existing data to evaluate performance.
  • The Federal Reserve should recognize the unique aspects of a bank’s business model in calibrating CRA tests.
  • Any changes to the regulatory requirements for delineating assessment areas should be calibrated so that they do not create or exacerbate an over-concentration of CRA activities in specific geographies and create appropriate incentives for banks to conduct activities in geographies that historically have not been major CRA activity centers.

BPI also joined a comment letter with other financial trades calling on the OCC to coordinate with the Fed and FDIC on a joint CRA rulemaking and to withdraw a request for bank data meant to underpin performance benchmarks for the OCC’s 2020 standalone CRA rule.

Waters: Market Maker Citadel May Pose ‘Systemic Threat’ 

Market maker Citadel Securities may pose a systemic financial risk, House Financial Services Committee Chair Maxine Waters said at a Feb. 18 committee hearing on the recent market volatility surrounding GameStop stock trading. “I am more concerned than ever that massive market makers like Citadel may pose a systemic threat to the entire system. The committee is going to continue to examine these issues,” Waters said. She said the panel plans to hold more hearings on the issues, which could include financial regulators.

At the hearing, lawmakers scrutinized Robinhood CEO Vlad Tenev, billionaire investor Ken Griffin of Citadel, Reddit CEO Steve Huffman, hedge fund chief Gabe Plotkin and retail trader Keith Gill over their roles in the recent GameStop surge. Ire was concentrated among Democrats. Several questions centered on Robinhood’s curbs on buying GameStop shares, a move that Tenev attributed to clearinghouse deposit requirements. The hearing covered a range of market topics, from market access for retail investors to the role of short selling. Democrats such as Rep. Brad Sherman (D-CA) also expressed concern about the “payment for order flow” business model used by market-maker firms such as Citadel, in which they pay other brokerages for the chance to execute trades and profit on small price differences.

Preliminary BPI Analysis: This Year’s Stress Scenarios Appear to be More Severe Relative to Last June

Preliminary BPI analysis found the 2021 stress scenarios generally more severe relative to the first-round stress scenario of last year and slightly less severe than those of December 2020. Once more, allowances for credit losses at the start of the test make up for the increase in projected loan losses and lower pre-provision net revenue relative to June 2020. As a result, the aggregate SCB of the 19 firms in categories I-III that are required to participate in this year’s stress tests is expected to be little changed. There is an opportunity for several category IV firms to opt in though impacts on SCBs will vary by firm portfolio. Overall, there remains significant uncertainty on how the supervisory models would map scenario variables to projected stress losses because of the COVID event and SCB outcomes as bank balance sheets evolve.

IIF Releases Climate Principles with BPI, Joint Trades

The Institute of International Finance, along with BPI and other financial trades, this week released Principles for a U.S. Transition to a Sustainable Low-Carbon Economy. The Principles reflect longstanding engagement by the financial industry on climate and make recommendations, among others, to:

  • Provide clear long-term policy signals that foster innovation in financial services
  • Ensure climate-related financial regulation is risk-based
  • Minimize costs and support jobs in the transition
  • Set science-based climate policy goals that align with the Paris Agreement
  • Increase and strengthen U.S. international engagement

As global policymakers consider how climate change affects banks’ risk management calculations, BPI has emphasized that using stress tests to quantify climate risk would rest on highly variable data and overly long time horizons. BPI’s Lauren Anderson also wrote in a recent American Banker op-ed that policymakers should avoid a binary “green or brown” approach that would punish companies seeking capital as they shift to lower-carbon business models.

POLITICO: FinTech’s Bid to ‘Democratize Finance’ Dealt a Blow by GameStop Frenzy

FinTech firms’ promises of financial inclusion are failing to deliver for Democrats amid the controversy over the retail investor-driven GameStop surge and the Robinhood brokerage app, according to a Feb. 16 POLITICO piece. The consumer protection risks of freewheeling FinTech platforms could prompt stricter oversight under the Biden Administration. Rules that expand access to small FinTech startups could also open the door for Big Tech giants like Amazon and Google to gain footholds in financial services, the article points out.

FT: BoE to Depart From EU By Excluding Software Investments From the Definition of Bank Capital

The Bank of England announced it will not be following European Union policy that allows banks to count certain technology investments toward their core capital levels, according to a Feb. 14 Financial Times article. The European Banking Authority policy move would boost core common equity tier 1 capital levels about 30 basis points across the EU banking sector, according to an EBA report last year. BoE Governor Andrew Bailey said in a speech that the EU framework would “give a false picture of a bank’s loss absorbing capacity.”

In Case You Missed It

Ed Hill to Lead BPI’s Government Affairs Team

BPI has tapped Ed Hill as Senior Vice President and Head of Government Affairs, BPI announced Feb. 16.  In his new role, Ed will manage BPI’s government affairs and advise on strategies to allow banks to maximize their support for their customers and U.S. economic growth.  Ed joins BPI from Bank of America, where he spent more than 20 years managing the bank’s relationships with federal policymakers.  He is well known to policymakers for his substantive knowledge of financial markets and the political process.

“There isn’t a government affairs executive in Washington who has more expertise in financial services policy than Ed,” said Kate Childress, BPI Head of Public Affairs. “Ed walks in the door with the trust of our members and deep relationships with policymakers.” Added Greg Baer, BPI CEO: “Ed will bring to BPI the extraordinary expertise and affability that have won him both respect and friendship all around Washington.”

Bloomberg: Yellen Shift on Vast Treasury Cash Pile Poses Problems for Powell

The Treasury Department announced plans recently to reduce the stockpile of cash it accumulated at the Federal Reserve over the last year, which would flood money markets with liquidity and edge already-low short-term interest rates lower, according to a Feb. 16 Bloomberg piece. The cash influx, which would balloon the reserve balances banks must hold, comes as the exemption of Treasuries and reserves from banks’ supplementary leverage ratios is set to expire at the end of March. This dynamic could force banks to make room on their balance sheets for swelling reserves.

“The concern is that it would further impair banks’ willingness to make markets in Treasuries, to hold Treasuries, and to extend repo financing so that others can hold Treasuries,” BPI Chief Economist Bill Nelson said in the article.

To avoid negative rates in the money markets, the Fed could lift its interest rate on overnight reserves and its reverse repo agreement rate. It could also choose to reduce its asset purchases. Both moves could spark market backlash if investors perceive that the Fed is prematurely withdrawing support for the pandemic-battered economy.

Goldman Sachs, U.S. Bank Launch Diversity & Inclusion Initiatives

Goldman Sachs Group Inc. and U.S. Bank this week announced initiatives aimed at broadening financial inclusion and boosting minority communities.

Goldman will commit $25 million to a five-year program to help historically Black colleges and universities, according to a press release. The program will train 125 students in core finance skills in its first year.

U.S. Bank announced a program that includes a new $25 million microbusiness fund focused on businesses owned by women of color; financial inclusion partnerships; homeownership education programs; and internal hiring changes that support workforce diversity.

The banks’ efforts echo similar programs and pledges across the industry to support minority communities, including investments in minority-owned financial institutions and similar initiatives from Wells Fargo, Citigroup, Bank of America, U.S. Bank and Truist.

Confirmation Hearing Scheduled for Treasury No. 2 Nominee Adeyemo

The confirmation hearing for Deputy Treasury Secretary nominee Wally Adeyemo has been scheduled for Feb. 23, the Senate Finance Committee announced this week. Adeyemo, a former Obama Administration official and BlackRock adviser, is expected to lead the Biden Administration’s review of sanctions policy, Reuters has reported.

Yellen Praises ECB Pandemic Response in Lagarde Call

Treasury Secretary Janet Yellen applauded the European Central Bank’s “swift and decisive” policy response to the COVID-19 pandemic in a Feb. 16 call with ECB President Christine Lagarde, according to a department readout. Yellen also discussed shared priorities between the U.S. and EU, including pandemic recovery, financial stability and climate change, and emphasized the importance of U.S.-European cooperation on financial issues of mutual interest.

CFPB Faces Uphill Climb in Supervising FinTech ‘Aggregator’ Go-Betweens

The CFPB faces a challenging task ahead as it considers how to safeguard consumers from data aggregators that gather bank account data and provide it to FinTech platforms, according to a Feb. 17 Bloomberg Law article. BPI has argued, including in a recent comment letter on the CFPB’s Section 1033 Advance Notice of Proposed Rulemaking, that the CFPB should supervise certain data aggregators directly. “It would be a complicated rulemaking effort, but necessary given the enormous volume of consumer financial data that aggregators possess, because the CFPB would need to define in its rulemaking what the market is, and what the larger participants are,” said Stephanie Wake, Vice President and Senior Program Manager at BITS, in the article.

BPI/Columbia Conference Panel Showcases Capital, Liquidity Research

On Feb. 19, 2021, Columbia University and BPI hosted the third panel of the 2021 Annual Columbia SIPA/BPI Bank Regulation Research Conference.  The panel featured two papers about bank capital and liquidity performance under stress, with implications for macroprudential policy.

The first paper discussed was “COVID-19 as a Stress Test: Assessing the Bank Regulatory Framework,” which provided a comprehensive and compelling look at how banks fared through the pandemic period.  The paper evaluates banks’ capital and liquidity positions; their willingness to dip into capital buffers; the role of Federal Reserve liquidity facilities; lending through the pandemic stress period, and the role of trading revenue. The authors find that banks had enough capital and liquidity to withstand COVID shocks, with average capital and liquidity ratios well above minimum requirements, though a second quarter increase in excess capital indicates that they were reluctant to dip into capital buffers. Banks also continued to lend throughout the year, showing little evidence of a credit crunch due to regulatory capital constraints. Some Federal Reserve liquidity facilities helped to improve bank liquidity positions: use of the discount window led to permanent increases in both bank liquidity coverage ratios and levels of high-quality liquid assets, while use of primary dealer credit led to less permanent increases. Finally, because increased volatility boosted trading revenues, banks were able to continue market-making, which in turn offset significant increases in loan loss provisions.  

The second paper discussed was “Low Price-to-Book Ratios and Bank Dividend Payout Policies.” This paper investigates historical, empirical relationships between price-to-book ratios and dividend payout policies using an international sample of financial and non-financial firms, covering the years 2005 through 2019. The authors find that a larger fraction of financial firms choose to pay out dividends than non-financial firms, a result that is consistent over the time period studied. They also find a negative relationship between price-to-book ratio and dividend payouts, with the greatest marginal increase in bank dividend payouts caused by a decline in an already low price-to-book ratio. This implies that declining profitability and price-to-book ratios during the pandemic could have induced larger dividend payouts than usual and shrunk the capital base, justifying the decision by regulators to cap or suspend dividend payouts in 2020.

Amsterdam Emerges as Post-Brexit Trading, Listing Hub

Amsterdam supplanted London as Europe’s largest share trading center in January, according to Reuters, marking the Dutch capital as an early winner among continental financial hubs vying for capital-markets supremacy after Brexit. The city hosts a fifth of the 40 billion euros-a-day trading action, compared to less than a tenth of trading before Britain left the EU. Amsterdam also beat London to become Europe’s top spot for corporate listings this year so far, and the leader in euro-denominated interest-rate swaps. 

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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.