BPInsights: February 5, 2022

Stories Driving the Week

Fed Nominees Face Senate

Three Federal Reserve nominees – Sarah Bloom Raskin, Lisa Cook and Philip Jefferson — testified at a nomination hearing Thursday. Here are key takeaways from the hearing.

  • Climate: Raskin, the nominee for vice chair for supervision, said it is “inappropriate” for the Fed to decide how to allocate credit. She was responding to questions from Banking Committee Ranking Member Pat Toomey (R-PA), about whether she thinks the Fed should curb banks’ lending to carbon-intensive firms.
    • “Banks choose their borrowers,” she said. “The Fed does not.” Toomey cited writings in which Raskin appeared to advocate for financial regulators discouraging fossil fuel lending.
    • Banks’ decisions about whom to lend to are “not a Fed decision and it never should be,” Raskin told Sen. Kevin Cramer (R-ND), who raised similar concerns about capital allocation pressure.
    • Within the law: Raskin emphasized she would stay within the Fed’s legal mandate when it comes to bank oversight. Sen. Jerry Moran (R-KS) asked Raskin: “[I]f it is your view that the oil and gas industry, fossil fuels need to be diminished in the role of this nation, in our economy, is there any path for you to accomplish that as a member of the Federal Reserve?” She confirmed that “I have no desire and if I had the desire, I couldn’t accomplish it.”
  • Fed accounts for FinTechs: Sen. Cynthia Lummis (R-WY) questioned Raskin about a Colorado-based FinTech trust company, Reserve Trust, that obtained a Fed master account, a key goal for crypto or FinTech firms with special “SPDI” charters in Lummis’ home state.  Lummis focused on the fact that the Fed turned down Reserve Trust’s application for an account, until Raskin joined the company’s board, after which the Fed reversed course and approved the application. Raskin defended against suggestions of any impropriety, emphasizing both that she complied with her ethical obligations and that the Fed has approved several other nonbank master account applications.
  • Small-dollar loans: Sen. Tim Scott (R-SC) raised concerns about 36% interest rate caps, which constrain regulated lenders’ ability to offer affordable small-dollar loans, citing a Federal Reserve study. Raskin said she had not yet read the study he referred to, but said “there’s more that can be done in terms of providing access to safe, affordable, small-dollar loans.”

Yellen on Climate Bank Capital Requirements: It’s ‘Premature’

Treasury Secretary Janet Yellen said this week that it’s too soon to consider raising bank capital requirements over climate risk. “It’s just premature at this point to talk about raising capital requirements,” Yellen said in a Bloomberg interview. Before any consideration of climate capital charges, “it’s really important that regulators do the groundwork that’s necessary for them to evaluate risks to individual firms,” she said. She also rejected the notion that the U.S. is lagging behind other global jurisdictions on climate risk in bank oversight.

The Price of Instant Payments

The Federal Reserve released pricing details last week for its upcoming real-time payments service, FedNow. The flat pricing structure of the service, seemingly identical to that of the existing, private-sector real-time payments network (the Clearing House’s RTP) foreshadows the central bank’s difficulty competing with a private-sector option. To learn why it matters, read BPI’s new blog post here.

How Crypto Became the New Subprime

The recent crypto crash draws alarming parallels with the subprime crisis of the 2007-09 era, New York Times columnist Paul Krugman writes in a recent piece. Like subprime mortgages in that era, crypto is touted as a new way to bring underserved populations, such as minority groups and working-class people, into the market. But similarly, these investors may be particularly vulnerable and unable to bear the risks of an asset that rapidly loses value, Krugman says. Crypto’s complexity could compound the problem; investors may not understand the risks. “[T]here’s growing evidence that the risks of crypto are falling disproportionately on people who don’t know what they are getting into and are poorly positioned to handle the downside,” he says.

What’s New in Crypto and Stablecoins

Here are the latest developments in stablecoin and crypto as the Senate and House prepare to hold stablecoin hearings in the coming weeks.

  • Gottheimer bill: Draft legislation led by Rep. Josh Gottheimer (D-NJ) would limit stablecoin issuance to depository institutions, while leaving room for “qualified” nonbanks that meet certain collateral requirements, according to American Banker. It would also direct the FDIC to create a new stablecoin insurance fund.
  • McWilliams’ parting words: In her final remarks as outgoing FDIC chairman, Jelena McWilliams this week said bank-issued stablecoins “closely resemble digital representations of deposits.” She urged the agency to provide clarity, including potentially changing deposit insurance rules. McWilliams also said bank regulators should avoid a one-size-fits-all approach to stablecoin rules. “For example, the regulatory framework for a GSIB issuing stablecoins may need to be very different from that of a $1 billion bank.”
  • Silvergate buys Diem: Facebook’s stablecoin dream is officially dead: the Diem Association’s assets and intellectual property have been sold to Silvergate Capital Corp.
  • What it means: Facebook’s exit brings regulatory questions on stablecoins to the forefront. One key issue, according to BPI’s Bill Nelson: what kind of assets count as “reserves” backing the coins.
  • The crypto Wild West? Several western U.S. states are considering taking tax payments in crypto, according to POLITICO this week. Wyoming (home of “crypto banks” Kraken and Avanti) and Arizona are both weighing proposals that would allow certain taxes to be paid with digital currency. Arizona’s would recognize Bitcoin as legal tender, while Wyoming’s would only apply to sales and use taxes. Colorado, Jackson, Tenn., and Miami-Dade County in Florida are also floating the idea of accepting taxes in crypto form.

American Banker: This Month in M&A

An American Banker article this week gives an overview of financial services mergers and acquisitions activity this month. For the larger institutions, deals involved strategic acquisitions of non-bank financial service providers.  Here are some deals to watch and trends as bank M&A emerges as a key policy issue.

  • UBS and Wealthfront: Swiss bank UBS announced in January it will acquire Wealthfront, a wealth management robo-advisor. The purchase will expand the bank’s wealth management client base in the U.S.
  • Fifth Third buys solar lender: Fifth Third is buying Dividend Finance, a nonbank lender that offers point-of-sale home improvement loans for solar panels.
  • Walmart inches into FinTech: In a sign of Walmart’s financial services ambitions, a FinTech backed by the retail giant announced that it is buying two California FinTechs targeting low- and moderate-income customers. Hazel, the Walmart-backed firm making the acquisitions, will eventually be rebranded as “One.” One of the target companies is a payment card and financial education firm, and the other offers early wage access.
  • Limited bank M&A activity: Thus far, only a handful of bank mergers have been announced this year, each involving community bank acquisitions.

In Case You Missed It

CBDC Global Roundup

Here’s what’s new in central bank digital currency around the world, in the wake of the Fed’s recent CBDC report.

  • Boston Fed/MIT research: The Boston Fed and the Digital Currency Initiative at MIT released a whitepaper this week outlining findings from the first phase of their CBDC research. The work “produced one code base capable of handling 1.7 million transactions per second,” the Boston Fed said in a press release. The researchers met their goal of creating a core processing engine for a hypothetical, general-purpose CBDC. Most transactions were settled in under 2 seconds “within architectures that support secure, resilient performance” and can be technologically flexible to adjust to policy changes. The paper expressed doubt that distributed ledger technology or public blockchain was a viable way to enable a CBDC.
  • China: The upcoming Beijing Winter Olympics are meant to be a launchpad for the Chinese digital yuan, marking both a milestone for the Chinese government and a security concern for the U.S. and its allies. But the grand debut could be anticlimactic, CNN reports, as spectators are tightly restricted and athletes and Olympics support staff are contained within a strict “bubble” due to COVID protocols.
  • India: India’s central bank will launch a digital rupee in the fiscal year beginning April 1, according to a recent speech from the country’s finance minister. The nation will also tax crypto transfers at 30%. India is highly dependent on cash, which will make the CBDC rollout a useful test case for cash-heavy societies.
  • Japan: The Bank of Japan, long grappling with a stagnant low-interest-rate environment, shouldn’t issue a digital currency with the angle of helping monetary policy, a former official said. “Some say that negative rates could work more effectively with a digital currency, but I don’t think so,” said former BOJ official Hiromi Yamaoka, who is leading a private-sector digital currency project. Instead, CBDC negative interest rates could spark fears over the yen’s stability.

House Panel Advances Federal Cyber Bill

The House Committee on Oversight and Reform this week approved the Federal Information Security and Modernization Act of 2022, a bill aimed at improving federal cybersecurity. The legislation includes language to require the government to notify private sector firms if sensitive information reported to regulatory agencies was affected by a cyber incident.

JPMorgan Chase Makes Top 10 in Fortune’s ‘Most Admired Companies’

JPMorgan Chase ranked #10 among Fortune’s World’s Most Admired Companies list this year. The other top-ranked firms included drugmaker Pfizer and other blue-chip names like Berkshire Hathaway and Walt Disney.

Citi Forms New Team in Trading Unit to Work With Black-Owned Banks

Citigroup has launched a new team within its trading division focused on working with minority depository institutions and diverse broker-dealers and asset managers, according to Bloomberg. The team will be led by Harold Butler, a veteran of Citi’s investment banking arm.

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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.