BPInsights: January 15, 2022

Stories Driving the Week

The Basel Premium 

U.S. companies could soon pay more for loans than their European peers depending on how the U.S. applies the latest round of Basel bank rule changes.

This factsheet explains why details in the final revisions to the global bank regulatory standards could make loans cost more for U.S. businesses. A prescriptive U.S. interpretation of the changes could imperil the American economic recovery by raising businesses’ borrowing costs.

Go deeper: A new BPI/Credit Benchmark working paper shows how using banks’ own internal ratings to sort borrowers between investment-grade and non-investment-grade would fine-tune the Basel “standardized approach.” Specifically, using those internal ratings would make the requirements more risk-sensitive and maintain the consistency of risk weights across banks lending to the same borrower.

Biden Unveils New Fed Noms

President Biden on Friday nominated Sarah Bloom Raskin, a former top Treasury official, to be vice chair for supervision at the Federal Reserve. The position would give her key authority over banking rules if confirmed. Biden also nominated Lisa Cook of Michigan State University and Philip Jefferson of Davidson College to fill other seats on the Federal Reserve Board.

For more on the nominees, see media coverage here:

The Fed is Stuck on the Floor: Here’s How It Can Get Up.

The Federal Reserve made a policy change in 2019 that forces it to stay large and keep growing larger. That change is expanding the range of financial market players the Fed deals with and entangling the central bank in day-to-day market interactions. To understand what happened and why it matters, see this post from Chief Economist Bill Nelson.

The Fed on the Hill

Federal Reserve Chairman Jerome Powell and Governor Lael Brainard answered questions from the Senate Banking Committee this week at their nomination hearings. Both Powell and Brainard, who was nominated for vice chair of the central bank, emphasized tackling inflation as a top priority. Here’s what they had to say on other policy topics.

  • M&A: The Fed is still applying the same law and practices to its review of bank mergers, Powell said to Sen. Thom Tillis (R-NC), who expressed concern about banks facing mounting difficulties getting mergers approved. Powell added that the Fed is still working its way through applications in the current pipeline. In response to Sen. Tina Smith (D-MN), Powell noted two key trends driving banks to merge: declining rural populations and high fixed costs, both regulatory and technological.
  • Climate: Powell said climate “stress scenarios” will be a key tool for assessing climate risk. He noted that they are “very different from the regular stress tests, which affect capital.” Separately, Sen. Pat Toomey (R-PA) asked Brainard if she agreed with potential Fed Vice Chair for Supervision nominee Sarah Bloom Raskin that the Fed should not direct money to “further entrench the carbon economy.” Brainard said she has not suggested the Fed do stress tests for climate. She also said the Fed would not tell banks what sectors they should lend to. Brainard said she had not studied Raskin’s positions and limited her response to the Fed’s supervisory guidance practices. Scenario analysis is distinct from stress testing and allows banks to see where risks are building up, she said in a separate exchange.
  • SLR: Sen. Mike Rounds (R-SD) urged both Powell and Brainard to consider adjusting the supplementary leverage ratio. Powell said he wants risk-based capital requirements to be binding, not the leverage ratio. “We do want to make adjustments,” he said. There are ways the Fed could adjust the SLR while preserving the overall bindingness of the capital requirements on the largest banks, he said. Brainard said adjustments would make sense given the large amount of reserves in the banking system and noted that she supported the removal of the reserves from the leverage ratio for custodial banks.
  • FinTech Fed accounts: In response to concerns from Sen. Cynthia Lummis (R-WY) that Wyoming SPDIs – which include crypto firms like Kraken – don’t have Fed master account access, Powell said the Fed is being careful about granting such access to firms with novel charters and the precedent it would set. “If we start granting these, there will be a few hundred of them pretty quickly and we have to think about the broader safety and soundness implications,” he said. “It’s just hugely precedential.”
  • CBDC: Powell reiterated that the Fed’s pending report on central bank digital currency will be released “in coming weeks,” though he said it’s largely “ready to go.” He described it as “an exercise in asking questions and seeking input from the public” rather than taking strong policy positions. In response to Sen. Pat Toomey (R-PA), he agreed that there was nothing to preclude a well-regulated private stablecoin from coexisting with a potential CBDC. Brainard said the Fed is looking to Congress and the Administration for guidance on the topic.
  • Fair access: Brainard agreed with Sen. John Kennedy (R-LA) that federal regulators should not use their power to discourage banks from lending to oil and gas firms. When Kennedy asked if regulators should discourage banks from lending to gun makers, Brainard said “it’s not our job” to do so. “We don’t tell banks what sectors to lend to; we just ask them to risk-manage and we make sure they have good processes in place.”

What’s New in CBDC (U.S. Edition)

In addition to Powell’s comments on central bank digital currency, here are some new developments on a U.S. digital dollar.

  • Emmer bill: Rep. Tom Emmer (R-MN) this week introduced a bill that would bar the Fed from issuing a CBDC directly to individuals. A direct-to-consumer digital dollar would “put the Fed on an insidious path akin to China’s digital authoritarianism,” he said.
  • Visa testing: Visa will offer central banks a way to test retail applications for CBDC this spring after discussions with about 30 central banks. Mastercard is also working on a CBDC pilot program.
  • Big Tech grab? A new BankThink op-ed by Rob Blackwell urges bankers to engage on the prospect of CBDC. A note of caution from Blackwell: Big Tech and FinTechs could gain an even bigger banking foothold if they are allowed to distribute CBDC.

What’s New in CBDC (Global Edition)

  • China: China is offering its digital yuan to Olympic athletes and spectators – a key early test of its appeal to foreigners. The rollout has raised concerns among some policymakers about espionage and privacy.
  • U.K.: A British Parliament panel expressed concern that a digital pound could bring the central bank into controversial privacy debates and threaten the banking system’s stability.
  • Switzerland: Project Helvetia (a joint experiment by the BIS, the Swiss National Bank and SIX, Switzerland’s main provider of financial infrastructure services, that included five commercial banks: Citi, Credit Suisse, Goldman Sachs, Hypothekarbank Lenzburg and UBS) successfully tested the integration of “wholesale CBDC settlement.”
  • Israel: The Bank of Israel is expanding its CBDC research, but the prospect remains hypothetical at this point.

In Case You Missed It

PayPal, Gottheimer Bill, Bank Consortium: What’s New in Stablecoins

  • PayPal: The payments firm is considering launching its own stablecoin. The move was reported by Bloomberg after a developer discovered traces of a “PayPal Coin” inside the company’s app.
  • Gottheimer bill: Rep. Josh Gottheimer (D-NJ) plans to introduce a bill that would require stablecoin issuers to either become a bank or partner with a bank.
  • Bank consortium: A group of FDIC-insured firms — New York Community Bank, NBH Bank, FirstBank, Sterling National Bank and Synovus Bank as well as Figure Technologies and JAM FINTOP – launched a stablecoin consortium this week. The group will promote a “bank-minted stablecoin” that “addresses the consumer protection and regulatory concerns of non-bank issued stablecoins and offers a more secure option for transacting on blockchain.” The project comes after the recent PWG report recommended Congress restrict stablecoin issuance to insured depository institutions.
  • OCC: Acting Comptroller Michael Hsu this week reiterated the need for consolidated supervision of crypto intermediaries. Such entities may have multiple subsidiaries supervised by different regulators, and no single regulator may understand the firm’s big-picture risk and operations, he said. He also said bank regulation would “give credibility to the ‘stable’ part of stablecoins.”

Evolving Regulatory Climate

In addition to Jerome Powell and Lael Brainard’s remarks about climate risk, here are some other developments in climate risk and bank policy.

  • Data gaps: Climate risk analysis is still in its early stages, and the banking industry is grappling with data and methodological shortfalls, BPI said in an American Banker piece on climate disclosures. Therefore, credit limits and surcharges on GSIBs would be inappropriate.
  • Hong Kong climate stress test: The Hong Kong Monetary Authority completed its pilot climate stress test and found that the city’s banking industry could withstand climate-related shocks. “The assessment results indicate that climate risks can give rise to significant adverse impacts on the banks’ profitability, capital positions and operations,” the HKMA said. “Notwithstanding the significant potential impacts of climate change, the Hong Kong banking sector should remain resilient to climate-related shocks given the strong capital buffers built up by the banks over the years.”

CFPB Data Sharing Rule Could Slip to Next Year

The CFPB’s long-anticipated rule on consumer financial data sharing may lag until 2023, according to an American Banker article this week. The rule is expected to establish a framework for consumer-permissioned financial data sharing among banks, aggregators and other FinTechs.

Banks Form Climate Risk Group 

Banks including BPI members Bank of America, Fifth Third, Huntington, KeyBank, M&T, MUFG Union Bank, Regions, Truist, U.S. Bank and Wells Fargo, formed a consortium to jointly address climate risks. The group, which includes 19 banks and the Risk Management Association, will develop standards for measuring and managing climate risk.

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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.