BPInsights: January 16, 2021

Stories Driving the Week

OCC Finalizes ‘Fair Access’ Rule That Would Bind Banks’ Decision-Making

Acting Comptroller Brian Brooks finalized the OCC’s “fair access” rule on Jan. 14, his final day in office. The hastily drafted rule supposedly combats political bias toward certain industries, but it effectively impedes large banks’ ability to make business decisions about which financial services they offer to which customers. The rule rests on a faulty understanding of banking law, contradicts long-standing OCC supervisory policy and undermines safe and sound banking practices.

“We are disappointed the Acting Comptroller chose to fast-track the final approval of this hastily conceived and poorly constructed rule on his last day in office,” BPI President and CEO Greg Baer said in a statement. “The rule lacks both logic and legal basis, it ignores basic facts about how banking works, and it will undermine the safety and soundness of the banks to which it applies. Its substantive problems are outweighed only by the egregious procedural failings of the rulemaking process, and for these reasons it is unlikely to withstand scrutiny.”

BPI urged the OCC in a comment letter earlier this month to withdraw the unworkable proposal, which would create a unique precedent in telling national banks what services they should offer to which customers, under threat of enforcement action. BPI had on Nov. 25 requested an extension of the unusually short comment period for the proposal. A reversal of banking system norms deserves full public transparency, as expected in a fair, balanced rulemaking process. BPI also made a FOIA request on Dec. 1 from the OCC seeking the data underpinning the policy. The OCC denied the extension request and has not provided the information sought in the FOIA request.

BPI’s response to the rule received press coverage from NPR, Bloomberg, POLITICO, The Wall Street Journal and several other outlets.  Bloomberg also published an editorial on Jan. 14 opposing the rule.

Banks Showed Resilience, Boosted Struggling Economy in 2020

Banks took historic actions in 2020 throughout the COVID-19 pandemic to provide liquidity to businesses, support small businesses through the Paycheck Protection Program and accommodate borrowers in unprecedented ways, all while maintaining a high degree of resiliency. But as banks approach earnings season, the focus of investors and the public will likely turn to bank profits, allowance for credit losses and shareholder payouts. This BPI roundup of six essential economy-boosting bank efforts serves as a complement to those discussions and a demonstration of banks’ role in supporting the nation’s ability to overcome the COVID-19 crisis. These supportive actions would not have been possible without a resilient and profitable banking sector—a necessity during periods of economic stress.

  • Banks deployed almost $540 billion in liquidity to businesses during March, increasing their lending 12 percent during that period, or 125 percent on an annualized basis.
  • Banks disbursed more than $500 billion in PPP funds, primarily to areas that experienced the highest economic disruption because of the pandemic, and they increased the amount of small business loans on their books more than 50 percent.
  • Large banks modified about $330 billion in loans (or about 6 percent of all loan balances) in the early stages of the pandemic.
  • The proportion of U.S. households that were unbanked reached the lowest level since the start of FDIC’s biennial survey in 2009.
  • The dollar amount of community development lending reached a record level.
  • Small business lending has continued to grow apace both inside and outside of low- and moderate-income areas.

Five Big Ideas for 2021 from the ABA Banking Law Conference

Regulators and banking lawyers gave predictions and insights into what 2021 holds for the banking industry at this week’s American Bar Association Banking Law Committee Meeting on Jan. 14. Here are five top areas to watch for the 2021 industry outlook:

  • ILCs could continue to be attractive charter options for nonbanks and tech firms. One area ripe for policy debate: the Industrial Loan Company charter, an option recently revived by the FDIC that could open a backdoor into the banking system for Big Tech firms like Amazon. Parent companies of ILCs would not be treated as BHCs due to a statutory loophole in the Bank Holding Company Act, and therefore would not face consolidated Federal Reserve supervision and could commingle banking and commerce activities in the same organization.
  • FDIC insurance, or lack thereof, could determine how FinTechs interact with the banking system. Some FinTechs—like Figure Bank, which is seeking an OCC charter—plan to take deposits that are not FDIC insured. The absence of FDIC deposit insurance triggers legal questions for regulators and may depend on the interpretation of Section 2 of the Federal Reserve Act, which indicates deposit-taking national banks should have FDIC insurance. Interpretation of that critical statute could determine the fate of FinTechs vying to enter the Fed payment system.

    A consequential question for FinTechs looking to be like banks is whether they can access the Fed’s payment system. Though the Fed has been silent so far on this question, it is an issue the Fed is actively considering and an issue on which the Fed may seek public comment.
  • Which federal agency charters FinTechs is up for debate. The CFPB’s recent Taskforce report suggested that Congress authorize it to oversee and charter FinTechs or that lawmakers clarify the OCC’s authority to do so. But outgoing Acting Comptroller Brian Brooks has pushed back on that notion. It is not clear where the Biden administration will land on the turf war. The dispute was featured in an American Banker piece this week.  For the CFPB to issue charters, Congressional action would be required.
  • Implementing the final elements of Basel III remains a priority for 2021. It has been widely noted that banks were a source of strength during this crisis. The major capital project for the Fed in 2021 is the Basel end-game proposal which will reduce the role of bank internal models. One key objective in implementing the package will have it be capital neutral for the banking system. The Fed is also is tailoring the capital planning requirements the large banks are subject to.  Lessons learned from COVID will focus on procyclicality, leverage ratios and exploring additional ways to make capital and liquidity buffers more usable. 
  • The new administration and Democratic Congress bring fresh uncertainty to banking rules. The Democrat-led Congress could try to undo some of the regulatory policies of the last four years, but with a thin margin in the Senate, they will likely pick their battles. One potential legislative tool is the Congressional Review Act, which can undo some federal regulations issued at the end of the Trump Administration with a legislative vote.  We largely expect the focus to quickly turn to the future rather than undoing the past. 

Brown Lays Out Oversight Priorities as He Prepares to Lead Banking Panel

Sen. Sherrod Brown (D-OH) previewed an aggressive oversight posture as incoming Banking Committee Chairman during a press event this week, according to a Jan. 12 Bloomberg piece. The Ohio Democrat said he plans to call financial industry chiefs to testify before the panel about how they conduct their businesses, though he did not offer a specific timeline or details.

Brown also gave a glimpse of his policy agenda, which he said will prioritize pandemic relief, housing assistance for low-income Americans and broadening consumer access to financial services, according to an American Banker article. He has proposed a free digital wallet known as FedAccount for underbanked consumers.

Brown said CFPB Director Kathy Kraninger should resign, and that he expects the Biden administration to fire her if she does not resign before Biden takes office.

Brown faces a razor-thin margin in the Senate for any major legislation, with 50 Democrats and 50 Republicans and Vice President-elect Kamala Harris holding the tie breaking vote.

Yellen Confirmation Hearing Slated for Jan. 19

Treasury Secretary nominee Janet Yellen will undergo a confirmation hearing before the Senate Finance Committee on Jan. 19. Yellen previously served as Federal Reserve Chair under President Barack Obama and is widely expected to face a smooth path to confirmation.

OCC Approves Trust Charter for Crypto Firm Anchorage

On Jan. 13, the OCC granted a national trust charter to cryptocurrency platform Anchorage, the first approval of its kind for a crypto firm. The conditional approval will allow Anchorage to convert its South Dakota state trust charter to a national one and to partner with banks whose clients want to store stablecoins and other digital assets. The move satisfies a goal of outgoing Acting Comptroller Brian Brooks to provide crypto firms with bank charters and expand digital currency’s role in the financial system.

In Case You Missed It

BPI Releases Exposure Draft of a Third Edition of its Guiding Principles for U.S. Bank Governance

BPI released an “exposure draft” this week of its “Guiding Principles for Enhancing U.S. Banking Organization Corporate Governance,” a document intended to provide guidance on core issues relating to bank corporate governance and facilitate effective execution of the board oversight function within banking organizations.  The 2021 Guiding Principles incorporates a range of trends in bank board governance, developments such as new and proposed bank regulations and guidance since 2015, and other considerations such as those brought about by the COVID-19 pandemic and technological advances. The Guiding Principles highlights important common governance elements that could help guide institutions but also recognizes that specific governance structures will necessarily differ for each particular bank’s circumstances.  BPI is publishing the updated Guiding Principles in exposure draft format for the purpose of gathering input from all interested parties by March 1, 2021.

BPI also released commentary relating to the Guiding Principles that puts the document into context.  

Brainard: Bank Regulators Should Explore AI in Lending Decisions

Banking regulators want more details on how banks use artificial intelligence to make decisions, Federal Reserve Gov. Lael Brainard said in a Jan. 12 speech at the Fed’s AI Academic Symposium. The Fed has been discussing an information request on risk management of AI applications in the financial industry, jointly with the other federal banking regulators, and also is weighing the use of AI as a supervisory tool, she said.  As a part of these discussions, bank regulators are closely considering steps to ensure that discriminatory bias is not embedded in algorithms that guide lending decisions, she said.  BPI released a whitepaper in September making several recommendations on how policymakers can modernize the regulatory framework to facilitate responsible use of AI in credit underwriting. 

Yellen Hires Bloomberg Exec, Ex-SEC Official as Top Aide

Treasury Secretary nominee Janet Yellen has hired Didem Nisanci, an executive at Bloomberg LP and former Obama era SEC staffer, as her chief of staff, according to a Jan. 11 Bloomberg article. Nisanci serves as Bloomberg’s global head of public policy.

OCC Issues Interpretive Letter Clarifying the OCC’s Authority to Charter National Trust Banks and Permissible Bank Trust Department Activities

The OCC recently posted a Chief Counsel’s Interpretive Letter 1176 on special purpose trust banks on its website. The interpretive letter was issued in connection with the OCC’s approval of the conversion of Anchorage Trust Company from a state to a federal trust bank charter.  It clarifies the OCC’s authority to charter national trust banks and the OCC’s interpretation of the permissible activities of trust banks and trust departments of full scope national banks.  

The letter clarifies that activities of a federally chartered trust bank may include activities permissible for a state trust bank under state law even if those activities are not considered fiduciary in nature under federal law.  The letter also discusses the standards the OCC considers when assessing whether an activity is conducted in a “fiduciary capacity” under the OCC’s Part 9, and the implications for chartering de novo institutions and approving the conversion of state institutions, along with the permissibility of certain activities for existing national banks that do not have fiduciary powers.

Visa and Plaid Drop Merger Plans After DOJ Sues

Visa Inc. and Plaid Inc., a FinTech startup that links payment app user data to customers’ bank accounts, scrapped their plans to merge after the Department of Justice sued to block the deal, DoJ announced Jan. 12. Antitrust chief Makan Delrahim called the decision a “victory for American consumers and small businesses.”

American Banker: Canadian Banks Eye U.S. Acquisitions

As Canadian banks amass excess capital amid pandemic restrictions on buybacks and dividend increases, some are keeping an eye out for opportunistic acquisitions of banks in the U.S., American Banker reported this week. According to the article, the CEOs of Royal Bank of Canada, Bank of Montreal, the Canadian Imperial Bank of Commerce and Toronto-Dominion Bank said they wouldn’t ignore opportunities to expand their presence in North America. The comments come after several years without U.S.-Canadian cross-border bank M&A.

Bloomberg: ECB’s Lagarde Takes Aim at Bitcoin’s Criminal Role

European Central Bank President Christine Lagarde critiqued bitcoin as a conduit for money laundering at a recent event, according to a Jan. 13 Bloomberg article. “For those who had assumed that it might turn into a currency — terribly sorry, but this is an asset and it’s a highly speculative asset which has conducted some funny business and some interesting and totally reprehensible money-laundering activity,” Lagarde said at a virtual event organized by Reuters.

Reuters: Gensler Tapped for SEC Chief

Former Democratic CFTC Chairman Gary Gensler, who has led President-elect Biden’s transition planning team for financial industry oversight, will be nominated to lead the Securities and Exchange Commission, Reuters reported Jan. 12. Gensler is expected to pursue an aggressive enforcement approach and left-leaning policy agenda.

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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.