BPInsights: January 29, 2022

Stories Driving the Week

CFPB Fees Measure Misses the Mark

BPI and a broad coalition of financial trade associations issued a joint statement this week on the CFPB’s request for information on fees charged by financial firms.

  • “The CFPB’s new Request for Information on fees is a misguided effort that paints a distorted and misleading picture of our country’s highly competitive financial services marketplace. Multiple federal laws and the CFPB’s own rules already require banks, credit unions and other providers of consumer financial services to disclose terms and fees in a clear and conspicuous manner, and our members do so each and every day. Consumers in this country know they have a wide range of choices when it comes to financial services products, and those businesses compete every day, including on fees. We look forward to responding to this Request for Information with facts and perspective sadly lacking from today’s announcement.”

Fed Noms Hearing Slated for Feb. 3

The Senate Banking Committee will hold a nomination hearing for Federal Reserve nominees Sarah Bloom Raskin, Lisa Cook and Philip Jefferson on Feb. 3.

A Major Limit on the Fed’s Crisis Toolkit: Shame

The Federal Reserve has the power to lend to banks in a crisis. But this crisis-management tool loses its usefulness if banks aren’t willing to use it, a new BPI blog post notes.

Dirty Money Has No Passport. FinCEN Info-Sharing Proposal Would Help Banks Track It.

FinCEN this week released a proposal to establish a new pilot program allowing banks to share suspicious activity reports and related information with their foreign branches, subsidiaries and affiliates. The proposal will “better position banks to detect and deter criminal activity,” BPI SVP of AML/BSA, Sanctions and Privacy Angelena Bradfield said in a statement. “Banks serve on the front lines in the effort to combat money laundering, and BPI has long supported additional information sharing given the borderless nature of these crimes. We look forward to working with FinCEN as the rulemaking process proceeds and appreciate its attention to this important provision.”

Facebook Stablecoin Dream Dies Quietly

The Diem Association, a group founded by Facebook to build the Diem stablecoin, is winding down and will sell its technology to Silvergate Capital Corp., a California bank that works with blockchain and crypto firms. The sale, for about $200 million, marks the end of Facebook’s stablecoin project, which evolved from Libra to Diem and rattled global regulators.

Russia Sanctions May Be Coming. What Does It Mean for Banks?

The U.S. and EU are weighing new sanctions on Russia if it invades Ukraine. They largely agree on the substance of potential financial sanctions, the Financial Times reported this week, including on the size of financial institutions and state-owned enterprises such sanctions would target; the severity and immediacy of the sanctions; and the extent to which the sanctions would affect existing “stocks of risk” and new financing flows.

  • Why it matters: Sanctions could cut Russia off from the U.S. dollar system or the SWIFT global payments network, both of which would potentially wield significant economic consequences. They would also affect global banks that do business in or with Russia or its citizens.
  • ECB warning: The European Central Bank this week cautioned banks with significant Russia exposure on the risks of Russia sanctions. ECB asked for banks’ contingency plans in the event of sanctions.

In Case You Missed It

All U.S. Trial Convictions for LIBOR Rigging Have Now Been Overturned

This week, the Second Circuit Court of Appeals reversed the convictions of two former Deutsche Bank traders who were charged with conspiring to manipulate LIBOR. The traders, Matthew Connolly and Gavin Black, had been convicted of wire fraud in 2018.  The court held “that the evidence was insufficient to prove that defendants caused Deutsche Bank to make LIBOR submissions that were false or deceptive, i.e., to prove that they engaged in conduct that was within the scope of [wire fraud].”  The reversal comes as LIBOR makes its final exit from global financial markets. This case marks the last of a series of cases where convictions were overturned.  Deutsche Bank earlier pled guilty to conduct for which its employees have now been acquitted, and paid a total of over $2 billion in fines to the Department of Justice and other U.S. regulators.
Wachtell, Lipton, Rosen & Katz released a memo analyzing the decision: “In a careful but blunt opinion today, the Second Circuit reversed the convictions of two Deutsche Bank derivatives traders charged with wire fraud for manipulating LIBOR.  The decision underscores that not all conduct deemed unfair is criminal, and represents the latest blow to a theory of criminal liability that DOJ has invoked to extract billions of dollars in penalties from financial institutions—all before the theory’s viability could be tested in the courts.”

White House Unveils ‘Zero Trust’ Cyber Strategy

The White House this week released a federal strategy document aimed at shifting the federal government to a “zero trust” cybersecurity approach. Zero-trust models require that all access attempts are verified, and no actor, system, network or service operating outside or within the security perimeter is trusted. The strategy calls for more tracking and monitoring of federal devices, isolation of agency systems from each other, and encryption of traffic flowing between and within agency networks, among other measures. The strategy stems from an Executive Order released following a review of the SolarWinds breach that affected many private organizations but primarily targeted federal agencies. BITS, the technology policy division of the Bank Policy Institute, is publishing a white paper entitled “Adaptive Trust: Zero Trust Architecture in a Financial Services Environment” in February.

As Central Bank Balance Sheets Grow, Banking System Drowns in Liquidity

Central bank balance sheet expansion doesn’t necessarily help market liquidity, according to a new working paper by Viral V. Acharya and Raghuram Rajan. In ordinary times, central bank balance sheet growth typically increases liquidity in the banking system, but in stressful times, it can exacerbate market turmoil, the paper says. The paper offers a note of caution about the increasing enlargement of central bank balance sheets and the effects it has on the financial markets. BPI research is cited seven times in the paper.

The Fed’s Balancing Act

Federal Reserve Chair Jerome Powell signaled an upcoming rate hike in March at the press conference following the FOMC meeting this week. Here’s what Chief Economist Bill Nelson had to say on the central bank’s task of communicating rate-hike timing as inflation risks loom.

  • Humble and nimble: Powell has successfully kept options open for the central bank without promising to proceed at a certain speed. “They’ve really, I thought, methodically prevented themselves from getting into any kind of box caused by market expectations that they would proceed at any particular pace,” Nelson said in POLITICO’s Morning Money this week. “I thought that that was very well done.”
  • Resilient: Powell also said, and we agree: “The banks are highly capitalized with high liquidity and quite resilient and strong.”

New Research Sounds Warning on Nonbank Lending as Crisis Amplifier

A recent paper by Iñaki Aldasoro, Sebastian Doerr and Haonan Zhou shows that nonbanks cut credit to riskier borrowers in crises significantly more compared to banks. Their research suggests that the rise of nonbank lending “amplifies financial instabilities and associated real effects during financial crises,” according to the summary of the paper.

WSJ: Cryptocurrency Doesn’t Amount to Much

A Wall Street Journal op-ed this week deconstructs crypto advocates’ argument that digital currency and blockchain are a major innovation. Blockchains “achieve bookkeeping without a bookkeeper and allow individuals to make transactions anonymously and quickly,” Steve H. Hanke and Matt Sekerke wrote. “But the innovation pretty much ends there.” Otherwise, they say, crypto simply mimics the functions of the regulated banking system, but without the safety of a regulatory framework.

FFIEC Finalizes Exam-Revamp Project

The FFIEC – an interagency standard-setting body composed of the CFPB, FDIC, FRB, NCUA, OCC and a State Liaison Committee – recently completed its multi-phase Examination-Modernization Project aimed at improving the safety and soundness and consumer compliance examination processes for financial institutions. For the Project’s final stage, the FFIEC sought to address both concerns about redundant examination information requests as well as differing or cumbersome authentication requirements to access FFIEC members’ supervision systems. The FFIEC recently issued a statement unveiling the results of the Project’s final stage, which was composed of:

  • New interagency principles on examination information requests to improve the clarity of communications and reduce duplicative requests
  • A common authentication solution for external access to the FFIEC members’ supervision systems

JPMorgan Acquires Stake in Greek FinTech Viva Wallet

JPMorgan this week announced it has agreed to take a 49% stake in Viva Wallet, a Greek cloud-based payments FinTech firm. The strategic investment will expand JPMorgan’s European foothold.

Wells Fargo Pledges $20M to Atlanta Small Businesses, With Diversity Focus

Wells Fargo donated $20 million to Atlanta small-business owners to help them upgrade facilities and invest in equipment. The pledge is part of the bank’s Open for Business Fund, a $420 million initiative aimed at helping small businesses stay open during the pandemic. The fund focuses on diverse small businesses.

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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.