BPInsights: January 30, 2021

Stories Driving the Week

OCC Freezes ‘Fair Access’ Rule

The Office of the Comptroller of the Currency on Jan. 28 froze the “fair access” rule recently finalized by former Acting Comptroller Brian Brooks, according to an agency announcement. Pausing publication of the rule in the Federal Register will allow the next Senate-confirmed OCC head to review the final rule and public comments on it, the OCC said.

BPI has argued that the impractical rule unfairly meddles with banks’ business decisions about which services to offer which customers and should be withdrawn. BPI further believes the egregious procedural failings of the OCC’s rulemaking process means the rule cannot possibly withstand scrutiny. 

BPI Blog: The FSOC’s Looming Challenge: Un-Ringing a Very Large Bell

The incoming Financial Stability Oversight Council faces a daunting challenge: a large and growing shortage of fixed-income capital market liquidity that has led to unprecedented government intervention and threatens to undermine those markets’ vitality, BPI President and CEO Greg Baer wrote in a new blog. This situation, where investors expect the Federal Reserve to rescue bond markets in times of volatility or mass selloffs, causes extreme moral hazard.  Regulators faced, and met, a similar challenge when they took steps to end a “Too Big to Fail” perception in the wake of the Global Financial Crisis. But the stakes now are much higher and the challenge far greater.  In sum, private sector markets are becoming accustomed to central bank support; those markets are likely growing inorganically large on the assumption of that support; private sector market making continues to be discouraged by regulation; and thus the need for future central bank support continues to grow.  If for any reason that support were ever withheld, the results would be devastating.  And, so, on our present course, it never will be withheld.To change course, policymakers have three basic options: (1) reduce private sector demand for market liquidity, either directly through new curbs on money market funds, hedge funds and mutual funds, or indirectly through major monetary and fiscal policy changes; (2) increase the private sector supply of market liquidity by rationalizing rules to allow bank-affiliated broker-dealers to provide more market-maker services; or (3) further nationalize U.S. markets by establishing a permanent role for the central bank in supporting U.S. capital markets.

The blog was covered by The Wall Street Journal in a Jan. 28 article.

Yellen Confirmed as Treasury Secretary

Treasury Secretary Janet Yellen, the former Chair of the Federal Reserve Board, was confirmed by the Senate on Jan. 25 in a bipartisan vote. Yellen now faces the immediate task of negotiating with Congress on President Biden’s pandemic stimulus proposal.

In an introductory message, Yellen called on her staff to use economic policy to speed the pandemic recovery in addition to addressing climate change, racial justice and economic inequality. Yellen also reminded Treasury staffers of the agency’s day-to-day work of overseeing markets, managing the national finances, strengthening the global economy and fighting illicit finance. Yellen has also begun speaking with foreign counterparts such as the U.K.’s Rishi Sunak and Germany’s Olaf Scholz, according to departmental readouts of those calls. She’s also well on her way to becoming a hip-hop sensation.      

BIS’ Carstens: Big Tech in Finance Deserves a Closer, Globally Coordinated Look

Big Tech entry into finance requires a “comprehensive public policy approach that combines financial regulation, competition policy and data privacy,” said Bank for International Settlements General Manager Agustin Carstens in a recent speech. Carstens pointed out the mammoth market cap and pervasiveness of Big Tech firms, whose self-reinforcing reach into the data of people’s daily lives could present systemic risks to the financial system. Carstens endorsed a style of regulation targeting a type of firm (“entity-based”) rather than a specific type of activity (“activities-based”), an approach that could resemble a U.S. Bank Holding Company Act structure for Big Tech firms. He also called for global coordination on the issue.

Fed Responds to House Republicans on Climate Change

The Fed signaled that it will not micromanage banks’ lending decisions about risks posed by climate change, according to a recent letter responding to Republican lawmakers, The New York Times reported. “We would note that it has long been the policy of the Federal Reserve to not dictate to banks what lawful industries they can and cannot serve, as those business decisions should be made solely by each institution,” Federal Reserve Chair Jerome Powell and Vice Chair for Supervision Randal Quarles wrote in a letter to House Republicans this month. The group of lawmakers had expressed concern about stress tests being used to evaluate banks’ exposure to climate change risks. Powell has said the central bank, which recently joined the Network for the Greening of the Financial System, a group of global central banks focused on climate issues, is in the early stages of parsing the risks that climate change poses to the financial system and noted that the Federal Reserve will not implement any recommendations of the NGFS that are not in the best interest of the U.S. financial system. 

JPM Institute Research: PPP Loans Bolstered Small Business Cash Balances and Supported Expenses

JPMorgan Chase & Co.’s JPM Institute released new research showing the impact of PPP on small business cash flows. Among their findings, researchers found that:

  • Among firms with PPP loans, the proceeds were typically enough to cover nearly one month of expenses. If payroll was one third of expenses, the loan could cover 11 weeks of only payroll.
  • PPP increased the typical small business cash balances by 136 percent, supporting an immediate increase in expenses and more than doubling balances relative to the prior year.
  • Other COVID relief programs and transfers may have bolstered balances of firms that received PPP loans later.

Fed Taps NY Fed’s Stiroh for Climate-Change Supervisory Role

The Federal Reserve Board has hired Kevin Stiroh, Head of the New York Fed’s Supervision Group, to lead its supervisory work related to the financial risks of climate change, the New York Fed announced Jan. 25. Stiroh, who starts in the role on Feb. 1, will also chair the Supervision Climate Committee, a newly formed group bringing together senior staff across the Federal Reserve Board and Reserve Banks. As mentioned above, Fed Chair Jerome Powell recently said the central bank is in the early stages of considering climate change’s risks to the financial system.

In Case You Missed It

Banks Expand Hiring Policies That Support Diversity and Inclusion

JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and U.S. Bancorp expanded commitments to requiring a diverse slate of job applicants in their hiring processes, according to a Jan. 26 Wall Street Journal article. Citigroup said effective this year it will require at least two candidates from diverse backgrounds on interview slates at the assistant vice president level and above, up from one candidate. Wells Fargo said it would disclose more details about a hiring policy requiring that at least half of the candidates on interview slates be women or otherwise from diverse backgrounds for jobs paying more than $100,000. U.S. Bancorp said it is expanding its policy of including at least one woman or person of color on slates to all positions in the company. JPMorgan agreed to publish a long-held policy of considering at least one woman and one person of color for all hiring of new employees in the U.S. Bank of America said it would expand its policy of considering at least one woman and one person of color for jobs to more positions, including all executive roles.

Fed’s Powell Skeptical that Low Interest Rates Harm Financial Stability and that Raising Rates Increases it

The Federal Reserve is more concerned about the near-term economic and pandemic outlooks, but less concerned about financial stability risks, according to Chair Jerome Powell’s Jan. 27 press conference following the Federal Open Market Committee’s regular meeting.

“I would say that financial stability vulnerabilities overall are moderate,” Powell said. That assessment marks an upgrade from “elevated” financial stability risks last March. Powell noted that bank capital levels are higher than before the crisis, loss reserves are elevated and loan losses have been lower than expected earlier in the year. Corporate bonds are also holding up well, he said.

Powell also seemed to cast doubt on the connected notions that low interest rates contribute to asset bubbles, reducing financial stability, and that raising interest rates improves financial stability.  “We would rely on macroprudential and other tools to deal with financial stability issues,” he said, though it’s possible he would prefer to rely on static macroprudential tools, such as conducting vigorous annual bank stress tests – rather than time-varying tools, such as the countercyclical capital buffer.

Powell also said the decision to lift restrictions on bank dividends and buybacks hinges on vaccination progress and economic performance as well as on “bank activity.” Banks can currently distribute capital to shareholders, but the amounts are limited based on their earnings.

White House Rule Freeze Affects Some AML Proposals

The White House memo aimed at pausing Trump-era rules would affect amendments to anti-money laundering rules proposed by FinCEN and the Federal Reserve, according to a Jan. 28 Wall Street Journal article. The October proposal from the agencies would require financial institutions to collect and disseminate details on a broader range of international transactions by lowering the threshold for these requirements from $3,000 to $250 and formally applying them to crypto firms, among other things.  In addition, the article discusses FinCEN’s extension, this week, of its comment deadline on a proposal to “require banks and cryptocurrency trading platforms to keep records of a customer’s cryptocurrency transactions and counterparties, including verification of their identities, for any transactions exceeding $3,000,” which is in line with written responses provided by Secretary Yellen as part of her Senate Finance Committee confirmation.

BPI Blog: The Costs of High Levels of Reserve Balances

The FOMC met Jan. 26-27 to discuss the state of the economy and the appropriate stance of monetary policy. While the Fed did not change its forward guidance about its target range for the federal funds rate or for its asset purchases, meeting participants likely discussed the costs and benefits of those purchases.

The Fed has stated that the benefit of the purchases is that they “help foster smooth market functioning and accommodative financial conditions.” The costs of the purchases are to a large part the result of the staggering increases in reserve balances that they create, BPI outlined in a new blog. Those balances could reasonably be expected to top out at $5.85 trillion in mid-2022, well more than twice the level they achieved after QE1, 2 and 3. Such a stratospheric level of reserve balances would have two important consequences: several bank regulatory capital ratios will fall, curtailing bank credit and reducing GDP; and when the Fed decides it is appropriate to raise interest rates, it will be forced to pay an above-market rate of interest on reserve balances to do so.

Chinese Payments Giant Ant to Become Financial Holding Company

Ant Group Co., the Chinese payments giant controlled by billionaire Jack Ma that owns the payment platform Alipay, will become a financial holding company subject to supervision from the Chinese central bank, according to a Jan. 27 Wall Street Journal article. Ant has submitted a restructuring plan outline to Chinese regulators after they required it to submit to more stringent capital requirements.

JPMorgan to Launch UK Digital Bank

JPMorgan Chase said it will launch a digital-only retail bank in the U.K. later this year, according to a Jan. 27 Financial Times article. The new bank will operate under the Chase brand. Sir Win Bischoff, former chairman and interim CEO of Citigroup, will serve on the project’s board.

CEA Nominee Rouse Calls for Stimulus Spending, Inequality Focus

Cecilia Rouse, President Biden’s nominee to lead the Council of Economic Advisers, called at her Jan. 28 confirmation hearing for more federal spending to support the U.S. pandemic recovery and said the crisis provided an opportunity to rebuild an economy with less inequality, according to a Jan. 28 Reuters article. Rouse previously served in senior economic policy positions in the Obama and Clinton Administrations.

House Financial Services Panel Names New Subcommittee Heads

House Financial Services Committee Chair Maxine Waters (D-CA) released new subcommittee leadership assignments, with some changes from the last Congress, the panel announced Jan. 26. Rep. Jim Himes (D-CT) will lead the National Security, International Development and Monetary Policy Subcommittee and Rep. Ed Perlmutter (D-CO) will lead the Consumer Protection and Financial Institutions Subcommittee. Himes replaces Rep. Emanuel Cleaver (D-MO), who will take the helm of the Subcommittee on Housing, Community Development and Insurance.  

BIS Chief Outlines Predictions on Central Bank Digital Currency

Agustin Carstens, General Manager of the Bank for International Settlements, explored the contours of potential Central Bank Digital Currencies in a Jan. 27 speech. Carstens highlighted several of the weaknesses of bitcoin, such as its volatile value and the intense electricity demands of “mining” it, and major potential governance problems with private-sector “stablecoins,” a form of digital currency designed to have stable value and sometimes pegged to a government-issued currency. He predicted any CBDC would require people to identify themselves in order to avoid money laundering and illicit finance risks – contrary to bitcoin enthusiasts’ preference for anonymous transactions.

He also discussed the likely role of central banks in digital money. “[C]learly, if digital money is to exist, the central bank must play a pivotal role, guaranteeing the stability of value, ensuring the elasticity of the aggregate supply of such money, and overseeing the overall security of the system,” he said, noting that 86 percent of central banks in a recent BIS survey are researching CBDCs. He said “CBDCs do not need to threaten the stability of bank funding or lending to the real economy,” predicting that the supply of such digital currency would be too small to affect monetary policy.

European Commission Launches Deposit Insurance Consultation

On Jan. 26 the European Commission launched a consultation across three EU legislative texts that cover recovery and resolution, the Single Resolution Mechanism and deposit insurance.  The consultation is part of a review of the bank crisis management and deposit insurance framework.  Specifically the consultation seeks feedback on revisions to the framework that would help in the completion of the banking union and in particular a EU-wide Deposit Insurance Scheme which is the missing third pillar of the banking union.  The consultation also touches on issues of protecting public funds when institutions are failing and the challenges around varying insolvency regimes across EU member states. The consultation runs until April 20, 2021.

FDIC Finalizes Supervisory Appeals Process

On Jan. 25, the FDIC published in the Federal Register final guidelines amending its appeals process for material supervisory determinations such as examiner decisions relating to bank examination ratings, adequacy of loan loss reserve provisions and significant loan classifications.  Significantly, the final guidelines, like the proposal, provide for the establishment of a new office, the Office of Supervisory Appeals, within the FDIC as a dedicated appellate authority outside of the examination function to review and opine on bank supervisory appeals.  In response to public comments including BPI’s, the FDIC revised its final appeals process in several important ways.  The guidelines will come into effect once the Office is fully operational.

The updates aligned with BPI’s comments such as: introducing a de novo review standard similar to the Fed’s approach rather than deferring to examiners’ judgment; permitting bank management (and not only a bank’s board) to authorize a supervisory appeal; and viewing banking industry experience favorably in hiring Office officials.

IMF Warns on Financial Stability Risks of COVID Complacency

The International Monetary Fund cautioned that a gap between investor optimism on pandemic recovery and the slow rollout of vaccines worldwide could imperil financial stability. The IMF emphasized the potential negative market impacts in a Jan. 27 blog attached to its most recent Global Financial Stability report update.

BPI’s Pat Parkinson Joins Systemic Risk Centre Panel

BPI Senior Fellow Pat Parkinson participated in a Jan. 28 panel discussion on “Financial risk, macroeconomy and central bank response to COVID-19” at the Systemic Risk Centre’s conference on financial cycles, risk, macroeconomic causes and consequences. The panel also featured officials from the Bank of England and European Central Bank.

BPI’s Angelena Bradfield Speaks at Future of Financial Crime Event

Angelena Bradfield, BPI Senior Vice President, AML/BSA, Sanctions & Privacy, participated in a Jan. 28 Association of Certified Financial Crime Specialists event on the Future of FinCrime Threats. Her panel offered a forward-looking perspective on AML regulation, corporate transparency, cryptocurrency and other financial crime topics.

BofA, JPMorgan Chase, Wells Fargo Pilot Service To Rein In Screen Scraping

Several banks, including Bank of America, JPMorgan Chase and Wells Fargo, recently piloted a service from The Clearing House and risk-assessment providers TruSight and KY3P that standardizes vetting of FinTech data aggregators that enable customers to pull up their bank account information in third-party apps like Venmo, according to a Jan. 26 American Banker article. The Clearing House wants to move the banking industry away from “screen-scraping” toward more secure data sharing methods.

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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.