BPInsights: January 8, 2022

Stories Driving the Week

A Bank-Merger Moratorium Isn’t Just Bad Policy. It’s Illegal. 

A proposed ban on bank mergers resulting in firms with assets over $100 billion isn’t merely a poor policy idea – it violates the law, notes BPI CEO Greg Baer in a new BankThink op-ed. Such a moratorium, which policymakers have recently suggested, would prevent banks from combining to achieve scale to meet massive cybersecurity threats and make costly tech overhauls. A $100 billion asset limit would bar 30 U.S. banks from any acquisition whatsoever, no matter how small, and limit major transactions for 11 others. But it would also be illegal: federal banking law states unequivocally that any bank merger application filed with the Federal Reserve is deemed approved after 91 days if the Fed does not act.  The Fed can approve or deny, but it cannot defer.

Here’s a sampling of BPI’s recent work on bank mergers:

  • Explainer of the legal steps for bank M&A applications
  • Statement on Biden Administration’s competition policy executive order
  • Op-ed on the myth of the bank-merger rubber stamp

Powell, Brainard Headed for Capitol Hill Next Week

Federal Reserve Chair Jerome Powell and Governor Lael Brainard will answer questions from the Senate Banking Committee next week at their nomination hearings. Powell’s hearing for renomination as Fed chair was scheduled for Jan. 11, while the hearing for Brainard – the nominee for vice chair of the central bank – will be Jan. 13. Both are expected to be confirmed. FHFA director nominee Sandra Thompson will appear alongside Brainard in a combined hearing.

7 Guiding Principles to Promote Lending, Further Objectives of CFPB Small Business Data Rule

BPI commented this week on a proposed CFPB rule that would implement changes to the Equal Credit Opportunity Act by requiring certain financial institutions to collect and report data on small businesses’ credit applications, including businesses that are owned by women or minorities. The proposed rule defines which institutions would be required to collect data, which institutions would be considered “small businesses,” what data would be requested and proposes general compliance expectations. The objective of Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was to facilitate the enforcement of fair lending laws and enable communities, governmental entities and creditors to identify business and community development needs and opportunities of women-owned, minority-owned and small businesses. BPI supports these objectives and efforts by the CFPB to achieve a final rule consistent with the statute’s intent. For the full press release on the comment letter, click here.
BPI also commented on the New York State Department of Financial Services’ recent proposed change to the state’s Community Reinvestment Act regulations that would evaluate banks’ extension of credit to minority- and women-owned businesses. While BPI supports the goal of preventing discrimination against underserved businesses and promoting credit access for such firms, the New York state policy change would layer multiple, very similar data collection rules on New York state-chartered banks. The letter urged New York to delay its rulemaking until the CFPB finalizes the Section 1071 rules.

What’s New in CBDC: Global Roundup

  • China: The Chinese central bank launched a pilot version of the digital yuan app on the Apple and Android app stores this week, according to Reuters.
  • Canada: Canadian government documents show that officials warned last year about “wide-reaching implications for the economy, the financial system” if the Bank of Canada issues a digital loonie. The partially redacted documents suggest some hesitation or concerns among officials about the prospect of a CBDC. The Bank of Canada held a series of meetings in 2020 with federal officials to gauge the potential implications.
  • Mexico: The Mexican central bank said last week that it plans to launch a CBDC by 2024, part of a plan to bolster financial inclusion.
  • Cambodia: The Bakong digital currency in Cambodia reaches nearly half the nation’s population, Nikkei reported, as a result of bank partnerships broadening usage of the CBDC.
  • Jamaica: The Jamaican central bank completed a CBDC pilot at the end of 2021 and expects to roll out its digital currency early this year.

McWilliams Resigns from FDIC After Board Clash

FDIC Chairman Jelena McWilliams resigned after an M&A rule dispute with Democratic board members raised larger questions about the agency’s governance and independence. McWilliams had called the unprecedented conflict – in which CFPB Director Rohit Chopra, also an FDIC board member, tried to circumvent McWilliams’ agenda-setting authority by launching his own rulemaking on bank mergers — a “hostile takeover” in a recent WSJ op-ed. After McWilliams’ departure, effective Feb. 4, Martin Gruenberg, another Democratic board member who joined Chopra’s effort, would be in charge until the Administration nominates and the Senate confirms a new chair.

In Case You Missed It

Potential Fed Names: Raskin, Jefferson, Cook

Sarah Bloom Raskin, a Duke law professor and former top Treasury official, is being considered for the Federal Reserve vice chair for supervision nomination, according to the Wall Street Journal. Raskin would be part of a slate of three nominees, the article said, joined by economists Lisa Cook and Philip Jefferson for other vacant Fed board slots. Cook is a professor at Michigan State University and Jefferson at Davidson College in North Carolina. If nominated, Raskin would likely enhance the central bank’s focus on climate risk.

Fed Minutes Stray from the Script

The FOMC minutes released this week departed from the standard formula, Chief Economist Bill Nelson wrote this week in one of his occasional emails on monetary policy. The minutes usually present the majority view first, then the second-most-popular alternative view, then the flip side of that view below. However, the most recent minutes stray from that format and instead appear one-sidedly hawkish, Nelson said, as noted in POLITICO’s Morning Money newsletter, Reuters and CNBC. Fed officials appear to be divided between those who want to raise rates and taper asset purchases fast, and those who want to do it even faster (notably missing a counterpoint view that it should go slower). The rare singlemindedness suggests that the FOMC worries it will be the first in decades to lose the fight against inflation, Nelson said.

Here are some other key takeaways from the minutes:

  • Leverage ratio: The leverage ratio requirement could imperil the Fed’s tapering process. Leverage ratios put pressure on the amount of safe assets like Treasuries that banks can hold. According to the minutes, “several participants raised concerns about vulnerabilities in the Treasury market and how those vulnerabilities could affect the appropriate pace of balance sheet normalization.” Fed officials said last year the central bank would consider changing the supplementary leverage ratio, but it has not yet done so.
  • Staying big: Fed officials are already discussing how they need to keep the balance sheet bigger than before because they don’t know how small it can get. “Several participants noted that the level of reserves that would ultimately be needed to implement monetary policy effectively is uncertain, because the underlying demand for reserves by banks is time varying. In light of this uncertainty and the Committee’s previous experience, a couple of participants expressed a preference to allow for a substantial buffer level of reserves to support interest rate control.”
  • Standing repo facility: The Fed is relying on the new standing repo facility, both for controlling interest rates and helping it get smaller. BPI is concerned that if they don’t allow banks to plan on using the facility when they are under liquidity pressure, the SRF will end up with the same stigma as the discount window.
  • Tighter interest margins for banks hurt financial stability: The Fed noted that lower net interest margins squeeze banks’ profits and therefore endanger financial stability.

Should Western Union Worry About Stablecoins?

Stablecoin proponents say the technology could displace firms like Western Union in overseas remittances. But stablecoins face several challenges before they could make such payments easy, columnist JP Koning wrote in a recent CoinDesk article.

  • They force users to ‘hop’ in and out of their familiar financial environment. People receiving remittances in stablecoins would have to jump out of cash or bank accounts onto stablecoin payment rails, then back in again. These extra “hops” are inconvenient and costly.
  • Miner fees add up. Some crypto platforms require that “miners” be paid a fee to validate transactions. Those fees can quickly add up to large sums.

Bloomberg Opinion: Bad News, London and New York. Finance Hubs Are Becoming Obsolete

While the title portends yet another analysis of New York commercial real estate, this article is actually an interesting look at how technology and regulation have changed the mechanics of securities trading, and where it can be conducted most efficiently.

Why bitcoin is worse than a Madoff-style Ponzi scheme

Comparing bitcoin to a Ponzi scheme is unfair to Ponzi schemes, the University of Oxford’s Robert McCauley wrote in a recent Financial Times op-ed. While Ponzi scheme victims can go after the schemer, there is no similar recourse for bitcoin holders to make a claim, he wrote. And because it costs money and energy to “mine” bitcoin, the asset is a negative-sum game as opposed to a zero-sum game like a Ponzi scheme.

BofA COVID Booster Initiative Boosts Food Banks

Bank of America will donate $100 to food banks and hunger-relief organizations for each U.S. employee that receives their COVID booster shot. Employees must register their booster by the end of January.

JPMorgan Chase Hires Ratner for Sustainability Position

JPMorgan Chase tapped Ben Ratner of the Environmental Defense Fund to advise banking clients on lowering their carbon footprint. Ratner will serve as an executive director in the firm’s Washington, D.C. office.

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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.