BPInsights: July 10, 2021

Stories Driving the Week

Credit-Sensitive Benchmarks in a Post-LIBOR World

As no new contracts for LIBOR will be written after 2021, markets are preparing for what comes next.  For derivatives markets, SOFR appears to be the predominant replacement rate, but for wholesale lending markets both lenders and borrowers are demanding a credit-sensitive benchmark.  In response, the free market is producing options like Bloomberg’s Short-Term Bank Yield Index (BSBY), ICE’s Bank Yield Index and American Financial Exchange’s Ameribor. The federal banking agencies have made clear that in their view lenders are free to choose a credit-sensitive benchmark for use in commercial loans, but recently the FHFA has issued regulatory guidance stating that credit-sensitive benchmarks come with the same risks as LIBOR and require examiner review and approval.  This note by BPI CEO Greg Baer focuses on one of those benchmarks, BSBY, and examines whether it raises manipulation or financial stability concerns.

White House Releases Executive Order on Competition  

The White House issued an executive order (and a related fact sheet) on competition July 9 addressing how the administration should address competition policy across a range of industries and business segments.  With respect to banking, the order called for a more robust government review of bank M&A and encouraged the CFPB to issue a rule on open banking.

On bank M&A, the fact sheet asserts that M&A has led to the closure of 10,000 banks over the past 20 years, resulting in disproportionate impacts on communities of color and higher costs for all consumers, though according to the data Treasury cites, the decline in the number of banks has been less than half that. Of course, in addition to Congress’s repeal of anachronistic interstate branch restrictions in the 1990s, the largest driver of consolidation over the last 20 years has been rapid technological changes that have dramatically increased economies of scale. A secondary driver has been dramatically higher regulatory requirements, which banks can better shoulder at scale.  Regardless, the order encourages the DOJ and the federal banking agencies to update their bank merger guidelines “to provide more robust scrutiny of mergers.”  It’s unclear exactly how the directive will be translated into policy changes, particularly in light of the fact that current DOJ guidelines already apply a stricter standard to bank mergers than mergers in any other industry, and that the banking agencies are independent and therefore not technically covered by executive orders. In response, BPI CEO Greg Baer said: “By any analysis, banking is among the most competitive, least concentrated industries in America, as anyone who has shopped for a credit card, mortgage or deposit account knows.  Moreover, banks continue to lose business to unregulated FinTechs or government-sponsored enterprises, whose presence in the market current DoJ guidelines inexplicably ignore in assessing market competition.   Those guidelines should be amended to reflect the underlying law.”

On open banking, the order encourages the CFPB to issue a rule under section 1033 of the Dodd-Frank Act “so consumers can more easily switch financial institutions and use new, innovative financial products.” Section 1033 basically requires the CFPB to prescribe rules requiring financial services providers like banks to make all of a customer’s information available at the customer’s request, but the CFPB never adopted a rule so the provision remains unimplemented.  The CFPB took a first step during the prior administration by issuing an advance notice of proposed rulemaking on section 1033, on which BPI commented.  All eyes are now on the new administration’s pick to lead the CFPB, Rohit Chopra, who once confirmed is likely to make a 1033 final rule a top priority. 

Chime is Suddenly Closing Accounts, Sometimes Without Returning Customers’ Money

FinTech platform Chime touts itself as a seamless gateway to banking for underserved customers, but the app has allegedly closed numerous customers’ accounts without adequate explanation or reasoning, sometimes without returning their deposits. These alleged closures, covered by ProPublica this week, have spawned a rash of consumer complaints and left low-income consumers in the lurch. The Chime saga marks the latest allegation of poor consumer treatment that can occur when FinTechs are not supervised as robustly as banks, even as they offer similar services. The article reports that Chime portrays the complaints as driven by fraud detection crackdowns related to government stimulus or unemployment payments, even when Chime has marketed its app as a quick way to receive stimulus funds. In addition, Chime has garnered regulatory scrutiny in California by branding itself on its website as a “bank” despite not having a bank charter.  Chime later agreed to stop calling itself a bank.

WSJ: Flaws Emerge in Justice Department Strategy for Prosecuting Wall Street

A judge’s dismissal of a Justice Department case against Barclays executive Robert Bogucki illustrates flaws in a strategy to ensnare individual employees in cases against large financial firms rather than levying fines on banks, The Wall Street Journal reported this week. The DoJ strategy — formalized in part in a 2015 memo by then-Deputy Attorney General Sally Yates in 2015 — began several years after the Global Financial Crisis in response to critiques that the government focused too much on fines. The memo said companies would not receive full credit for cooperation unless they turned over everything they knew about employees’ misconduct.

“The government completely overreached,” said the judge who dismissed Bogucki’s case without hearing the defense present its evidence. “Lines have to be very clear, because when somebody crosses a line and is likely to end up in jail, you want that line to be clear.” Critics of the strategy say it pushes banks into acting as agents of the prosecutors.

Biden Sanctions Path Diverges from Trump Administration with Emphasis on Allied Efforts

The Biden administration plans to take a different approach from the Trump White House on U.S. sanctions, according to a recent Wall Street Journal article that previews some of the conclusions of the pending Treasury Department-led review of sanctions policy. The review will be completed near the end of summer, the article says. In its use of sanctions, the administration plans to avoid collateral economic damage and coordinate with allies, according to the piece. Areas for U.S. collaboration with allies could include sanctions against China over human-rights abuses and against Russia for attacks on political dissidents. Elizabeth Rosenberg, the nominee for Treasury assistant secretary for terrorist financing who is expected to play a key role in sanctions policy if confirmed, stated in her June Senate confirmation hearing that “[t]his work requires close collaboration with Congress, across the executive branch, and with foreign counterparts, the private sector and civil society.

OCC Reshuffle Puts Supervision Teams Directly Under Hsu 

The OCC this week announced organizational changes that will give Acting Comptroller Michael Hsu direct oversight of the agency’s supervision units and Office of Management. The Chief Operating Officer position, currently held by Blake Paulson, will be eliminated. Paulson will move to a new position, the Senior Deputy Comptroller for Supervision Risk and Analysis. The agency will also merge its Enterprise Risk Management Office with its Office of Enterprise Governance and Ombudsman. The changes are expected to take effect this summer.

In January 2019, then-Comptroller of the Currency Joseph Otting created the Chief Operating Officer position as part of changes to the agency’s executive-reporting structure.  Comptroller Otting consolidated all OCC bank supervision, bank supervision policy, economics, compliance and community affairs, and innovation unit reporting lines under a single Chief Operating Officer (Morris Morgan) who was a direct report to the Comptroller.  The executive-reporting changes announced by the OCC this week will effectively revert back to an OCC leadership structure in place prior to the creation of the Chief Operating Officer position.

FSB Unveils Climate Risk Roadmap as Quarles Outlines Stability Priorities 

The Financial Stability Board this week outlined its roadmap for addressing climate-related financial stability risks. The blueprint is meant to keep international regulators on a consistent track as they weigh climate-related risks in the financial system. It covers four blocks of work including disclosure, data, vulnerabilities analysis and regulatory and supervisory policies and practices. Its publication comes as FSB Chair Randal Quarles, also Vice Chair for Supervision at the Federal Reserve, laid out his priorities in a letter to G20 financial officials ahead of their July 9-10 meeting with the FSB. He highlighted recent weaknesses among nonbank financial intermediaries, such as money market mutual funds, LIBOR transition and cyber risk as areas of focus for the FSB.

In his letter to the G20, Quarles wrote: “A large, and growing, number of international initiatives are underway on addressing the various financial risks posed by climate change. This reflects the increasing attention paid to the topic as well as the global and cross-sectoral nature of climate-related financial risks. The interconnected nature of climate-related financial risks and the growing body of work to address them reinforce the need for coordinated action.”  Quarles also stressed that, “The FSB is helping to bring cohesion to climate-related disclosures” and the FSB is calling for an acceleration of progress in the implementation of disclosure requirements.

In Case You Missed It

OCC Drops Cases Against Former JPM, Citi Forex Traders

The OCC this week announced it scrapped administrative cases against two former JPMorgan and Citigroup foreign exchange traders, Richard Usher and Rohan Ramchandani, according to a Law360 article. Usher and Ramchandani were acquitted by a federal grand jury on foreign-exchange rigging charges in 2018, but the OCC had continued pursuing its own enforcement actions. The OCC decision marks a rare instance of the agency dropping administrative proceedings years in the making.

WSJ: Fixing Climate Change Isn’t the Central Bank’s Job

As the ECB marks climate change as a priority in a major strategic review, central banks should proceed with caution as they move to incorporate green finance into their mandates, Jon Sindreu wrote this week. Nebulous data and inconsistent metrics could introduce uncertainty into central banks’ core missions, Sindreu said. While ECB head Christine Lagarde admitted recently that she doesn’t know whether the green transition will increase or decrease inflation, it’s clear that small changes in funding costs are not a good way to meet emissions goals and distract from the targeted policies that could really make a difference.

Truist CIO Positions Combined Bank for Innovation

The merger that created Truist from BB&T and SunTrust was partly motivated by the prospect of enhanced digital capabilities, according to a Wall Street Journal article this week. Truist Chief Information Officer Scott Case is prioritizing investments that support innovation to enable the bank to compete in the digital banking era, according to the piece. 

BNY Mellon to Acquire Fund Management Tech Firm Milestone Group

BNY Mellon is aiming to boost its digital capabilities with a planned acquisition of Milestone Group, whose platform automates certain fund management and investment functions, the bank announced this week. The acquisition will expand BNY Mellon’s digital offerings and improve timeliness and accuracy in core accounting and asset services, the bank said. Terms of the deal, which is expected to close in the second half of 2021, were not publicly disclosed. 

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Disclaimer:

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.