Stories Driving the Week
BPI Releases Report Profiling Innovative Bank Practices to Close Racial Equity Gaps, Bolster Diversity
The Bank Policy Institute this week unveiled a report offering best practices for banks as they intensify their efforts to support racial equity. The report, “The Time Is Now: 30 Best Bank Practices to Help Improve Outcomes in Black Communities,” is the result of a year-long effort to work with banks to identify, study and share innovative steps banks are taking to deepen their engagement, broaden access to affordable financial services and credit, diversify their workforces and serve as engines of shared prosperity. Many BPI members are already showcasing their efforts in this space, and this report will allow banks to share successful experiences on how to best meet the needs of their customers, employees, and the communities they serve. The profiled practices are intended to provide a menu of innovative options for banks to select from as they develop, enhance and tailor their engagement efforts to address inequity.
BPI’s Vice President of Government Affairs Fabrice Coles addressed some of these practices when he testified this week at the House Financial Services Subcommittee on Diversity and Inclusion’s hearing on George Floyd’s legacy and the financial services industry’s commitments to economic and racial justice.
“The nation’s banks are helping address racial inequity by leveraging business models, networks and resources to better serve Black communities,” Fabrice Coles said. “Much more work is left to be done but banks are engaged across the country in efforts to bring positive change—especially in the wake of the deadly pandemic and global awakening brought about by the murder of George Floyd.”
The best practices include, but are not limited to:
- Investments, such as equity capital infusions in Black-owned financial institutions;
- Partnerships, such as with governments, historically Black colleges and universities, affordable housing organizations and Black-owned broker-dealers;
- Product innovation, such as low-cost deposit accounts and responsible, affordable emergency loans; and
- Philanthropy delivered efficiently to new types of organizations, like providers of children’s programming.
In addition to supporting Black homeownership, credit access and entrepreneurship, banks are looking within their own businesses to make sure their workforces and senior leadership reflect America’s diversity. These best practices represent actions banks are already taking, but banks’ work to ensure Black Americans can build wealth and access opportunities will continue to evolve to meet the challenge.
Coverage of the report can be found in a CNN exclusive.
Quarles Casts Doubt on U.S. CBDC Prospects
In a speech that compared the novelty of central bank digital currency to the parachute pants fad, Federal Reserve Vice Chair for Supervision Randal Quarles this week raised doubts about the prospect of a U.S. CBDC, a debate he said has reached “fever pitch.”
“First, the U.S. dollar payment system is very good, and it is getting better,” Quarles said. “Second, the potential benefits of a Federal Reserve CBDC are unclear. Third, developing a CBDC could, I believe, pose considerable risks.” Those risks include siphoning low-cost business funding out of the banking system (by diverting deposits into CBDC, where they can’t be loaned out), cybersecurity vulnerability, illicit activity such as money laundering and a massive, costly overhaul of the Fed’s role in the economy.
Quarles is not the only senior official urging caution within the Fed. Chair Jay Powell has also said that the U.S. does not need to fast-track a CBDC to match China, that the U.S. dollar’s reserve currency status is cemented in its democratic rule of law and trustworthy legal system and that a CBDC would need Congressional support to move forward.
BPI has explored CBDC’s potential costs and benefits to the economy in a comprehensive working paper by President and CEO Greg Baer, who was interviewed for a recent Euromoney piece on the topic entitled “Beware the Hype Over Central Bank Digital Currencies.” “Apple stock has a bigger market capitalization and much greater stability than bitcoin. But I don’t think we’ll ever be using Apple shares to pay for our groceries or our electric vehicles,” he said in the article. He also pointed out in the piece that many benefits touted by CBDC enthusiasts are mutually exclusive or offset by risks such as a CBDC’s likely disruption of low-cost deposit funding that fuels economic growth. BPI has also published an FAQ guide to CBDC and blog posts on its impact on monetary policy, the Chinese e-yuan’s effect on the dollar and whether the Fed has the authority to issue a CBDC.
FinCEN Releases Broad List of AML Priorities Including Corruption, Cyber
The Treasury Department’s anti-money laundering priorities include corruption and cybercrime, according to a Wall Street Journal article this week citing BPI’s Angelena Bradfield. The priority list is required under the recently passed AMLA and signals where banks should concentrate their compliance efforts. “Plenty of work remains to turn these priorities into rules around implementing these priorities into AML programs, but we look forward to engaging with FinCEN and consider the announcement an encouraging first step,” Bradfield said in a statement. Treasury’s move comes as the U.S. government continues its implementation of a far-reaching AML overhaul enacted early this year, which includes a central database of beneficial owners of businesses meant to combat anonymous shell companies.
BPI Releases Statement on Climate Risk Hearing
BPI released the following statement this week in anticipation of the House Financial Services Subcommittee on Consumer Protection and Financial Institutions’ hearing entitled “Addressing Climate as a Systemic Risk: The Need to Build Resilience within Our Banking and Financial System”:
“Banks are responding to the demands of the low-carbon transition by helping clients evolve their business models, supporting client financing needs, developing new risk management tools and providing greater transparency of climate-related risks to investors,” said BPI Senior Vice President and Associate General Counsel Lauren Anderson. “However, policymakers should keep in mind that some policies and requirements currently under discussion could stifle these efforts and in particular, restrict finance flowing to businesses’ necessary investments in the journey to a lower-carbon economy. A flexible policy environment enables banks to make the necessary investments to support that transition.
“Banks are helping businesses adapt to a changing climate and transition to a greener economy, but overly prescriptive approaches or the blunt use of tools like the capital framework hinder their ability to participate in the economic transformation that is taking place,” Anderson continued. “What banks need now is a policy landscape that allows banks to help their clients invest in new technologies and a consistent lexicon to talk about these risks and their impacts.”
In a recent blog post, BPI has argued that regulators and lawmakers should ensure that they are not thwarting the green transition they seek to support by imposing prescriptive requirements that would force banks to curtail credit to carbon-intensive companies. In particular, climate-related capital charges would increase the cost of loans needed to finance companies’ transition to greener business models. Policymakers should also avoid taking a simplistic black-and-white – or in this case, “brown” vs. “green” – approach to labeling businesses’ emissions profiles.
Last year, BPI published an infographic explaining the difference between climate stress testing and the Dodd-Frank Act stress tests, which the Federal Reserve uses to ensure U.S. banks have enough capital to weather downturns. Climate stress testing is handicapped relative to its micro-prudential counterpart because it relies on a decades-long time horizon, suffers from material data gaps and oversimplifies bank behavior over the planning horizon. BPI also published a blog post outlining the challenges of climate stress testing, which limits its usefulness as a tool to manage climate-related risk.
Dividend Bans Raise Banks’ Cost of Capital, Hurt Economic Growth
The ECB published new research showing that the ban on dividends and share repurchases imposed in March of last year caused European bank stock prices to fall and raised their cost of capital permanently. As it is assumed in the economic literature on optimal capital regulation, higher cost of capital reduces lending and economic growth. The conclusion of ECB’s research aligns with BPI’s analysis published during the pandemic, including this Financial Times op-ed, a blog post and a research note alerting to the perils of imposing capital distribution restrictions outside the current regulatory framework.
Problems Mount for Crypto Exchange Binance as UK Moves to Ban It
The UK’s Financial Conduct Authority banned crypto firm Binance from doing business with UK customers, according to a release from the regulator this week. Binance’s UK ban follows similar bans issued against the crypto exchange by authorities in Japan and the U.S. Subsequent to its U.S. ban, Binance formed Binance.US, a separate crypto exchange registered with FinCEN, and hired former Coinbase executive and former Acting Comptroller Brian Brooks to run it. Although registered with FinCEN, Binance.US is reportedly banned in seven U.S. states. Further, recent press reports indicate that Binance is under investigation by the United States Department of Justice and Internal Revenue Service for money laundering and tax evasion. Binance’s UK ban marks another recent instance of international authorities cracking down on crypto. China has recently taken aim at crypto mining, and the Basel Committee on Banking Supervision proposed a very high capital requirement for crypto assets like Bitcoin held on banks’ balance sheets.
In Case You Missed It
NY Issues Guidance for Bank Ransomware Attacks
New York state’s Department of Financial Services issued guidance to banks and other financial firms on how to strengthen safeguards against ransomware attacks in the wake of several prominent breaches of critical infrastructure outside the sector. The guidance urges the firms not to pay ransoms when attacked, aligning with FBI guidelines. It also advises firms to report ransomware attacks within 72 hours and use best practices such as multi-factor authentication and anti-phishing training. BPI recently published a blog on 7 Things to Know About Ransomware.
BPI Featured in GARP on CBDC
BPI CEO Greg Baer’s recent statement on central bank digital currency in advance of a House Financial Services Committee hearing was featured in a GARP piece this week on FedNow: “The push for CBDCs is oddly timed given the revolution in real-time payments that is already underway, and its proponents ignore or minimize the reduction in lending and economic growth that would come if consumers and businesses could instantly move their money from bank deposits into a digital mattress. Major policy problems remain to be solved.”
Citizens CEO Says Bank Has ‘Earned the Right to Do More Deals’
Citizens CEO Bruce Van Saun said in a Financial Times interview this week that the bank has “earned the right to do more deals” by being thoughtful about its M&A moves and ensuring they make strategic and financial sense. Citizens recently agreed to buy HSBC’s branches on the U.S. East Coast.
