BPInsights: Jun 8, 2024

Don’t Be Like the SEC. Coordinate Often on Cyber Regulations.

The U.S. Senate Committee on Homeland Security and Governmental Affairs hosted a hearing this week to examine ways to streamline federal cybersecurity regulations and improve harmonization among the agencies tasked with enforcing these rules. BPI submitted a statement for the record reiterating its recommendations to identify duplicative and conflicting regulatory regimes, establish common frameworks and promote reciprocity.

Heather Hogsett, senior vice president, technology and risk strategy for BITS, stated: “Regulations are effective when those responsible for developing and enforcing those rules coordinate their approaches. The current state of affairs is a complex web of competing priorities where rules aren’t just duplicative but create confusion and contradict one another — the most glaring example being the SEC’s cyber incident disclosure rule that undermines congressionally mandated efforts to improve cyber incident response. Redundant and contradictory regulations strain the teams tasked with defending the nation’s financial system and harm America’s cyber preparedness. Regulators must work together to identify and address this overlap. We thank Congress for prioritizing this important discussion.”

To learn more, click here.

Five Key Things

1. House Financial Services Committee Announces FDIC Hearing 

The House Financial Services Committee this week announced a hearing on June 12 focusing on oversight of the FDIC’s “failed leadership and toxic workplace culture.” Lawmakers are expected to summon FDIC Chairman Martin Gruenberg to testify, but it is unclear whether he will do so. The announcement follows Gruenberg’s appearance before the Committee last month during a regular prudential regulatory oversight hearing, where lawmakers from both parties excoriated the agency chief over the revelations of sexual harassment and other deep-seated issues in a recent external probe of the agency’s workplace environment. Gruenberg recently said he would resign when a Senate-confirmed successor is in place. So far, there has been no nomination of his replacement.

2. The Supreme Court Just Ruled on National Bank Preemption. But What Is It, and Why Does It Matter?

When it comes to national banks – banks that hold federal OCC charters – federal law takes precedence. The legal principle of national bank preemption means that federal laws supersede any state laws that interfere with a national bank’s powers to operate and do business. The concept of federal preemption extends beyond banking – it is enshrined in the U.S. Constitution and provides that federal law is the supreme law of the United States.

What happened: Last week, the U.S. Supreme Court issued a decision in a case called Cantero v. Bank of America. The case centered on whether a national bank is required to follow a New York law requiring banks to pay interest on mortgage escrow accounts. The decision points to the Supreme Court’s historical precedents and says courts should compare state laws with the laws that were at issue in those earlier cases to determine if they are preempted.

Why it matters: The case is important because the Supreme Court was deciding how lower courts should determine which state laws apply to the activities of national banks – and, specifically, the extent to which those laws may be preempted by federal law.

Learn more: A BPI explainer outlines what the Cantero case is, how national bank preemption works and how this important Supreme Court ruling will affect it in the future.

3. Banks Told to Brace for ECB Fines Over Climate Risk Handling

A European Central Bank supervisory official confirmed that banks may face fines for failing to meet certain milestones in handling climate risk, according to Bloomberg. The comments by ECB Supervisory Board member Kerstin af Jochnick follow an earlier Bloomberg report about four banks facing fines related to climate risk assessment deadline lapses. “Though likely to be largely symbolic in size, the fines represent an historic step and distinguish the ECB from the US Federal Reserve in its approach to addressing climate change,” this week’s Bloomberg article said. The news follows a speech this week on banks and climate from ECB supervisory chief Claudia Buch, who said that “almost all banks see climate-related and environmental risks as material financial risks and are adjusting their risk management step by step,” but that “a great deal more work lies ahead.” Buch said that “If they don’t meet our supervisory expectations, we can take applicable measures, for example by requiring better risk management or higher capital.”

  • Transparency: Since supervisory penalties are relevant information to investors that would typically be included in disclosure forms, such fines would presumably warrant transparency with the public. ECB penalties are generally published on the central bank’s supervision website, though sometimes with a delay or anonymized details. It’s not yet clear what the details of these fines are, but they signal an aggressive approach to oversight of a still-nascent risk management area.
  • Modeling challenges: Important context should be considered in banks’ assessment of climate risks – namely, the uncertainty in modeling such risk and the reality that climate risk is more ordinary than some policymakers assume – that is, it’s like any other risk on a bank’s balance sheet rather than an existential risk that threatens their capital. 

4. CFPB Launches Registry of Nonbank Lawbreakers

The CFPB this week finalized a rule to create a registry of nonbank firms that have violated consumer protection laws. Such nonbank firms would have to register with the CFPB upon any violations, and a senior executive from a firm would have to attest in writing that the company is complying with any relevant orders. The action is the CFPB’s latest move targeting nonbank financial firms.

  • Fine print: The rule also requires nonbank affiliates of insured depository institutions to register. For these affiliates, the attestation requirement doesn’t apply.

5. CFPB Launches Process to Recognize Open Banking Standards

The CFPB issued a rule this week specifying how standard-setting bodies can obtain recognition by the Bureau in the context of its open banking, or financial data-sharing, rule under Section 1033 of the Dodd-Frank Act. The rule lays out both the required attributes for such standard-setters and the process they must follow to receive official recognition from the CFPB. The Bureau said it is aiming to avoid “dominance” in this market by larger industry incumbents. The attributes it requires include transparent procedures, “balanced decision-making”, consensus-driven standards development and due process and appeals.

  • Changes from the proposal: The rule replaces the term “qualified industry standard” with “consensus standard,” and adds a definition of “recognized standard setter,” a term not defined in the proposed rule. The maximum duration of the CFPB’s recognition of a standard-setting body has also been extended from three years to five years.
  • Context: The Section 1033 rule governs how data can be linked between financial accounts and shared between financial firms. The CFPB released a proposal in October 2023. Large banks are spearheading the transition to APIs, a more secure method of data sharing, and calling to eliminate the less secure method of screen scraping. Standard-setting bodies can play an important role in these efforts by providing a blueprint for firms to adapt their processes and share data securely.

In Case You Missed It

U.S. Dollar Now Accounts for Nearly Half of Global Payments

The U.S. dollar now makes up more than 48 percent of global payments, according to a recent chart from Macrobond, a macroeconomic data provider. The chart breaks down currencies dominating the SWIFT payment system. The euro’s use, in contrast, appears to be declining, accounting for 23 percent of global payments compared to 40 percent two years ago. In a LinkedIn post, Macrobond didn’t suggest a reason for the trends, but the dominance of the dollar strikes a contrast with fears of U.S. CBDC advocates that the U.S. currency has diminished in prominence worldwide.

Jurisdiction Back-and-Forth Continues in CFPB Late Fee Case

The U.S. Court of Appeals for the Fifth Circuit once again halted the transfer of a lawsuit against the CFPB’s credit card late fee rule from the Texas federal court to one in Washington, D.C. A three-judge panel at the court said that the transfer would be stayed, or paused, until close of business on June 18. For the second time, Texas-based U.S. District Judge Mark Pittman attempted to send the case to D.C., but industry plaintiffs successfully sought to stop that transfer.

The Crypto Ledger

Here’s what’s new in crypto.

  • Vetoed: As expected, President Joe Biden vetoed bipartisan legislation to invalidate the SEC’s Staff Accounting Bulletin 121. The policy precludes banks from providing certain custody services by requiring them to keep custodied digital assets on their balance sheets, in a departure from normal custody banking practices.
  • Crypto miners: So-called crypto “miners” are sitting on a goldmine in the perspective of artificial intelligence firms, which are looking to make use of the data centers that power energy-intensive crypto mining. “The artificial-intelligence boom has created an unprecedented shortage of both data-center space and the graphics-processing unit chips used in AI, as well as quick access to enough electricity to power it all,” according to Bloomberg. This pursuit of scarce data-center capacity “is leading many in AI to a slew of crypto-mining companies, which already sit on the necessary resources and are looking for more-profitable uses for them.”
  • Legislative movement: After the House passed a crypto regulation bill recently, the Senate is working on its own, according to POLITICO. Senate Agriculture Committee leaders Debbie Stabenow (D-MI) and John Boozman (R-AR) are working to revise a bill that would overhaul U.S. crypto oversight.

Santander Launches Healthcare Innovation Challenge

Banco Santander and the Oxentia Foundation recently announced the launch of the Santander X Global Challenge / Innovation in Healthcare, which invites startups and emerging businesses in 11 countries to receive recognition in healthcare innovation. Areas of focus include technology, operational efficiency and improved patient care.

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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.