BPInsights: June 17, 2023 - Bank Policy Institute

Late Fees, Chatbots: CFPB’s Chopra on the Hill

CFPB Director Rohit Chopra testified before House and Senate panels this week at semiannual oversight hearings. Here are some key takeaways from his testimony.

Late fees: The CFPB’s late fee proposal was a major focus of the Senate hearing. Banking Committee Ranking Member Tim Scott (R-SC) suggested that late fees play an important deterrent role. “Let’s be honest, no one likes paying late fees, but they do encourage financial discipline,” Scott said. He expressed concern that the CFPB’s campaign against fees “will do more harm than good, and actually end up restricting access to credit for low- and middle-income Americans with limited credit histories. To make matters worse, this proposal has major gaps and errors in the data used, and the procedure applied.”
Pricing: The CFPB proposal would drastically lower the safe harbor level under which late fees are considered “reasonable” under the law. But curtailing late fees wouldn’t eliminate the costs associated with late payments, Scott said. “There’s this misnomer that somehow the government can just snap its fingers and say the fee is no longer there,” he said. “But it’s embedded in the cost of everything else,” such as higher interest rates or limited credit availability. Sen. Thom Tillis (R-NC) echoed that concern. “It looks like your data doesn’t account for the actual costs incurred by banks to actually manage these accounts,” he told Chopra. “So if banks aren’t able to cover their full cost, won’t that lead to driving up prices for consumers who will continue to be banked?” Chopra pushed back on this notion and said banks would be able to recover the costs.
Redefining ‘abusive’: Rep. Andy Barr (R-KY) pressed Chopra on the Bureau’s policy statement on abusive acts and practices, which takes a sweeping approach to what is considered “abusive.” “It’s kind of like the Supreme Court Justice Potter Stewart in 1964 when he was asked to describe his test for obscenity. He said ‘I know it when I see it,’” Barr said. “ This vague and ill-defined guidance on what abusive means under UDAAP sounds a lot like Justice Stewart’s test for obscenity: abusive is whatever you say it is.”
Regulatory structure: Sen. J.D. Vance (R-OH) asked Chopra about his views on the bank regulatory and supervisory system. Vance asserted that “the Fed is both an over-burdensome regulator but also a very ineffective regulator; that they take up a lot of time but don’t actually do a whole lot to make the banking system safe” and asked if the OCC was a better regulator than the Fed. He also expressed dismay about recent supervisory failures from the San Francisco Fed. “I think if we were starting from scratch, we probably would not create this balkanized system of who’s accountable for oversight,” Chopra said. “From my viewpoint as having backup supervision on consumer for all types of banks, including large banks and others, as well as from the FDIC board, I do think inconsistency in supervisory approach does have costs.”
Data sharing: The CFPB plans to issue a rule on consumer-authorized data sharing (under Dodd-Frank’s Section 1033 provision) in October, Chopra said. In response to Rep. French Hill (R-AR), Chopra explained why the CFPB focused on specific types of data such as transaction data.
Arbitrage: Chopra said the Bureau is “focusing more heavily on supervision of nonbank financial firms, which have not always been subjected to similar oversight as local banks and credit unions.” He added, “We’ve activated unused authorities to minimize regulatory arbitrage by nonbank firms seeking to gain a competitive advantage.”
Other topics: Lawmakers also discussed a pending small business data collection rule, the importance of the notice-and-comment rulemaking process and other issues.

Five Key Things

1. Fed to Release Stress Test Results on June 28

The Federal Reserve will release the results of its latest bank stress tests on Wednesday, June 28 at 4:30 p.m. Eastern Time, the central bank announced this week. This year’s scenario featured a severe global recession with heightened stress in commercial and residential real estate. included an additional “exploratory market shock” to assess their sensitivity to interest rate risk in the trading book. For more details, please refer to our initial analysis regarding the expectations for the DFAST 2023 results.

Context: This year’s stress test results release will come as policymakers prepare to implement the Basel changes to the capital framework in the U.S. Vice Chair for Supervision Michael Barr has said he expects the Basel proposal to be issued this summer. These changes may raise capital requirements for large U.S. banks. The results also come after large banks proved resilient to real-life stress in the banking sector.

2. Beyond the ‘Pause’: Banking Nuggets from Powell’s Press Conference

Federal Reserve Chair Jerome Powell spent most of his post-meeting press conference answering questions on core FOMC topics like monetary policy and inflation. But some notable banking topics also emerged in the Q&A. Here are a couple of key exchanges.

Balance sheet, ON RRP: Powell responded to a question about how he will judge whether “reserve scarcity” is approaching, and whether he is considering lowering the rate on the ON RRP facility to “take some pressure off banks.” Powell noted Treasury Secretary Janet Yellen’s recent comments about avoiding market disruption. He said the Fed will be monitoring market conditions carefully as Treasury refills the TGA (its account at the Fed). “The adjustment process is very likely to involve both a reduction in the RRP facility and also in reserves. It’s really hard to say at the beginning of this which will be greater.” He observed that the system is starting out at a high level of reserves and “still elevated” RRP take-up, “so we don’t think reserves are likely to become scarce in the near term or even over the course of the year.” The RRP facility “doesn’t look like it’s pulling money out of the banking system; it’s actually been shrinking here lately,” Powell said. Asked whether the FOMC would reduce the ON RRP rate, Powell said “I wouldn’t say that that’s something that’s likely that we would do in the near term.”
Banking system risk: Powell also received a question on systemic risk and the banking turmoil. The Fed is monitoring risks of losses in commercial real estate lending carefully, Powell said. “To the extent it’s well-distributed, then the system could take losses. We do expect that there will be losses, but there will be banks that have concentrations, and those banks will experience larger losses. So we’re well aware of that,” he said. On nonbank financial risk, he noted that the nonbank sector was “where issues really arose” in the pandemic and that the Administration is working to address Treasury market issues. “In terms of the events of March … we will be carefully monitoring that situation,” he said. “Our job generally involves worrying about a lot of things that may go wrong, and that would include the banks. It might be hard for me to identify something that we don’t worry about rather than a thing that we do worry about. So we’re watching those things very carefully.” The Fed can take any tightening in credit conditions into account in its rate setting, Powell said.

3. CFPB Late Fee Proposal Threatens Consumers’ Choice and Rewards

Right now, the credit card market is competitive and offers a wide range of options. The CFPB’s recent late fee proposal could change that.

The CFPB recently proposed to cap the “safe harbor” for credit card late fees at $8. This would drastically reduce the level at which late fees are allowed under the law. The CFPB is touting its proposal as good for consumers, but it would actually constrain consumers’ ability to seek credit cards that meet their individual needs. It would also harm consumers by raising the costs of credit cards and decreasing the availability of credit for those with lower credit scores.

According to a recent survey conducted by Morning Consult on behalf of BPI:

82% of adults agree that consumers have many options to choose from when shopping for credit cards.
8 out of 10 adults agree that the credit card market is competitive.
91% of consumers with rewards cards think it is important that their financial institution continue to offer credit cards with rewards.

Bottom line: If the CFPB wants to benefit consumers, it should not move forward with a proposal that takes choices out of their hands. Learn more here.

4. The Risks the OCC is Watching

The OCC this week released its semiannual risk perspective report, giving a glimpse into the risks the agency is monitoring. At a press briefing surrounding the report, Acting Comptroller Michael Hsu also weighed in on other relevant banking regulatory topics. Hsu said he was “open-minded” to bank M&A applications. “We will act on them in a timely manner consistent with the law and our internal policies and procedures,” he said. “Healthy mergers are good for the economy, they’re good for the banking industry. What’s a healthy merger – that’s defined by statute. … Where there may be an unhealthy merger, we will apply appropriate scrutiny.” Hsu also said the spring banking stress pushed back the timeline for finalizing the new Community Reinvestment Act rules. Here are some takeaways from the report which concluded that operational and compliance risks remain elevated.

Liquidity: Liquidity strengthened in the banking system after the spring bank failures, the report said. It encouraged banks to test their liquidity regularly and emphasized the need to ensure access to ready sources of funding to meet contingent needs. “Examples include repurchase lines, Federal Home Loan Banks capacity, and access to Federal Reserve facilities,” the report said.
Interest rate risk: The OCC stressed the importance of interest rate risk modeling amid uncertainty about future rate movements.
CRE: Banks should prepare for a potential downturn in commercial real estate, the report suggested.
Technology: The OCC cautioned banks to safeguard against cyberattacks and maintain strong fraud controls, including around P2P payments. In addition, the report reiterated that crypto asset products and services warrant a cautious approach. The OCC suggested that as part of a bank’s risk management practices, it may be prudent for bank management to monitor digital channels for unusual or higher-volume activities (such as outflows of deposits), prepare and train call center staff, and monitor social media for shifts in sentiment or other negative news.
Supervisory actions: The report included a breakdown of OCC’s outstanding Matters Requiring Attention. Nearly half of the MRA concerns centered on operational risk, with compliance and credit risks second and third.
Management of climate-related risks: The report noted that large banks have been making progress to incorporate climate-related financial risks in their risk management frameworks and policies. At the same time, the OCC noted that large banks overall have significant additional work to do to move those programs to maturity.

5. Capital, Climate, Crypto: Yellen on Capitol Hill

Treasury Secretary Janet Yellen testified before the House Financial Services Committee this week. Although the main topic of the hearing was the state of the international financial system, Yellen discussed several other key topics, such as China, inflation and the failure of Silicon Valley Bank. Here are some notable takeaways.

Capital: Some lawmakers raised questions about the implications of upcoming Basel bank capital changes. Punitive capital charges associated with capital markets activities are “counterproductive to promoting liquidity and efficient markets,” said Rep. Frank Lucas (R-OK). Treasury will carefully consider those implications, Yellen said, “particularly for the Treasury market, where we have a particular responsibility.” Rep. Andy Barr (R-KY) noted several instances in which Yellen said the banking system is well capitalized. He warned that Basel capital changes could raise required capital by 20 percent or more and could sideline financing from the economy.
Supervision: Yellen referred to the Fed’s report on SVB supervision and said the turmoil set off by SVB’s failure “certainly did concern me.” “I believe that … the bank regulators do have the authority to put in place effective regulations and supervision to address these issues,” Yellen told Rep. Nydia Velazquez (D-NY) at the hearing. “Some of the supervisory standards were relaxed. And we think it’s appropriate, the President thinks it’s appropriate and I think the Federal Reserve thinks it’s appropriate to revisit some of the changes, and also to shore up bank supervision.”
Climate: In response to another question from Rep. Lucas, Yellen expressed concern about an EU proposal on ESG reporting that will apply to non-European companies with a significant presence in the EU. The measure has been widely criticized as overly broad and could wield meaningful effects on U.S. companies with European footprints. “While we’re supportive of the high-level aims of the [Corporate Sustainability Due Diligence Directive], we are concerned that it has extraterritorial scope and potential for unintended negative consequences for U.S. firms,” Yellen said.
Stablecoins: The Financial Stability Oversight Council, which Yellen leads, continues to believe there are regulatory gaps in crypto oversight, she said. Those gaps include spot markets for crypto assets that are not securities, she said, as well as stablecoins.

In Case You Missed It

LCR Disclosures and Deposit Behavior

The latest quarterly liquidity coverage ratio disclosures from large banks offer insights into deposit flows amid the spring banking turmoil. The LCR disclosures indicate that non-operational deposits at non-GSIBs declined by the most in the first quarter and stable retail deposits at those banks grew the most.

What it is: Every quarter, Category I – Category III banks publish LCR disclosures. The disclosures include not only the projected cash inflows and outflows that go into the LCR metric, but also the underlying balance sheet items. They are the only publicly available source for retail and wholesale deposits broken down by stability category. Exhibit 1 reports the percentage change in stable and other retail deposits and operational and non-operational wholesale deposits for GSIBs and non-GSIB. Unfortunately, the data are only provided on a quarter-average basis, so the information on the consequences of the banking turmoil that started in March is diminished.
Flows: The sample had 14 banks that reported LCR disclosure in both 2022q4 and 2023q1, which BPI economists then used to calculate the percentage change for certain variables. As might be expected, the largest percentage outflow was in non-operational deposits – more “movable” deposits in excess of those that companies and institutions keep on hand to service their daily needs – at larger mid-size banks (non-GSIBs). The largest increase was stable retail deposits (insured deposits) at non-GSIBs. The results could reflect large uninsured deposits being broken up into many small insured deposits by IntraFi.

BPI also examined how these changes were correlated bank-by-bank with triggers of the recent bank distress. The variables in Exhibit 1, specifically Stable Retail Deposits to Non-Operational Funding, were used as the dependent variables for the regressions. For independent variables, economists used various combinations of the uninsured deposits as a percent of liabilities, uninsured deposits as a percent of deposits, the tangible common equity ratio adjusted for after tax losses on held-to-maturity securities, and the ratio of losses on HTM securities to TCE from 2022Q4. None of the variables were statistically significant. The lack of statistical significance is most likely simply the result of there being only 14 observations, but it may suggest that the deposit outflows and inflows observed in the first quarter for LCR-reporting banks reflected broad trends rather than concerns about specific banks.

Senators Target Fraud and Scams on Venmo, Cash App

A group of Senate Democrats led by Banking Committee Chair Sherrod Brown (D-OH) urged PayPal (the owner of Venmo) and Cash App to crack down on fraud and scams proliferating on their platforms. “Venmo’s consumer protection policies have not kept pace with the explosion in customer interest in the platform,” the lawmakers wrote in the letter to PayPal. The senators sought answers by the end of June from both firms on the number of fraud reports they receive, actions they are taking to combat such fraud and other related topics.

Context: The share of disputed transactions, including fraud allegations, made using PayPal, Venmo and Cash App are higher than those via Zelle, the bank-owned payment platform, according to 2022 survey data. The share of disputed transactions made using PayPal is 3x higher than those on Zelle, and the share made via Cash App is 6x higher relative to Zelle.

Tethered to China: Tether’s Commercial Paper Exposure

A recent CoinDesk report notes stablecoin issuer Tether’s exposure to Chinese financial institutions, as detailed by documents obtained by the news outlet:

The Agricultural Bank of China Ltd, Bank of China Hong Kong, Bank of Communications Co Ltd, Industrial and Commercial Bank of China, China Merchants Bank, China Construction Bank, China Everbright Bank Co and more all issued commercial paper and securities that Tether used to back its token.

Treasury’s Steele Talks Faster Payments

Treasury’s Assistant Secretary for Financial Institutions Graham Steele gave a recent speech highlighting key developments in payments innovation. The speech previewed the upcoming rollout of the Federal Reserve’s FedNow, while acknowledging that the Fed is not the first mover in the real-time payments space: “[T]he introduction of FedNow adds another crucial element to the payments landscape by creating a second operator alongside the existing private sector Real-Time Payments (RTP) network operated by The Clearing House,” he said. “Having multiple payment operators promotes choice and competition in payments, driving innovation and encouraging the development of new payment services and features. It can also enhance resiliency in the payments system by providing redundancy that helps ensure that disruptions or outages in one operator do not completely halt the flow of transactions.” Treasury is piloting FedNow as an early adopter for “payments where speed is particularly important” – notably, it has not adopted RTP for that purpose despite the service being on the market for years.

CBDC: Steele said Treasury is leading an interagency effort to consider the implications of a potential U.S. CBDC, including flight-to-safety run risks that could destabilize private sector lending. Other considerations include privacy and financial inclusion. Treasury’s work on the Administration side aims to complement that of the Federal Reserve. “Striking the right balance between these priorities, and realizing potential benefits while minimizing risks, would depend on the design of both policy and technology,” he said.
Data sharing: The CFPB recently convened a Small Business Review Panel to examine the impact of its proposals on consumer-permissioned financial data sharing, which Steele said is “a positive step towards defining the rules and responsibilities for data providers.” He noted that Treasury recommended that the CFPB review its authorities to consider if and how the agency might supervise data aggregators.

Who’s Replacing Silvergate, Signature as Crypto Industry’s Banking Back-Office? Read On…

A few global banks appear to be replacing failed banks Silvergate and Signature as crypto’s conduit to the banking system, according to Bloomberg. Internationally, some Swiss, Asian and UK banks such as Standard Chartered and SEBA Bank are playing a role.

Stateside: The U.S. banks cited in the article are Customers Bancorp, Cross River Bank, Western Alliance, Axos Financial and FV Bank International. Services offered to the crypto sector include deposits and real-time payments. The risks inherent in crypto ties raise the question of who is overseeing them—in this case, turns out: nearly everyone. Two of these banks (Customers and Western Alliance) are state-chartered with the Fed as the primary federal regulator. Axos Bank is an OCC-regulated savings and loan association. Cross River is state-chartered with the FDIC as the primary federal regulator. FV is licensed and regulated by the Office of the Commissioner of Financial Institutions (OCIF) in Puerto Rico.

CFPB Sanctioned for Abusive Acts and Practices

The U.S. Court of Appeals for the 11^th Circuit affirmed this week that the CFPB’s discovery abuses justified dismissing part of its enforcement action in a Georgia robocall case.

Background: The district court found that the CFPB used improper tactics to obstruct its witnesses from being deposed, putting “up as much opposition as possible at every turn” in the case. These tactics included witnesses reading from memory aids to bury defendants in a deluge of information, and asserting objections to questions that the court repeatedly ordered to be answered. In addition, a CFPB witness read from memory aids, was unable to answer questions without them and refused to address evidence supporting the defendant’s perspective.
District court decision: Because the CFPB’s conduct was egregious, and “the Court [was] not optimistic that reopening the depositions would be fruitful,” the district court granted defendants’ motions for Rule 37 sanctions, struck all claims against the five service-providing defendants, and dismissed them from the case. (Rule 37 is a measure in the federal court procedure rulebook that lays out penalties for forbidden conduct in the discovery process.)
What’s new: The 11^th Circuit panel affirmed the district court’s dismissal because “sanctions were clearly permitted under Rule 37(b) and the CFPB’s discovery abuses were sufficiently egregious to merit dismissal; thus, the district court did not abuse its discretion.”

Long-Term Bank Debt Continues to Rebound From Recent Turmoil

The European market for long-term bank debt – known as AT1 in European parlance, TLAC in the U.S. – continues to recover from upset caused by Credit Suisse AT1 holders faring worse than equity holders in its resolution. Prices of such bonds climbed on Tuesday to their highest level since SVB’s collapse, according to Bloomberg.

Teetering BRICS Development Bank Suggests Reality Check for Dollar Skeptics

For those concerned that China’s state-run economic system and currency will dominate the dollar in global finance, the state of the New Development Bank paints a reassuring picture. The global financing hub run by the “BRICS” countries, including Russia and China, is struggling to make new loans and raise dollar funds to pay its debts, according to the Wall Street Journal. The bank has faltered in the wake of Russia’s invasion of Ukraine and subsequent global crackdowns on Russian financing and commerce. Worries that China will overtake the US as a powerhouse of global financing have fueled efforts to match the Asian nation in central bank digital currency, among other areas.

The Crypto Ledger

The SEC’s cases against Binance and Coinbase continued to drive questions about the future of crypto in the U.S. For a good summary of where things stand in the SEC’s case against Coinbase, read Molly White’s recent analysis. Here’s what else is new in crypto.

House bill: House Financial Services Committee Chair Patrick McHenry (R-NC) said at a hearing this week that he plans to hold a markup of crypto legislation when lawmakers return from July 4 recess. McHenry said he invites bipartisan feedback on the legislation. Ranking Member Maxine Waters (D-CA) expressed concern with a “provisional registration” measure in the draft legislation that she said could allow crypto firms accused of breaking the law to continue doing business.
Freeze: A federal judge directed Binance and the SEC to continue negotiating over a potential freeze of the crypto exchange’s assets. She declined to impose a temporary restraining order freezing the assets.
FTX latest: U.S. prosecutors withdrew five charges against FTX founder Sam Bankman-Fried as they head toward an October trial – but the move may be a temporary victory for the disgraced crypto mogul. The prosecutors asked the judge overseeing the case to schedule a second trial in early 2024 on those five counts. Bankman-Fried’s attorneys had argued that U.S. prosecutors should not have been allowed to charge him with those counts after his extradition.
Exit doors locked: Two crypto lenders, Delio and Haru Invest, halted withdrawals in an echo of the 2022 crypto turmoil, according to Bloomberg.

EU Plans to Seek Limits on Digital Euro Use

The European Commission plans to require the European Central Bank to set limits on use of the digital euro without setting specific thresholds on transactions or holdings, Bloomberg recently reported. European finance ministers planned to discuss the digital euro project this week at a meeting in Luxembourg. The draft EC text may still change ahead of its presentation on June 28, but it said the digital euro would have legal tender status and mandatory acceptance, with some exceptions for very small businesses and nonprofits that don’t accept digital payments.

Citizens Hosts ‘Play 60’ Event with NY Giants Players

Citizens Financial Group last week hosted a “Play 60” health and wellness event with the New York Giants and students from the Thirteenth Avenue School in Newark, N.J. The event, organized in partnership with LISC Greater Newark, was part of a health and wellness initiative to promote the benefits of exercise. Last year Citizens committed $150,000 to LISC in support of community development initiatives in Brooklyn, N.Y., and Newark. This most recent Play 60 event is a part of that commitment.